Climate Change Litigation

Ceres and a Series of Serious Thoughts About the NAIC Climate Disclosures - Part III

September 19, 2011 05:15
by J. Wylie Donald
This is the last of three parts concerning Ceres’ recently released Climate Risk Disclosures by Insurers:  Evaluating Insurer Responses to the NAIC Climate Disclosure Survey.   We already have looked at the first two Recommendations to Regulators.  Today we finish with number 3:  more clarity in disclosure expectations.  Id. at 51.  It is always easier to make apples-to-apples comparisons when everyone is speaking the same language.  Uniform and detailed disclosure requirements would help achieve that goal.  However, the down side of specifying what will be disclosed is that it assumes the specifier knows all that needs to be identified.  The scariest part of climate change is that we probably do not yet know how all the changes will interact.  Correlated risk is a prime example.  IRMI describes “correlated risk profiles” as those “that move in concert when affected by the same set of stimuli.”  Insurers run from correlated risk and the Ceres report rightly poses a troubling concern in that regard:  “If … climate change has the potential to introduce correlated risks across previously uncorrelated assets and to drive market values in ways that cannot be predicted from historical trends, the insurance industry may be poorly positioned to meet its investment objectives.”  Climate Risk Disclosures at 39.  According to the report, few companies recognize the potential for correlated losses across their business.  Id. at 43.  And the ones that do say no more than that climate change will increase insured losses and may negatively impact the businesses in which insurers invest.  Id.   We don‘t think that this is news to those who did not specifically mention correlated risks in their submissions.  What we take from all this is that no one yet knows in a meaningful way where the climate change correlated risks lie.  Or they are keeping mum (see our first posting on the Ceres report concerning competitive advantage).  So the question for a regulator is the following:  Is one better off with answers that are less-constrained and potentially more revealing, or is more specificity in the guidance more helpful?  If one is a regulator who knows all the questions that should be asked, one should opt for more specificity.  But if one does not, then one might support providing unstructured disclosure opportunities. The Ceres report, of course, is not all about recommendations, but we have gone on for too long to delve further.  Before we close, however, we did want to address the need for stronger research. The Corporate Liability section attracted our particular focus, as climate change liability suits and their insurance have been a central feature of the blog.  Those of us following this subject drop the names of the three liability damages suits, Comer, General Motors and Kivalina, and the insurance suit, Steadfast, like they were business cards.  The statement that got our dander up was this:  "Since the first suits were filed in 2003, their numbers have rapidly proliferated—more than 120 suits were filed in 2010 alone, nearly two-thirds of them in the U.S."  Id. at 11.  This is an accurate paraphrase of its source, a sentence in a short article published by the Geneva Association.   The problem is that the source, at best, is misleading.  While there may have been 120 climate change suits filed in 2010, as demonstrated by the comprehensive set of charts kept by the Climate Change group at Arnold & Porter LLP there were none filed that were seeking damages under common law theories.   Those suits continued to be the three:  Comer, GM and Kivalina. We will be the first in line to agree that the insurance industry should be concerned about climate change liability suits.  But that concern has not yet had to focus on 120 climate change liability suits, because they have not been filed yet. That being said, the Ceres report brings to the fore statements by representatives of a multi-trillion dollar industry that is in the eye of the climate change storm.  Those statements otherwise might languish in some regulator’s dark bottom drawer.  The report is a valuable resource; we look forward to next year’s reprise.

Climate Change Litigation | Insurance | Regulation

Virginia Supreme Court Decides First Climate Change Insurance Case

September 16, 2011 14:32
by J. Wylie Donald
This morning the Virginia Supreme Court decided the first climate change liability insurance coverage case:   The AES Corp. v. Steadfast Ins. Co., Record No. 100764 (attached). It held that there was no covered “occurrence” and that therefore the trial court properly dismissed the insured’s claim for coverage. Followers of this blog are well familiar with Steadfast and the underlying Kivalina case.  For those new to this subject, this coverage case arose out of the climate change nuisance damages case, Native Village of Kivalina v. ExxonMobil Corp., CV 08-1138 SBA (N.D. Cal.), in which claimants asserted that defendants' greenhouse gas emissions resulted in warmer winters, which lead to melting of sea ice and erosion of the shoreline around their community to the point that their village was set to fall into the sea.  They brought suit against oil and gas companies, electric utilities and a coal company, seeking damages for an alleged nuisance.  In Steadfast one of the Kivalina defendants’ insurers (Steadfast), after first defending under a reservation of rights, brought a declaratory judgment action against its insured (electric utility AES), seeking to avoid coverage under its general liability policies.  Shortly thereafter Steadfast filed a motion for summary judgment asserting that there was no occurrence, and that coverage was barred by the loss-in-progress and pollution exclusions. AES initially prevailed and defeated Steadfast’s motion.  AES then moved for summary judgment on the duty to defend and Steadfast cross-moved.  This time Steadfast gained victory.  The trial court issued a very brief opinion holding:  “Steadfast has no duty to defend AES in connection with the underlying Kivalina litigation because no 'occurrence' as defined in the policies has been alleged in the underlying Complaint.”  AES appealed. In most jurisdictions, including Virginia, an “eight corners” rule is applied:  “only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured.”  Opinion at 7 (citations omitted).  Coverage under the Steadfast policies hinged on whether there was an occurrence, specifically defined to mean “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”  In Virginia the terms “occurrence” and “accident” are synonymous and an “accident” is commonly understood to mean “an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed, or reasonably anticipated.”  Id. at 9. There was no dispute that AES intentionally released carbon dioxide as part of the combustion process at its power plants.  But intentional acts do not preclude coverage:  “[W]hen the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision.”  Id. at 10 (citing 20 Eric M. Holmes, Appleman on Insurance 2d § 129.2(I)(5) (2002 & Supp. 2009)).  However, “If a result is the natural and probable consequence of an insured’s intentional act, it is not an accident” and coverage will be barred.  Id. at 9.  The Court summarized the rule it would apply: Thus, resolution of the issue of whether Kivalina’s Complaint alleges an occurrence covered by the policies turns on whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that a reasonable person would not have expected to result from AES’s deliberate act of emitting carbon dioxide and greenhouse gases.  Id. at 10-11. Notwithstanding that the Kivalina plaintiffs specifically alleged negligence, and that AES adduced evidence that the Kivalina plaintiffs were arguing on appeal before the Ninth Circuit that their claim sounded in negligence, the Court followed strict adherence to the eight-corners rule: Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities. Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered. Whether or not AES’s intentional act constitutes negligence, the natural and probable consequence of that intentional act is not an accident under Virginia law.  Id. at 12. Further, “[e]ven if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina’s nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.”  Id. at 13.  In sum, “If an insured knew or should have known that certain results would follow from his acts or omissions, there is no 'occurrence' within the meaning of a comprehensive general liability policy.”  Thus, the trial court was affirmed. As noted at the outset, this is the first skirmish of what is certain to be a protracted battle between insurers and insureds.  There are 50 other jurisdictions (including the District of Columbia) and this is only one issue based on one complaint and one insurer's policy language.  There is a long way to go before we will have clarity here. Post scriptum:  Many will recall that Steadfast argued in its papers and before the Court that the pollution exclusion also barred coverage; AES responded that it had not been properly raised.  The Court did not even address the subject, apparently feeling that it was enough to cite to AES's grounds for appeal, which did not include the pollution exclusion.  So even in Virginia, there are still coverage battles to be fought. AES Corp. v. Steadfast Ins. Co., No. 100764, slip op. (Va. Sept. 16, 2011).pdf (64.69 kb)

