Climate Change

Disclosure Pressure Ratchets Upward - Will D&O Policies Provide Cover?

February 16, 2010 02:42
by J. Wylie Donald
I concluded that I needed to pay more attention to climate change issues when I attended a seminar in 2005 and one of the speakers commented that inadequate climate change disclosures would not be covered under a D&O policy because of the pollution exclusion. Could it be so? The argument was deceptively simple. Carbon dioxide was a "pollutant." The inadequate disclosure "arose" out of the "release" of carbon dioxide. There is no coverage for same. Q.E.D. Thoughtful analysis, however, dispatches this canard. As we have written previously, carbon dioxide should not be classified as a pollutant. It does not irritate or contaminate: it is biologically benign except at impossibly high concentrations, and it is found in the atmosphere in billions of tons, a natural and essential constituent. And because it does not make the atmosphere impure, it is not a pollutant. But one does not even have to reach that conclusion. Any liability alleged against a director or officer for inadequate disclosure of risks from rising CO2 levels, arises from the inadequate disclosure not from the release of carbon dioxide. Cf. Owens Corning v. National Union Fire Insurance Co., No. 97-3367, 1998 WL 774109 (6th Cir. Oct. 13, 1998) (alleged inadequate disclosure of asbestos risk); Boliden Ltd. v. Liberty Mutual Insurance Co., Dkt. No. 05-CV-284493PD1, 2007 CanLII 11309 (Ont. Super. Ct. Apr. 3, 2007) (ore processing risks); Sealed Air v. Royal Indem. Co., 961 A.2d 1195, 404 N.J. Super. 363 (App. Div. 2008) (asbestos risk). But see National Union Fire Insurance Co. v. U.S. Liquids, Inc., 88 Fed. Appx. 725 (5th Cir. 2004) (per curiam) (pollution exclusion applies to allegations of improper disclosure of illegal toxic waste disposal). The requirements for disclosure are ratcheting upward. It started with activist shareholders requesting climate change disclosure at their companies' annual meetings. Next came the Carbon Disclosure Project, which over time has enlisted over 2000 companies in their annual reporting. See cdproject.net. In 2007, New York Attorney General Cuomo served subpoenas on certain publicly traded electric utilities and a coal company (based far from New York), seeking information on their climate change disclosures. New York has settled with three of the five companies, Xcel Energy, Dynegy and most recently with AES Corp. Dominion Resources and Peabody Energy remain in the dispute. The National Association of Insurance Commissioners weighed in with their disclosure requirements for insurance companies in 2009 (effective 2010). And now, with the publication of the SEC's recent interpretive guidance on climate change disclosures, it is only a matter of time before some investor's prescience is not rewarded and he or she or it concludes that the fault lies not in the stars, but in a corporate prospectus.   Should that come to pass, we anticipate the corporation will tender the claim to its D&O insurer for a defense. Undoubtedly the insurer will consider asserting the application of the policy's pollution exclusion. The ultimate result will depend on all the facts. One fact will be the extent and timing of disclosures. Another, however, could be that the policyholder had the pollution exclusion endorsed out its policy. That is a step the risk manager could be taking right now, regardless of what the corporate lawyers ultimately conclude about disclosure.

