Virginia Court to Decide the First Climate Change-Related Insurance Coverage Case

By Julia Ciardullo

On April 19, 2011, the same day the United States Supreme Court heard oral arguments in American Electric Power Co. Inc., et al., v. Connecticut, et al., the Supreme Court of Virginia heard oral arguments in a less well known climate-related case, AES Corp. v. Steadfast Insurance Co. (No. 100764).

The case involves a dispute over whether AES Corporation (“AES”), a defendant in Native Vill. of Kivalina v. ExxonMobil Corp. (“Kivalina”), a climate change nuisance case,[1] is entitled to a defense under its general liability policies by its insurer, Steadfast Insurance Company (“Steadfast”).  The Virginia trial court granted summary judgment for Steadfast, finding that Steadfast has no duty to defend AES because the allegations in the Kivalina complaint did not constitute an “occurrence” within the meaning of the policies.

On appeal, the parties raise two central issues concerning whether a duty to defend exists.  The first is whether the Kivalina complaint alleges an “occurrence,” defined in the policies as an “accident,” sufficient to trigger a claim for liability.  The second involves the “pollutants” exclusion in the policies – whether Steadfast has the right to raise the issue on appeal, and if so, whether carbon dioxide (“CO2”) falls within the policy’s definition of a “pollutant” and is thus excluded from coverage.

Does the Kivalina complaint allege an “occurrence” (an “accident”)?

The parties’ dispute about whether there was an “accident” is based on two related issues: (1) whether allegations of negligent conduct, even if alleged to a much lesser extent than intentional conduct, constitute an “accident”; and (2) whether an unplanned harm, even if it is the result of intentional conduct, is an “accident.”

On the first point, Steadfast argues that the Kivalina complaint unequivocally alleges intentional actions – specifically, that AES intentionally emitted CO2 into the atmosphere as part of a continuing business decision – and such actions led to reasonably foreseeable consequences.  Steadfast points out that although the word “negligence” was used in the Kivalina complaint, it was only used twice in the entire 68 page document, and thus must be read in context of the document as a whole.  According to Steadfast, the allegations in the Kivalina complaint focused entirely on the intentional nature of AES’s conduct, and AES’s knowledge of the natural and probable consequences of such conduct.

AES, on the other hand, points to the use of the word “negligence” in the Kivalina complaint, and argues that such allegation was made as an alternative theory of liability.  AES further argues that negligence falls within the common understanding of the word “accident” because of the unplanned and unintentional nature of the harm.  Finally, AES argues that as long as there is at least one claim that alleges any potentially accidental damage from the viewpoint of the insured, the insurer has a duty to defend.

On the second point, Steadfast argues that because AES’s intentional conduct led to reasonably foreseeable consequences, it is not an “accident.”  According to Steadfast, the purpose of general commercial liability insurance policies is not to transfer the policyholder’s cost of doing business to its insurer.  In other words, the foreseeable results of intentional business activities should not be considered “accidents” triggering liability insurance.

AES, on the other hand, claims that even if its business activities were intentional, the damages resulting from those activities were not.  Because the alleged damage was not “clearly” planned or expected from the viewpoint of the insured, it must be considered an “accident.”

The “pollutants” exclusion

In order to understand the parties’ arguments about whether Steadfast has the right to raise the “pollutants” exclusion issue on appeal, a brief overview of the procedural history of case is necessary.  Steadfast filed an initial motion for summary judgment with the trial court, which was denied due to the existence of questions of material fact.  The order denying summary judgment addressed the “pollutants” exclusion issue, but did not explicitly address Steadfast’s duty to defend.  As a result, AES filed another motion for summary judgment on the issue of the duty to defend, and Steadfast filed a renewed cross-motion for summary judgment.  This time, the trial court denied AES’s motion for summary judgment and granted Steadfast’s renewed cross-motion for summary judgment, finding that Steadfast did not have a duty to defend because there was no “occurrence.”  AES appealed the second summary judgment order.

Consequently, AES argues that, as a procedural matter, because Steadfast did not assign cross-error in its response to AES’s appeal, it waived the right to raise the “pollutants” exclusion issue on appeal.  Steadfast, on the other hand, argues that it raised the issue below, and thus did not need to assign cross-error to raise the issue on appeal.

Moreover, AES argues that if the Court does consider the “pollutants” exclusion issue, Steadfast failed to prove that the exclusion unambiguously applies to CO2.  In particular, AES points to the policies, which expressly exclude many substances, but do not exclude CO2 emissions.  AES further argues that Steadfast cannot rely on the general exclusion, which defines “pollutants” as “any solid, liquid, thermal, or gaseous irritant or contaminant, including smoke, vapors, soot, fumes, acids, alkalis, chemicals and waste,” because CO2 is not an “irritant” or “contaminant;” rather, it is an omnipresent substance critical to the survival of animal and plant life.

In response, Steadfast claims that “every substance is proper and benign in its proper place or proper quantity; it is only the violation of proper boundaries that makes a substance a pollutant.”  Further, Steadfast argues that the Kivalina complaint clearly alleges claims of environmental pollution.  Thus, even if the Court were to find that there was an “occurrence,” AES’s alleged CO2 emissions would fall within the policies’ “pollutants” exclusion and Steadfast would not have a duty to defend.

Looking ahead

There is some indication that oral arguments favored AES, although others point out that the Court previously refused to overturn a trial court ruling that naturally occurring organic compounds arising from chlorination of drinking water are excluded “pollutants.”  Regardless of how the Court decides, insurance experts are certain about one thing: climate-change related insurance coverage cases are likely to continue in the near future.

A copy of AES’s opening brief can be found here; Steadfast’s brief can be found here; and AES’s reply brief can be found here.  An amicus brief was also filed by the Complex Insurance Claims Litigation Association and American Insurance Association in support of Steadfast, which can be found here.

[1] In February, 2008, AES and 23 other oil, energy and utility companies were sued for allegedly causing property damage to an Inupiat village in Kivalina, Alaska.  The plaintiffs allege that the defendants’ CO2 emissions contributed to climate change, which, in turn, diminished the Arctic sea ice that protects the Kivalina coast from storms, which, in turn, accelerated erosion of the coast, rendering their village uninhabitable and forcing them to relocate.  The plaintiffs seek damages of between $95 and $400 million.  The trial court dismissed the case on the grounds that (1) it raises a political question not appropriate for the judicial branch and (2) plaintiffs lack Article III standing because they could not demonstrate that the defendants’ actions caused their injuries.  See 663 F. Supp. 2d 863 (N.D. Cal. 2009).  The case is currently on appeal in the Ninth Circuit Court of Appeals.

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