Carbon Dioxide | Climate Change Litigation | Insurance

Damascus Citizens for Sustainability Attack Marcellus Shale Gas

August 28, 2011 21:10
by J. Wylie Donald
No, this is not jihad or the last gasp of a d esperate despot.  Instead, it is a citizens group taking on the government and seeking to compel the completion of environmental impact statements (EISs) prior to the promulgation of regulations for the development of shale oil wells in the Delaware River Basin.  If they are successful, they will certainly delay the drilling of hundreds if not thousands of wells.  And as part of that success, the role of natural gas as a "bridging" fuel to ease us into a carbon-free world may be substantially diminished. Taking a page from the playbook of past environmental challenges, Damascus Citizens for Sustainability, Inc. filed suit earlier this month against the Army Corps of Engineers, Fish and Wildlife Service, National Park Service, Department of the Interior, EPA and Delaware River Basin Commission (DRBC), as well as various officers in their official capacities to block hydraulic fracturing ("fracking") activities in the Delaware River Basin. The gravamen of the complaint (attached) is that the agencies have violated federal law by failing to require the completion of an environmental impact statement before promulgating regulations allowing natural gas development within the Basin.  Plaintiff seeks declaratory and injunctive relief.  DCS is a non-profit conservation group whose members "live, work and recreate" in the Basin. Complaint ¶ 11.  Members of DCS include organic farmers, bird watchers, hunters and fishermen. Id. ¶ 12.  Some will take offense at the disengagement of some of the plaintiff's members who "escape on weekends and vacations to their refuge in the Upper Delaware Basin where they can commune with nature in the bucolic setting of the Basin."  Id.  As summarized by the complaint, "For each member of DCS, the Basin's unspoiled resources are his or her own Walden Pond."  Id. Defendants are government agencies responsible in one way or another for the watershed.  As such, effects from fracking (which, according to the complaint, will result in between 15,000 and 18,000 natural gas wells in the Basin, id. ¶ 62) fall under their jurisdiction. A substantial hurdle in plaintiff's suit is whether the National Environmental Policy Act (NEPA) (which requires EISs) even applies to an interstate commission such as the DRBC. As the complaint acknowledges, "DRBC has stated that it is not subject to NEPA, noting that four of the five commissioners are appointed by states.  DRBC thus refuses to comply with NEPA."  Id. ¶ 32.  There is support in the case law for this position:  "That DRBC is a federal agency for purposes of NEPA is very doubtful."  Delaware Water Emergency Group v. Hansler, 536 F. Supp. 26, 35 (E.D. Pa. 1981).  DCS argues that, among other things, the DRBC is a federal agency as it was established by federal legislation, publishes its regulations in the Code of Federal Regulations, publishes its activities in the Federal Register, is listed as a U.S. Government Agency by USA.gov and is viewed as a federal agency by the Council of Environmental Quality, which oversees the federal government's compliance with NEPA.  Complaint ¶¶ 26, 28, 29. If DCS gets past that hurdle then numerous aspects of fracking may come under the microscope.  Allegations include:  highly contaminated return flows of water, gas and other materials, confidential fracking fluid formulas containing "carcinogenic, acutely toxic, chronically toxic and bioaccumulative" materials, methane emissions as greenhouse gases, "systematic evidence of methane contamination of drinking water from gas extraction activities", "large-scale changes in land use and increased water withdrawals," "significant air pollution from truck exhaust emissions," "serious vehicular accidents,"  "significant public health problems" and  permanent change to the rural and scenic character of the area.  Id. ¶¶ 50, 51, 54, 59, 62, 63, 65 and 66.  It is obvious that full development of all these topics will substantially delay the development of the Marcellus shale. To focus on just one aspect of the allegations, it is worth looking at greenhouse gas emissions.  The conventional wisdom is that because natural gas is composed of lighter, less complex hydrocarbons, and therefore when combusted it emits less carbon dioxide per BTU than other fossil fuels, it is to be preferred over oil and coal.  NaturalGas.org reports on its webpage that "The combustion of natural gas emits almost 30 percent less carbon dioxide than oil, and just under 45 percent less carbon dioxide than coal."  (Particulates, SOx and NOx and mercury are likewise much lower.)  Methane, an even more potent greenhouse gas than carbon dioxide, and a significant component of natural gas, likewise is reported to have better characteristics in natural gas. An EPA/Gas Resources Institute 1997 study concluded "that the reduction in emissions from increased natural gas use strongly outweighs the detrimental effects of increased methane emissions."  Id.  Accordingly, many believe that if one substitutes natural gas for coal and oil, one could continue to grow the economy while at the same time reducing greenhouse gas emissions. This proposition is under attack.  Citing a 2010 EPA study, DCS pleads that EPA "revised its estimated potential emissions from gas well completions from 0.02 tons of methane per well to 177 tons of methane per well."  Complaint ¶ 63. We tracked down the EPA study and some additional scholarship.  In Greenhouse Gas Emissions Reporting from the Petroleum and Natural Gas Industry, Background Technical Support Document, the EPA walks away from its earlier study:  "new data and increased knowledge of industry operations and practices have highlighted the fact that emissions estimates from the EPA/GRI study are outdated and potentially understated for some emissions sources."  Background Technical Support Document at 8.  One of those sources is unconventional natural gas production, aka fracking.  Appendix B of the study lays out the sources of the new data and they are thin: four presentations at a 2007 EPA Natural Gas STAR Production Technology Transfer Workshop .  Nevertheless, they may be a game changer. Cornell researchers Howarth, Santoro and Ingraffea took the new numbers and applied them to the proposition that natural gas should be used "as a transitional fuel, allowing continued dependence on fossil fuels yet reducing greenhouse gas (GHG) emissions compared to oil or coal over coming decades."  Howarth at 2.  They concluded that shale gas has a greenhouse gas footprint substantially larger than previously thought and that, depending on circumstances, the footprint of coal can be superior to that of shale gas (i.e., smaller).  Id. ¶ 8.  Thus, "the large GHG footprint of shale gas undercuts the logic of its use as a bridging fuel over coming decades, if the goal is to reduce global warming."  Id. One thing that was striking in the EPA study was the acknowledgment of "great variability in the natural gas sector and [that] the resulting emission rates have high uncertainty."   Background Technical Support Document at 86.  EPA also noted that its results do not include reductions due to control technologies.  Id. at 87.  Howarth et al. acknowledge the efficacy of technology and that "methane emissions during the flow-back period in theory can be reduced by up to 90%."  Howarth ¶ 7.  In practice, they assert it does not happen.  If Damascus Citizens for Sustainability has anything to say about it, we will know more. Damascus Citizens for Sustainability, Inc. v. U.S. Army Corps of Engineers et al, 11-cv-03857 Complaint (Aug. 10, 2011).pdf (828.33 kb)