Carbon Dioxide | Climate Change | Insurance | Greenhouse Gases

Climate Change Disclosure at the SEC - A Move for Consistency

January 31, 2010 16:00
by J. Wylie Donald
It has been our view for a number of years that climate change disclosures are not for every publicly traded company. What is for each of those companies, however, is the need to take a close look at the risks and opportunities posed by climate change and to assess their importance for the company's specific circumstances. The Securities & Exchange Commission has now reached a similar conclusion. In a press release this past Wednesday, the SEC announced its decision (3-2 on partisan lines) to provide interpretive guidance on existing SEC disclosure requirements applicable to legal and business developments relating to climate change. As stated in the press release, http://www.sec.gov/news/press/2010/2010-15.htm, the Commission's interpretive releases "are intended to provide clarity and enhance consistency for public companies and their investors." As further stated by Commissioner Schapiro, the application of this guidance to climate change is not an opinion on "whether the world's climate is changing, at what pace it might be changing, or due to what causes." The SEC expressly was not "weighing in" on those topics. Nonetheless, some who are familiar with the SEC's inner workings were surprised and acknowledged that it is a big deal for the SEC to take such a step in confirming its interpretation of the applicable disclosure regulations as they relate to global warming risks. Environmentalists and leading state pension fund investors have long argued that the SEC should issue such guidance and formally requested such action in a peition filed with the SEC in 2007. The guidance identifies various areas where disclosure might be required: 1. Legislation and regulation that may impact a business. (e.g., the effect a carbon tax may have on revenue) 2. International agreements that may impact a business. (e.g., the lapse of the Kyoto Protocol may change the need for carbon credits) 3. Regulation and business trends that may have indirect consquences on a business (e.g., refrigerator manufacturers may need to assess energy efficiency as a business trend) 4. Physical impacts of climate change. (e.g., a shipping company may need to evaluate the effect of a melting icecap and the opening of the Northwest Passage) After reading this list, some will certainly conclude that the guidance offers nothing new. Each of these subjects falls within one of the disclosure requirements already on the books for many years. For example, Item 303 of Regulation S-K requires the disclosure in management's discussion and analysis of circumstances materially affecting one's business. If rising sea levels can be determined to pose a material risk to casino operators on the Atlantic seaboard, then disclosure is required. In similar fashion, brethren in Nevada may need to discuss the impact of perpetual drought in the American southwest. Whether these outcomes are the result of climate change is not relevant to the disclosure obligation. Whether they are material is. Likewise, Item 101 would capture disclosure of legislation and regulation material to one's operations. If a carbon tax or cap-and-trade program has a material impact on one's bottom line, one does not need the new guidance to make disclosure. On the other hand corporate disclosures to date are uneven. The Carbon Disclosure Project, http://www.cdproject.net, has been soliciting disclosure from the world's publicly-traded companies for several years. A review of those reports is striking in the variation of both the scope and detail of the disclosures. As a result of the guidance, however, one can now expect disclosing institutions to be reviewing the disclosures of their peers, in order to assess more precisely what needs to be said. The SEC's decision was not the first regulatory pronouncement on climate change disclosure. Last year the National Association of Insurance Commissioners promulgated rules for their regulated community (insurance companies). We do not expect the SEC's guidance to be the last word either. Regulated entities will do well to pay close attention.

Carbon Emissions | Climate Change | Legislation

16 States Back EPA in Suit Challenging Endangerment Finding

January 26, 2010 07:02
It has only been a month since an organization called the Coalition for Responsible Regulation, Inc. filed suit in the U.S. Court of Appeals for the District of Columbia Circuit challenging the U.S. Environmental Protection Agency’s endangerment finding and, already, 16 states have lined up with the EPA, seeking to intervene in support of the challenged regulation.   The challenged regulation, entitled “Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act” (the “Final Rule”), was published in the Federal Register on December 15, 2009 and was issued by the EPA in response to the U.S. Supreme Court’s landmark decision in Massachusetts v. EPA, 549 U.S. 497 (2007).  The rules regulate emissions of greenhouse gases from new motor vehicles and engines.    In the Final Rule, the Administrator finds that “the body of scientific evidence compellingly supports” her conclusion that “greenhouse gases in the atmosphere may reasonably be anticipated both to endanger public health and to endanger public welfare.” She defines the resulting air pollution referred to in Section 202(a) of the Clean Air Act to be “the mix of six long-lived and directly-emitted greenhouse gases: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O)), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfer hexafluoride (SF6).”  The Administrator concluded that the mix of greenhouse gases from transportation sources contribute to the climate change problem, which is reasonably anticipated to endanger public health and welfare.   The Final Rule triggers the EPA’s statutory duty to promulgate regulations establishing emissions standards for motor vehicles covered by Section 202(a)of the Clean Air Act.   Noting that the Court’s action on the petition for review will affect the public health and welfare of their residents and will also affect a host of global warming impacts that the proposed intervenors are suffering, the following states seek to intervene in support of the EPA: Commonwealth of Massachusetts and the States of Arizona, California, Connecticut, Delaware, Iowa, Illinois, Maine, Maryland, New Hampshire, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington.  The City of New York also filed in support of the EPA.   Notably absent from the Motion for Leave to Intervene as Respondents is the State of New Jersey, from which EPA Administrator Lisa Jackson came as the prior Commissioner of the New Jersey Department of Environmental Protection. New Jersey, which just last week inaugurated new Republican Governor Chris Christie, who unseated Democrat Jon Corzine, formerly supported climate change litigation and was among the states challenging the EPA in Massachusetts v. EPA.  The following states were not in the Massachusetts v. EPA case but joined the fight now in support of the regulations: Arizona, Delaware, Iowa, Maryland and New Hampshire.