Carbon Dioxide | Carbon Emissions | Climate Change Litigation | Greenhouse Gases | Sustainability

Gifford v. USGBC - Dismissed (But Not on the Merits)

August 18, 2011 19:55
by J. Wylie Donald
One of the more infuriating things about lawyers is that often, if they do their job right, their client wins and no one else benefits from it. This is what happened Monday before Judge Sand in the Southern District of New York in the closely followed green building case, Gifford v U.S.Green Building Council. The judge, in a short Memorandum & Order barely over seven pages (attached below) dismissed Mr. Gifford's case on procedural grounds. So we are left to wonder about the merits. Mr. Gifford and his co-plaintiffs are building engineering professionals. They assert that the USGBC's LEED standard is false and misleading and has injured them in their business. Specifically, "LEED-certified buildings are no more energy-efficient than non-LEED certified buildings.  USGBC's own study data on the subject indicate that, on average, LEED buildings use 41% more energy than non-LEED buildings.  There is no objective empirical support for the claim that LEED buildings consume less energy.  LEED buildings are less efficient because the criteria that USGBC purportedly uses to certify buildings do not correlate with energy efficiency."  First Amended Complaint ¶ 4 (attached below); also id. ¶ 32 (providing more detail).  As a result of the LEED claims made by USGBC, customers purchase LEED services rather than plaintiffs' design services. These injuries, according to plaintiffs, entitled plaintiffs to proceed in court for injunctive relief and damages under the federal Lanham Act for commercial misrepresentations and parallel state law claims. USGBC defended on the ground that the plaintiffs had no standing to assert Lanham Act injury. The court agreed.  Memorandum & Order at 7. There are two tests for standing in the Second Circuit. Under the first test, the parties must be competitors.  Id. at 4.  Plaintiffs did not certify green buildings or accredit professionals, as USGBC did. Accordingly, they failed the first test. The second test, the reasonable commercial interest test, was more forgiving. There "a plaintiff must demonstrate (1) a reasonable interest to be protected against the alleged false advertising, and (2) a reasonable basis for believing that the interest is likely to be damaged by the alleged false advertising." Id. (citation omitted). Where the parties are not direct competitors a plaintiff must make a "more substantial showing of injury and causation.".  Id. at 5 (citation omitted). Mr. Gifford and his co-plaintiffs could not satisfy that test either. The court found the allegation that plaintiffs' professional services would be "subsumed" by USGBC was "speculative".  It commented that  "there is no requirement that a builder hire LEED-accredited professionals at any level, let alone every level, to attain LEED certification, ..." Id. at 6.  (While technically correct, my LEED AP colleagues confirmed that as a practical matter they can't imagine a LEED project would proceed without a LEED AP on the project team.  At the very least, having a LEED AP on the team entitles one to points toward certification.) As to the specific allegation of misrepresentation regarding building efficiencies, there was no allegation that anyone relied on that statement to decline to hire Mr Gifford. So the plaintiffs lacked standing under the second test too.  Id. at 7. The absence of standing was fatal to the federal claims, which the court dismissed with prejudice.  Id.  As to the state law claims, it declined to assert supplemental jurisdiction and dismissed those claims as well (but without prejudice).  Id. at 8. The blogosphere reports that Mr Gifford is considering his appeal.   A press release by USGBC states: "This successful outcome is a testament to our process and to our commitment to do what is right."  What the rest of us want to know, however, is whether there was any substance to any of Mr. Gifford's allegations. This is important and not only for the decision of whether it is sensible to build a LEED-certified building. One has to think about plans that go awry.  Should a green building project fail and investors and lenders lose money (and it is a statistical certainty that this will happen), the injured parties will cast about looking for a place to lay the blame. Mr Gifford might assert that false hopes raised by USGBC's claims are at the root of the problem.    20110815 Memorandum & Order (of Dismissal) Gifford v. U.S. Green Building Council (72.00 bytes) Gifford v U.S. Green Building Council - First Amended Complaint February 7, 2011.PDF (94.75 kb)