Carbon Dioxide | Climate Change | Legislation | Regulation | Greenhouse Gases

Top 10 List for Solar as Connecticut Considers Solar Strategy

January 21, 2010 05:44
As the legislative season heats up again in Connecticut, with a session scheduled to commence in early February, some energy industry lawyers, policymakers and leading Legislators themselves have been talking over the last few weeks about what Connecticut should do to improve the deployment of renewables generally and solar in particular.  There seems to be more recognition that, for Connecticut to achieve its broad greenhouse gas emission reduction strategies and climate change mitigation goals, more needs to be done to promote investment in renewables in the state and, if green jobs can be created along the way, all the better. A question that keeps coming up in Connecticut is how New Jersey, which has a similar climate and is not even in the top-ten list among states with respect to the intensity of sunshine, could achieve status as the state with the second largest quantity of installed solar photovoltaic capacity, second only to California.  If you look at per-square-mile or per-capita statistics, New Jersey can even boast that it has the most installed solar projects in the U.S. So what has New Jersey done to promote solar PV? After implementing one of the more aggressive renewable portfolio standards (RPS) in the country as part of the Energy Master Plan, with its mandate that 22.5% of the energy supply be generated from renewable sources by 2021, the NJ RPS also contains a solar “carve out” of 2.12% by 2021.  This is the amount of energy supply required to come from solar PV.  The state also decided to wean itself from the grant-based program except for residential and small commercial on-site solar P/V installers, because the available grant funds alone would not support the growth needed to achieve the RPS and solar carve-out.  And so, the New Jersey Board of Public Utilities adopted a rule that instituted a massive increase in the “alternative compliance payment,” or ACP, for solar from $350 (the amount for other renewables) to initially $711 per megawatt hour.  This is the amount that has to be paid into the fund if load-serving entities do not have enough solar energy in their portfolios.  And hence, the solar renewable energy certificate, or SREC, was given a massive increase in valuation.  Since SRECs typically trade at 75% to 80% of the ACP, market values for SRECs rose to the $600 to $650 range. Especially when these state incentives are combined with the federal renewable energy investment tax credit and accelerated depreciation allowed, the market signals sent in New Jersey to the solar industry have attracted business investment on a grand scale, created green jobs and market-based renewable investments along the way. In my view, Connecticut needs to take similar steps.  The following strategies would help Connecticut facilitate deployment of solar photovoltaic installations in a market-based approach that reduces the reliance on direct governmental grants, promote the creation of green jobs, and attract private capital investments.  Here’s my Top-10 List: 1.      Create a Solar PV Carve-out within the Class I RPS to mandate separate solar RPS. 2.      Create separately-recognized solar renewable energy certificates, or SRECs. 3.      Substantially increase the alternative compliance payment amount for solar PV. 4.      Allow electric distribution companys (EDCs) to conduct auctions or otherwise conduct a process to acquire long-term SREC contracts (+/- 15 years), but mandate transparent pricing to send market signals in real time. 5.      Allow EDCs and capacity and peaking generation contractors to install on-site solar (with reasonable size limits to protect viability of non-utility market for projects) and recover project costs through rate base.  (For private wholesale generation sites, this can be done through a cost of service contract for differences with an EDC.) 6.      Establish one-stop-shopping with the Connecticut Department of Public Utility Control or other capable agency to certify completion and verify qualifying amounts of SRECs generated by a solar project installed in Connecticut with transparent market prices to facilitate open trading of SRECs. 7.      Authorize Connecticut to negotiate a compact or memorandum of understanding  with New Jersey and other states with similar programs to allow for the cross-border recognition and free trade of SRECs (at least through other states that comprise the Regional Greenhouse Gas Initiative (RGGI) or Northeast regional transmission organizations (i.e., ISO New England, ISO-NY, and PJM) with comparable GIS tracking systems). 8.      Adjust real and personal property tax law to ensure that solar improvements are not taxed. 9.      Revise zoning law to define solar as a beneficial use such that solar projects cannot be denied without substantial evidence in a written record finding that a solar project is not a beneficial use in a specific case.  Consider establishing exclusive jurisdiction for larger scale solar PV projects with the Connecticut Siting Council for projects equal to or greater than 1MW to expedite siting by petition for declaratory ruling. 10.  Allow for unlimited size of net metered solar projects behind customer meters provided that system size cannot be greater than customer’s on-site electricity requirements, subject to standard interconnection agreement with EDC following EDC confirmation of no adverse impact on distribution system.  Please write in on this blog and let me know what would be on your wish list to help facilitate the deployment of solar and other renewables in Connecticut.

Climate Change | Solar Energy

NJ Proposes Net Metering Rule Change, Expanding On-Site DG

January 11, 2010 04:44
By Shawn Smith McCarter & English, Hartford Office The New Jersey Board of Public Utilities (BPU) recently proposed an amendment to its net metering rule that will create an even greater economic incentive for utility customers to develop on-site renewable energy, especially solar energy systems.   The proposed amendment would eliminate the 2 megawatt (MW) limit on the size of renewable energy systems eligible for net metering, which would lift an obstacle for large-scale solar projects.  This gives customers the opportunity to develop larger renewable energy systems to generate renewable energy and offset their electric bills.  By developing new systems or expanding upon existing ones, customers can take advantage of the economic and environmental benefits of net metering.   The net metering rules allow customers which generate on-site electricity using Class I renewable energy sources, such as solar, to connect with the local electric distribution company (EDC) and generate electricity on the customer’s side of (or “behind”) the meter.  The net meter virtually “spins both ways,” meaning that the EDC will either charge the customer for electricity supplied in excess of that generated on site by the renewable project, or credit the customer for purchases resulting from excess energy generated by the renewable energy source.  Under the existing net metering rules, a renewable energy system cannot (1) generate more than 2 MW of electricity, or (2) exceed the annual amount of “electricity supplied by the electric power supplier or basic generation service provider to the customer.”  The 2 MW restriction created a ceiling that limited the ability for larger commercial customers to take advantage of net metering.   By proposing to lift the ceiling, the BPU is inviting customers (or third-party developers using power purchase agreements, for example) to invest in larger renewable energy systems that generate more than 2 MW of electricity.  Such a policy shift helps the state to achieve its ambitious objectives set forth in the Energy Master Plan of  achieving 22.5% of renewables, including a renewable portfolio standard target of 2.12% of all energy sold in NJ coming from solar generation.   Despite arguments from some owners of large warehouses and developers seeking to build utility-scale solar projects on vacant property sites, the BPU rejected calls to revise the second net metering condition, which requires that a renewable energy system’s generating capacity be equal to or less than the average amount of electricity consumed by that customer on site either from that supplied annually by an electric power supplier or the EDC in the form of basic generation service.  Nevertheless, the potential economic payoff for customers investing in renewable energy projects is clear--the larger the renewable energy system, the lower their electric bill.   When the net metering rule is combined with other New Jersey regulatory incentives that promote solar projects, especially as the available federal investment tax credits and accelerated depreciation credits provide enhanced opportunities to support solar projects, the solar industry is expected to continue to focus its business development efforts on NJ and larger-scale sites can expect the solar industry to come knocking.    The proposed amendment provides a particularly significant opportunity for commercial customers to develop or expand upon solar energy systems to take advantage of the substantial market incentives for solar that exist in New Jersey.  New Jersey has encouraged the development of solar energy through its Energy Master Plan (EMP) and the market for Solar Renewable Energy Certificates (SRECs). New Jersey’s solar market, which is the second-largest in the United States (second only to California), continues to grow as a result of these efforts.    The BPU is soliciting comments on the proposed amendment to the net metering rule through March 5.  Anyone interested in submitting comments is free to do so.   Another notable proposal of the BPU concerns New Jersey’s “Prevailing Wage Law,” which requires the BPU to adopt regulations to ensure that the prevailing wage rate be paid to workers “employed in the performance of certain contracts for construction undertaken in connection with board [BPU] financial assistance.”  Renewable energy projects constructed with BPU’s financial assistance will soon be subject to the prevailing wage requirements if the BPU proposal is adopted.  The BPU is soliciting comments on the prevailing wage law through March 5.  Anyone interested in submitting comments is free to do so.   Finally, in yet another effort to expand renewables, the BPU opened the door for renewable energy projects located outside of New Jersey, other than solar, to qualify for New Jersey RECs.  Previously, only on-site renewable energy facilities directly connected to a New Jersey EDC’s distribution system could qualify for RECs.  Now, pursuant to the new regulation adopted recently, the BPU is allowing qualifying renewable projects located outside of New Jersey, except solar, to obtain New Jersey RECs provided these projects are connected to the PJM Interconnection, L.L.C.’s (PJM) generator information system for tracking renewable energy.  PJM is a non-profit regional transmission organization that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia, including Pennsylvania, New Jersey and Maryland.