Climate Change Litigation | Green Buildings | Sustainability

Comer Resurgens: Life After American Electric Power v. Connecticut

July 7, 2011 10:23
by J. Wylie Donald
We thought last January, when the Supreme Court denied a writ of mandamus, that the long saga of Ned Comer through the courts had finally come to an end.  We were wrong.  At the end of May, the case, Comer, et al. v. Murphy's Oil USA, et al. (attached), was refiled in the Southern District of Mississippi.  Although predating the Supreme Court's June decision in American Electric Power v. Connecticut, one could be excused for concluding that it was filed afterward as it relegates federal common law to a sentence and instead is all about state law causes of action. But before we get into the resurgent Comer, we thought we would point out a June paper published by the Geneva Association, an insurance industry think tank.  One of the industries most affected by climate change is insurance. In Why Insurers Should Focus on Climate Risk Issues, Chief Climate Product Officer, Lindene Patton, outlines some of the risks and opportunities she perceives.   Her perspective is particularly worth considering as her employer, Zurich Financial Services, faces climate change issues across a broad spectrum of activities. (Ms. Patton notes, however, that the positions in the paper are hers alone.) Ms. Patton's views are insightful:  "society at large appears increasingly underinsured for the impacts of climate change at the time of its greatest need."  And they are ominous:  "Unless global societal risk management of climate change improves, the mismatch between the loss exposure and monies needed to cover economic loss associated with climate change-related severe weather events and other impacts will only become more extreme."  The solution she calls for is for insurance companies to take the lead to overcome the current "governance gap with respect to climate change policy."  Even without leadership, important social decisions can be made if the right price signals (i.e., premiums) are sent. Such signals can lead to "cogent risk management decision-taking" and assist in the spreading and management of climate change risks. An example of such price signals from an earlier period are the fire proofing of much of America as the result of the insurance industry's support of fire codes and the underwriting to go with them. The alternative to leadership in the marketplace is what Ms. Patton refers to as the frictional costs of litigation. In some cases those costs can be trivial, such as occurred with Y2K. In other cases, the outcomes can be devastating -- think asbestos and tobacco, on which insurers have paid, by some estimates, $150 billion and $750 billion respectively. Driving litigation in the climate change sphere is the relatively unknown fact of "a trend of decreasing percentage of insured loss when calculated as a percentage of damages from extreme weather events on an annualized basis."  Stated more simply, those harmed by hurricanes are not insured or are underinsured and the path to being made whole lies with a judge, not with an adjuster. The litigation path is not set out in black and white. Yet. But there are areas that may be fruitful for plaintiffs. Ms. Patton identifies SEC disclosure rules, fractional allocation (market share) schemes, and de minimus liability regimes as potential routes for "activist judges to find liability associated with" greenhouse gas emissions.  Regardless of the theory du jour, the ongoing injuries and displacement caused by climate change "may ultimately end up over a number of years in dedicated, repeated efforts by plaintiffs to find a legal theory that 'sticks' as happened in tobacco or asbestos." Which brings us back to Ned Comer and his protean and unvanquishable litigation.  All remember Hurricane Katrina; most will recall the lawsuit filed 20 days after Katrina made landfall.  In various iterations it sued insurance companies, mortgage lenders, oil companies, electric utilities, coal companies, and chemical companies; it alleged against all of the greenhouse-gas-emitting defendants responsibility for Katrina's "unprecedented" ferocity.  Its appellate travails are legend.  Following dismissal in the district court, and reinstatement by a Fifth Circuit panel, that decision was vacated when the Fifth Circuit accepted the case for en banc argument, and then dismissed the case when its quorum dissolved.  The petition for mandamus did not avail and everyone thought the case was gone. Everyone, that is, except Ned Comer's lawyers.  On May 27, 2011 Comer v. Murphy Oil USA, Inc. was re-filed.  It is a monstrous class action lawsuit with over 90 named corporate defendants - a crowd even larger than the earlier iterations of the case.  Like a Who's Who of particular industries, it alleges against classes of oil companies, utilities and coal companies, and chemical companies claims in three counts of public and private nuisance, trespass and negligence. But it also includes, almost as afterthoughts, a strict liability claim (¶ 36) and a conspiracy claim (¶ 41).  It concludes with a count for a declaratory judgment that federal law does not preempt state law claims. Ms. Patton's frictional costs are here in vast numbers.  As is her recognition that it is injury rather than an interest in climate change policy that provides the litigation incentive:  "Plaintiffs do not ask this Court to regulate greenhouse gas emissions or change national policy regarding climate change. Instead, Plaintiffs seek legal redress for the damages caused by these Defendants."  (¶ 11). Those damages are broad.  "[Plaintiffs'] homes and property were destroyed by Katrina's destructive winds and storm surge, which effects were increased in frequency and intensity by Defendants' emissions of greenhouse gases." (¶ 18)  "Plaintiffs' property also is damage[d] by sea level rise as a result of submersion and/or increased exposure to hurricanes. (¶ 19) "Plaintiffs' insurance premiums for their coastal Mississippi property have risen dramatically, and the resale values of their homes and property values have plummeted."  (¶ 20) The insurance premium allegation is thought-provoking.  Plaintiffs recognize that proving a particular defendant caused Hurricane Katrina will be difficult. Pleading in the alternative, they assert that the Defendants' greenhouse gas emissions "put Plaintiffs' property at greater risk of flood and storm damage, and dramatically increase Plaintiffs' insurance costs." (¶ 37) They link insurance company efforts to price climate change risk to increased premiums (Ms. Patton's risk-based price signals), and, because those "insurance costs attributable to global warming are distinct and quantifiable", they assert they are entitled to recovery. (¶¶ 38-40)  This theory of damages based on increased risk, rather than actual harm, bears watching. Ms. Patton concludes, "the AEP case only addresses nuisance cases and does not address broader theories under tort liability law.  A verdict for the defendants on the nuisance issue may not arrest the flow of cases and associated defence costs.  The plaintiffs bar may still continue to file demands and claims for other types of tort damages."  We would go further. With apologies to Atlanta, Comer Resurgens demonstrates that the conditional "may" is being replaced by the declarative "will." 20110527 Comer v. Murphy's Oil (re-filed) Complaint.PDF (796.31 kb)