Climate Change | Legislation | Renewable Energy | Solar Energy

The Top 7+ Climate Change Insurance Topics for the New Year

December 31, 2009 02:38
by J. Wylie Donald
Crystal balls are preferred by some over tea leaves; others resort to reading entrails. We all seek some assistance as we peer into the future at the cusp of a new year and a new decade. I am no exception, my divining rod: an imprecise dialog with peers and the ever-probing investigation of Google. So here goes a look at coverage in a world of climate change in 2010. 1. The lead story in this area will have to be a decision in Steadfast Insurance Company v The AES Company. In July 2007 Steadfast brought suit against its insured to ascertain coverage obligations in the climate change lawsuit, Native Village of Kivalina v ExxonMobil Corp. Steadfast moved for summary judgment last March; the motion is fully briefed. A decision should be forthcoming. Regardless of how it comes out (unless there is no decision), the ruling will be significant, if only because it will be the first climate change coverage decision. 2. Will the beach pools continue to avoid disaster? Since Katrina in 2005, United States hurricane seasons have been relatively tame. After predicting an above average season last year, meteorologists had to backtrack and acknowledge a below average season. At some point, the averages will catch up and a Category 5 storm will make landfall here. When that happens we will learn whether the post-loss funding mechanisms will fly, or whether a different legislative fix (even a federal fix) will take over. 3a. New products are the name of the game. Insurance is no different. The Property and Casualty carriers have been rolling out green building coverages focused on certification, re-building upgrades, and recycling. Carbon sequestration projects have found cover. Policies covering carbon credits are less apparent. Expect more innovation, but also expect some re-tooling as the carriers respond to more and better information about what they are insuring, and what insureds want. 3b. Don't take my word on this. Dr. Evan Mills of the Environmental Energy Technologies Division of the Department of Energy has annually and comprehensively assessed insurer responses to climate change. Let's hope there continues to be funding for his important work. 4. The National Association of Insurance Commissioners last March established requirements for insurers to disclose climate change risk. The first disclosures are due on May 1. If past history is any metric, the quality of the disclosures will be all over the map. One can be sure the SEC and state regulators will be paying close attention. The SEC has received numerous petitions seeking the same types of requirements for other industries. State regulators are concerned that climate change threatens the viability of insurers. 5. The Carbon Disclosure Project is on an asymptotic roll. It started slowly in 2003 but since 2006 the CDP has grown at an ever-increasing clip (2204 in 2008, up from 1449 in 2007, which is from 922 in 2006). And it has real heft behind it: "on behalf of 475 institutional investors, holding $55 trillion in assets under management and some 60 purchasing organizations such as Cadbury, PepsiCo and Walmart." The CDP reports annually on corporate climate change statements; its cutoff date for the 2009 report was February 1. Companies wishing to join the ever-increasing number of disclosing entities in 2010 will have to move smartly. (For those pondering the link to insurance, the NAIC rule accepts CDP disclosure.) 6. The climate change risk management dialog will become more sophisticated. Climate change will be a disaster for some; for others it will be a golden annuity. Assessing those risks and opportunities will be key to commercial success. As an example, the cement industry is one of the major identified sources of carbon emissions. Yet if adaptation proceeds, cement is going to be a primary element in the "armoring" of the coast. But does one build in a developing country and export the cement with accompanying political risk and transportation cost, or does one make cement where it will be used. Figuring out the successful business plan will not be simple and risk managers and their consultants will have a lot to keep track of. 7. The absolute carbon dioxide exclusion will remain only theoretical. Insurers will continue to rely on their pollution exclusions to stave off any coverage liability for carbon dioxide claims. Don't expect a different approach until the pollution exclusion gets nicked. If you've gotten this far, you deserve a holiday (I find this stuff interesting, but many do not). So take tomorrow off. Contemplate the future and then grab it. It is the only one we have. Best wishes for 2010.  