Climate Change | Climate Change Litigation | Greenhouse Gases | Insurance | Supreme Court

American Electric Power v. Connecticut: 8-0 the Supreme Court Rules Federal Common Law is Displaced

June 20, 2011 20:25
by J. Wylie Donald
The moment we have been waiting for since 2004 (when the first climate change liability case was filed) finally arrived. The Supreme Court today rendered its opinion in American Electric Power Co., Inc.. v. Connecticut.  As many predicted following oral argument, the use of the federal common law of nuisance to limit carbon dioxide emissions simply is not a viable theory because it has been displaced by the Clean Air Act and the EPA's steps to implement the Act. For those who have not yet read the opinion, it is straightforward. Following the Supreme Court's 2007 decision in Massachusetts v. EPA, the EPA undertook to begin the regulation of carbon dioxide emissions. AEP at 2.  Within the framework of the Clean Air Act it issued its "Endangerment Ruling" (76 Fed. Reg. 66496), and then adopted final rules regulating emissions from light-duty trucks, initiated a joint rulemaking covering medium and heavy-duty vehicles, began phasing in requirements for best available control technology for major greenhouse gas emitters, and commenced a rulemaking on emissions from fossil-fuel fired power plants. Id.at 2-3.  That rule is due to be final in May 2012.  Id.at 3. With those steps, and the comprehensive activities authorized under the Clean Air Act (id. at 10-11), the Court applied the simple test:  "whether congressional legislation excludes the declaration of federal common law is simply whether the statute 'speak[s] directly to [the] question' at issue." Id.at 10. The Court held:  "the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon-dioxide emissions from fossil-fuel fired power plants." Id. The Court responded to arguments that the EPA was only beginning to regulate but had not yet finished the process by emphasizing that it was the "delegation [that] displaces federal common law.". Id.at 12 (emphasis added). That is, even if the EPA chose not to regulate carbon dioxide emissions, "the federal courts would have no warrant to employ the federal common law of nuisance to upset the agency's expert determination." Id. Some may recall that the political question doctrine was front and center in the decisions below. See id. at 5-6.  Here, however, the Court mentions it only indirectly.  In describing the "prescribed order of decisionmaking" (i.e., expert agencies and then federal judges), "the expert agency is surely better equipped to do the job than individual district judges issuing ad hoc, case-by-case injunctions." Id.at 14. Notwithstanding the apparently simple rule and its application, we do not expect AEP to end climate change liability litigation.  State nuisance law (which plaintiffs pleaded) remains. Although the Court offered no opinion on such a theory's efficacy, it did give a hint of where it might land:  "the Clean Water Act does not preclude aggrieved individuals from bringing a 'nuisance claim pursuant to the law of the source state.'" Id. at 15-16 (citing International Paper Co. v. Ouellette, 479 U. S. 481 (1987)). Accordingly, the case was remanded to the Second Circuit. Further, the significance of Justice Sotomayor's recusal (which we called in an earlier post) manifested itself. The Court split 4-4 on the issue of standing (which compelled it to hear the case on the merits).  Id. at 6.  This jurisdictional dispute could surface in the future when Justice Sotomayor is included in the full panel. She presumably would be in favor of broader standing, which is likely to support more claims of aggrieved climate change plaintiffs. Last, the Court offered some helpful commentary for future carbon-dioxide liability insurance coverage cases.  We have written often on how carbon dioxide should not fall within the meaning of pollution in a comprehensive general liability policy's pollution exclusion.  The Court appears to agree.  In discussing the scope of legislative activity needed to preempt federal common law, the Court stated:  "Congress could hardly preemptively prohibit every discharge of carbon dioxide unless covered by a permit. After all, we each emit carbon dioxide merely by breathing." Immediate effects of the decision will be filings by the defendants in the Kivalina v. ExxonMobil case before the Ninth Circuit for dismissal.  Undoubtedly the justices deciding Steadfast Insurance Co. v. AES Corp. will read the decision; how it will affect them is hard to say.  It should have no effect on the multiple climate change lawsuits orchestrated by Our Children's Trust.  And over the long term, it likely will have the effect of forcing plaintiffs' to come up with new climate change liability theories.  That will not be necessary, of course, if (as has been suggested) Congress acts to remove carbon dioxide from EPA's jurisdiction.  In that case, we just might find AEP revived.

Carbon Dioxide | Climate Change Litigation | Legislation | Supreme Court

Coal Exports and Rising Temperatures

June 13, 2011 04:33
by J. Wylie Donald
Front page news in Baltimore this past week were two stories. The first notes record temperatures in Maryland in the first full week of June, 2011.  The second was a lead article this Sunday on the record year the Port of Baltimore is having moving coal from the mines of Appalachia to the coke ovens of Asia. It does not take a Shakespeare schooled in climate change to grasp the irony. First, the weather. Central Maryland suffered four 90-plus record highs in ten days, topping out at Baltimore-Washington International Airport at 99 degrees on June 8.  The summer (which hasn't even started yet) is picking up where last year left off as being the hottest on record for Baltimore.   Now, the coal. Ships are literally waiting in line in Chesapeake Bay to get a place at the pier to load the high quality anthracite "metallurgical" coal that this part of the world produces in abundance. Freight trains deliver millions of tons to two private terminals, which load ships capable of carrying 77,000 tons of the black stuff, or even 135,000 tons.  The Port of Baltimore is on track to ship over 14 million tons this year. For comparison this is almost 3 times the pre-recession volume of just 5 years ago. More jobs, more dollars, more activity. Of course, not everyone is happy. The Sierra Club points out that shipping coal is not consistent with being a leader on combating global warming. But the Sierra Club has no present intent to attempt to interfere with exports (but they will object to increasing the size of the Port). Not so across the continent.  Seems the Asian appetite for coal is also seeking the carbon of Montana and Wyoming.  The difference is that on the West coast the only dedicated coal terminal is in British Columbia.  Washington State is seeking to build new coal terminals with the first being at Longview.  Montana interests are excited at the prospect.  In Washington, however, the Sierra Club and others are opposing such activities and have appealed the Cowitz County commissioners' approval of an application to build a new coal terminal.    Besides the usual types of challenges to mining and transport in the domestic realm, the appellants also assert that the commissioners should have studied the consequences of burning coal in Asia.  This is novel.   My colleague, classmate and Seattle Port Commissioner John Creighton shared with me the implications:  "While many in Washington State are sympathetic to the environmental community's concerns over the ultimate impact of a large dirty coal export operation on global warming, the port community is apprehensive about how such a precedent might affect the environmental review process on other port projects.  For example, in looking to permit an airport project, would we be required to go beyond the airport grounds and consider greenhouse gas emissions of a British Air nonstop all the way from Seattle to London?  On a container terminal project, would we have to trace the greenhouse gas impacts of every possible product transportable in a container?" Commissioner Creighton's concerns are well-founded.  What are the limits of environmental impact assessments?  This approach by environmental groups - looking at the entire chain of events in a particular activity - is well-tested, however.  New nuclear power was stopped in California by focusing on California waste disposal law.  See Pacific Gas & Elec. Co. v. State Energy Resources Conservation & Development Comm'n, 461 U.S. 190 (1983).  Chemical weapons disposal was challenged (unsuccessfully) by attacking the environmental impact statement and transportation across the "global commons."  See Greenpeace USA v. Stone, 748 F. Supp. 749 (D. Haw. 1990), dismissed as moot, 924 F. 2d 175 (9th Cir. 1991). So, it is hot in Maryland.  And elsewhere.  Notwithstanding the pass current coal shipping operations have in the East, the West may hold a lesson on whether this will continue to be business as usual.

Climate Change | Climate Change Litigation | Regulation

Our Children's Trust Unleashes Wave of Climate Change Litigation

May 5, 2011 10:40
by J. Wylie Donald
When we wrote last month concerning the implications of the upcoming decision by the Supreme Court in American Electric Power v. Connecticut, we were fully expecting to wait for the decision to test our powers of prognostication.  We were very wrong.  In a collection of lawsuits and regulatory filings across the nation, environmentalists have joined the climate change litigation fray in a very big way.  Here is what we wrote:  "[A dismissal of Connecticut] says nothing about state law nuisance claims, nor new theories that have not yet been tested, nor even thought up. We strongly believe that carbon dioxide liability suits will be with us for a while yet. Our reason: climate change is ongoing and those whose interests are harmed will look for succor. So theories of liability will be spun and suits will be brought. And such suits will require a defense." Here is what has happened:  On Monday, May 4, in state courts across the nation lawyers representing children and young adults filed (and apparently will continue to file) suits seeking to compel State governments to recognize the application of the public trust doctrine to greenhouse gas emissions and to take action to abate those emissions.  The environmental group coordinating these actions is Our Children's Trust, based in Eugene, Oregon.  Its mission:  "Protecting Earth's Climate for Future Generations."  It is joined by Kids vs. Global Warming, whose "youth activists" are named plaintiffs in a number of the actions.  So far (according to the Associated Press), cases have been filed in California, Colorado, Minnesota, Montana, New Mexico, Oregon, and Washington, and also in federal court in California.  Our perception is that these jurisdictions are friendlier to environmental issues than other places.  In those other places regulatory petitions are being filed. We won't go into the details of all of these filings but here is the gist of the claims brought in New Mexico: Sanders-Reed v. Martinez.  New Mexico is at risk from the effects of climate change.  From loss of snowpack to drought to extreme heat waves, as temperatures rise life in New Mexico is being degraded.  Enter the State.  Before the current administration of Governor Martinez, New Mexico was taking steps to limit the discharge of greenhouse gases within New Mexico.  State agencies studied the problem and made recommendations.  The governor issued executive orders.  The Environmental Improvement Board promulgated greenhouse gas regulations.  New Mexico joined the Western Climate Initiative.  Id. ¶¶ 61-73, 76.  Then Governor Martinez took office at the beginning of this year.  According to the complaint, she attempted to block the publication of the greenhouse gas rules and announced that she would keep New Mexico from joining a regional cap-and-trade program. She also removed all of the members of the Environmental Improvement Board because she believed the Board was anti-business.  The Small Business-Friendly Task Force, created by the Governor, has recommended that New Mexico shift to “observer” status in the Western Climate Initiative. Id. ¶¶ 74-76.  Plaintiffs, one teen-ager (a member of Kids vs. Global Warming) and one environmental group, sued under the public trust doctrine, which has not yet been applied to the atmosphere.  In a nutshell, plaintiffs assert that "Defendant State of New Mexico has failed in its fiduciary duty to recognize and protect our atmospheric public trust resource, thereby injuring these Plaintiffs."  Id. ¶ 19.  In more detail, plaintiffs desire a declaration by the New Mexico court that "(1) the public trust doctrine is operative in New Mexico and, pursuant to this doctrine, the State holds the atmosphere in trust for the public; (2) the State has an affirmative fiduciary duty to establish and enforce limitations on the levels of greenhouse gas emissions as necessary to protect and preserve the public trust in the atmosphere; (3) the State’s fiduciary duty to protect the atmospheric trust is defined by the best available science; and (4) the State has breached its fiduciary duty to protect the public trust in the atmosphere by failing to exercise its right of control over the atmosphere in a manner that promotes the public’s interest in the atmosphere and does not substantially impair this resource."  One will note that the claim is for declaratory relief, but not damages.  Plaintiffs' goal is to stabilize before 2100 the earth's atmosphere at 350 ppm carbon dioxide.  Id. ¶¶ 51-53.  Today it is at 390 ppm and increasing.  Id. ¶¶ 43, 45.  Failure to achieve such stabilization will lead to catastrophe.  Id. ¶ 46. (If you wish to read other complaints and petitions, visit Our Children's Trust's website.) There are a host of issues before these lawsuits are successful.  First, is the atmosphere subject to the public trust doctrine?  Second, can private parties require the State to act to preserve that trust?  Third, what are the elements of standing for those parties?  Fourth, what is the "best available science"?  Fifth, could federal preemption apply?  And probably many more.  But plaintiffs have a lot of opportunities to address these questions and will undoubtedly learn from one case so as to improve the others. In the meantime, the battle for control of the public dialog will continue.  Environmentalists have chosen a broad-based attack and will certainly make the most out of any successes they have.  Further, although we will not link the Tuscaloosa tornadoes and this year's record Mississippi flooding to climate change, some certainly will because more extreme weather is a central prediction of the climate change story.   Those kinds of extreme weather events may be all that is necessary to push climate change back onto the federal agenda.   Perhaps the most interesting facet of this set of cases is how it juxtaposes with Connecticut.  In that case, States are suing private parties to compel them to abate carbon dioxide emissions.  Commentary on the Supreme Court argument suggests that the Court may have some sympathy to States who are trying to remedy a problem that the federal government is ignoring.  Now private parties are suing those same State governments asserting that they are not doing enough either. And where does all this leave our prediction.  We are right about new theories, right about claims of ongoing injuries and right that more suits would be brought.  We are wrong that those suits would be suits for liability.  We are wrong today, anyway.

Carbon Dioxide | Climate Change | Climate Change Litigation | Greenhouse Gases | Supreme Court

The Implications of American Electric Power v. Connecticut for the Duty to Defend

April 24, 2011 18:52
by J. Wylie Donald
We were interviewed by Business Insurance last week after the Virginia Supreme Court heard argument in AES Corp. v. Steadfast Insurance Co. The topic du jour:  what would be the effect of the U.S. Supreme Court's decision in American Electric Power v Connecticut. Obviously, an insurance readership would very much like to know if carbon dioxide liability was something they needed to continue to worry about. Much of the blogosphere has concluded that the justices didn't give much credence to the public nuisance theories of the plaintiffs (we reserve judgment on that conclusion - there were some pretty tough questions posed to the appellants too). If that is so, then carbon dioxide liability is something like Y2K, right? Unfortunately, we fear that is not the case. The concerns over Y2K reached their zenith at 1159 on December 31, 1999. By 1201 on January 1, 2000 most everyone had slapped each other on the back and moved on. Story over. Concerns over carbon dioxide liability are unlikely to have that sharp crest.  If a decision favorable to carbon dioxide emitters is issued by the Supreme Court, that will only mean that federal common law nuisance claims cannot move forward. It says nothing about state law nuisance claims, nor new theories that have not yet been tested, nor even thought up. We strongly believe that carbon dioxide liability suits will be with us for a while yet. Our reason:  climate change is ongoing and those whose interests are harmed will look for succor. So theories of liability will be spun and suits will be brought.  And such suits will require a defense.  All of which leads us back to AES v. Steadfast.  The Virginia Supreme Court will render a decision on one state's law on likely only one issue. Indeed, at oral argument, Steadfast's counsel conceded the result would be different in other jurisdictions. Thus, insureds concerned about carbon dioxide liability should be paying attention to choice of law rules, and to the range of issues where choice of law matters. Let's look at just the two issues in dispute in AES, the application of the pollution exclusion and the meaning of occurrence. The Wisconsin Supreme Court has already ruled that exhaled carbon dioxide is not a "pollutant" and numerous jurisdictions have held that a so-called "absolute" pollution exclusion is not absolute.  Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728, 730 (Wis. 1997); Am. States Ins. Co. v. Koloms, 687 N.E.2d 72 (Ill. 1997) (carbon monoxide); W. Am. Ins. Co. v. Tufco Flooring E., Inc., 409 S.E.2d 692 (N.C. Ct. App. 1991) (floor sealant); Cont’l Cas. Co. v. Rapid-Am. Corp., 593 N.Y.S.2d 966 (1993) (asbestos); Keggi v. Northbrook Prop. & Cas. Ins. Co., 13 P.3d 785 (Ariz. Ct. App. 2000) (bacteria).   As for occurrence, in many jurisdictions there is no question that an occurrence is determined by looking at the intentionality of the injury from the subjective standpoint of the insured, rather than the reasonably foreseeable standard argued by the insurer in AES. Compare Ohio Cas. V. Henderson, 939 P.2d 1337 (Ariz. 1997); Am. Family Mut. Ins. Co. v. Pacchetti, 808 S.W.2d 369 (Mo. 1991) with Brief of Appellee, AES Corp. v. Steadfast Ins. Co., No. 100764 (Va. Sup. Ct. Oct 8, 2010).  Accordingly, it would be extremely shortsighted for insureds to assume every jurisdiction is like every other.  Potential carbon dioxide liability defendants should take two steps going forward. They should ascertain what state's law will be applied on the liability contract they are purchasing today and how that law is likely to address the carbon dioxide liability coverage questions. And they should be asking the same questions for past occurrence-based policies.  And of course, if the oracles and seers who have channeled the Supreme Court turn out to be wrong, the need for coverage and the answers to these questions will manifest themselves much sooner. Brief of Appellee, AES Corp. v. Steadfast Ins. Co..pdf (182.69 kb)     

Carbon Dioxide | Climate Change Litigation | Insurance | Supreme Court

Oral Argument in Steadfast v AES Seemed to Favor AES

April 20, 2011 07:25
by J. Wylie Donald
Supreme Court argument is delicious - for lawyers anyway. Following months of preparation, thousands of pages of research, and draft after draft, finally the parties are called to the fore and bluntly told: "Make your best arguments, counsel." In that context, I ventured to Richmond, Virginia this morning to hear the able presentations on behalf of The AES Corporation (appellant - insured) and Steadfast Insurance Company (appellee - insurer). The parties were locked in a contest over who should pay for the defense of Native Village of Kivalina v. ExxonMobil Corp., the climate change liability suit emanating from the northern shores of Alaska, where native Inupiat residents assert that various utilities, oil companies and a coal company are liable for the emission of carbon dioxide, which resulted in global warming, which melted winter sea ice, which loss permitted fierce winter storms to erode the peninsula on which the residents made their home. The case is the first climate change coverage case with all the implications primacy may have. In the proceedings below, the trial court had initially denied the insurer's motion for summary judgment based on (as argued by the insured) the existence of factual issues. The court specifically held that it could not decide whether the pollution exclusion could be applied. The insured then turned around and filed its own summary judgment motion on the duty to defend. The insurer cross-moved and argued that there was no "occurrence" as the allegations in Kivalina were all intentional acts leading to reasonably foreseeable injury. It also argued that the policies' pollution exclusions applied. The court issued a terse order: "no 'occurrence' as defined in the policies has been alleged in the underlying Complaint." With this prelude, the parties crossed lances before seven justices of the Virginia Supreme Court. In our view, the insured carried the day (and, as explained below, this is not just because AES cited our law review article in their reply brief). Counsel kept it simple. First he opened with a nod to the pollution exclusion and emphasized what was clearly set out in the briefs: the pollution exclusion issue was decided in the insured's favor (the court ruled a fact issue existed) and the insurer did not assign cross-error in its response to the insured's appeal. Accordingly, there was no issue before the Court. Next he turned to the issue that was appealed: whether an allegation of negligence, even if mixed in with numerous allegations of intentionality, constituted an "occurrence." More specifically, did the allegations of Kivalina contain an "accident"? Accident was undefined in the policies, but well-defined under Virginia law. Even if the act was intentional (such as the emission of CO2 by a utility), if the harm was unplanned, the carrier was required to defend. An allegation that the alleged tortfeasor "should have known" (as was asserted in the Kivalina complaint) was sufficient to establish the duty to defend. In keeping with his theme, counsel provided a simple example: if he intentionally changed lanes, but failed to look in his rear-view mirror and clobbered someone, surely that was covered. And it would be covered even if it was reasonably foreseeable that someone would be injured if he failed to look. It was a good example (as we will discuss). Counsel for Steadfast likewise appeared to be starting her discussion with the pollution exclusion. Labeling it a "toxin" (a poisonous substance that is a specific product of metabolic activities ???), she then proceeded to make the point that the insured was sued for its routine business decisions, which insurance does not cover. Further, if the four corners of the policy are compared with the four corners of the complaint (the so-called 8-corners rule which is adopted in Virginia) then it is beyond cavil that the Kivalina plaintiffs alleged that AES knew it was emitting carbon dioxide and knew that that would cause harm. At which point Justice Mims interrupted and attempted to pin down the parties' positions. As he heard it, the insurer argued that there was no coverage for intentional acts with known consequences, and AES argued coverage was lost only for intentional acts with intentional consequences. Insurer counsel refined that slightly: coverage was lost for intentional acts with reasonably anticipated consequences. And then that automobile example resurfaced - embraced by the chief justice. Frankly, I did not follow insurer counsel's rejoinder but I will attempt to recreate it. First, the policy's terms address "accidents" not negligence. Negligence is not necessarily the same as an accident. For example, while speeding and hitting someone would be both an accident and negligent, drag racing and hitting someone might be negligent but it would not be an accident. Furthermore, mere words in a complaint (like the "negligence" used in the Kivalina complaint) were not sufficient. The court must look, counsel argued, to the "facts and circumstances," which showed that there was no error, no mistake, no mishap. It was volitional and deliberate conduct. Counsel then turned to the pollution exclusion and pointed out that the Kivalina complaint talked about pollution everywhere. "But," pointed out Chief Justice Kinser, "isn't the only ruling below that there was a fact issue precluding summary judgment?" Justice Mims chimed in and emphasized the failure to assign cross-error. Although insurer counsel asserted that it was argued on the second motion, Chief Justice Kinser spoke again and affirmed that there needed to be cross-error assigned. Rebuttal was quick. Counsel stated: "We won the pollution exclusion issue and the trial court never ruled differently." And he effectively brought up again his lane-changing example. "If the Court adopts the insurer's position there will be no coverage in lots of areas because foreseeable harm is common. The issue is whether the harm was intended." Prognostication is the devil's own but one can't help oneself. The pollution exclusion issue seems that it will be decided entirely on procedural grounds: as it was not raised below, it was not preserved for appellate review. The occurrence issue is a little more difficult but, as was effectively pointed out in the moving brief and in argument, the Kivalina plaintiffs chose their words and they chose negligence. How could the Court possibly ignore that?

Carbon Dioxide | Climate Change | Climate Change Effects | Climate Change Litigation

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