Climate Change | Insurance

Senator Kerry's, Lieberman's and Graham's Climate Change "Framework" Lacks Substance

December 12, 2009 18:15
by J. Wylie Donald
In a bid to give some muscle to United States climate change negotiators in Copenhagen, Senators Kerry, Graham and Lieberman unveiled Thursday a "framework" for a Senate climate change bill. See http://www.scribd.com/doc/23946492/12-10-09-Kerry-Graham-Lieberman-Climate-Framework  The thinking is that U.S. credibility took a big hit when the Kyoto Protocol died in the Senate. This time, any agreement will be informed by the position of the Senate, communicated to the world at large.   So what exactly was this position? The envisioned bill will do the following:   Produce better jobs and cleaner air. Secure energy independence. Create regulatory predictability. Protect consumers. Encourage nuclear power. Ensure a future for coal. Revive American manufacturing by creating jobs. Create wealth for domestic agriculture and forestry. Regulate the carbon market.   Does this move the ball forward? I am skeptical. Every one of these subjects will have proponents and opponents who will lobby for their particular interest. To take just two: energy independence and regulatory predictability.   1. Energy independence. If independence were that simple, it would have been figured out sometime in the last four decades since the oil embargos of 1967 and 1973. But instead, America's dependence on foreign oil has only increased. If America is going to be energy independent, that might mean increased use of coal (critics there), or nuclear power (critics there), or ethanol (critics there), or tar sands (critics there). If you read sober scientific assessments of the environmental impact of any nationally meaningful collection of solar arrays, you see literally millions of acres overlain by panels, facilities and conduit (more critics there). In short, everyone (except oil exporters) is for energy independence; the issue is how to get there. The framework offers little to assist in that regard.   2. Regulatory predictability. With California's AB32 and RGGI, the States initiated climate change regulation in this country. Two things were important to States in taking the lead. First, they were able to order climate change regulation in accordance with their priorities, not someone else's. Second, they were able to tap a new source of revenue. The framework (properly I believe) wants to take all that over. Nevertheless, it is exceedingly unlikely that the States will go quietly into the night and just let Uncle Sam do whatever he pleases.   It is trite (but that doesn't make it untrue) to say: the devil is in the details. That is exactly the case with climate change laws and regulations. The framework contains plenty of rhetoric* but little more than that. What business needs are the new rules of the game. That is the framework that really needs to be published.   *Speaking of rhetoric, we have a long way to go. The Senators quote Jim Rogers on the need to "ignite" a revolution and put the recession in the "rear-view mirror." Too much ignition and rear-view-mirror-vehicles are what got us into this mess in the first place. Maybe some new metaphors (to go with the new rules) are needed too.

Climate Change

Needed: Action at Copenhagen

December 6, 2009 18:05
by J. Wylie Donald
What is it about Denmark?  Several hundred years ago a Danish prince couldn't make up his mind about a certain King Claudius and there was hell to pay.  Tomorrow, the leaders of the world (or their representatives) will gather in Copenhagen, and, if everything I read is correct, won't be able to make up their collective minds and there will be hell to pay.   Humankind has set loose on the world's stage a specter, Climate Change, impossible to grasp, subject to many disagreements, and of violent character.  To tame it, an army of diplomats gathered and played out Scene I, where the Kyoto Protocol was conceived, delivered, and is now nearing its final rest.  Now the curtain rises on Scene II in Copenhagen, where all await bold and decisive action.  Or even any action.  Let's look at one sector of the world's economy:  insurance.  In the run-up to Copenhagen, Allianz and the World Wide Fund for Nature teamed to produce a report that identifies four tipping points, where rapid change can be expected with just a small additional change in global average temperatures.  See Allianz SE, World Wide Fund for Nature, Major Tipping Points in the Earth's Climate System and Consequences for the Insurance Sector (November 2009).  Those tipping point scenarios are: 1. rising sea levels and accompanying flooding, with a heightened increase in the Northeast United States; 2. droughts as the Indian monsoons falter, 3.  die-back of the Amazon rainforest, and 4. a shift to a very arid Southwest North America. The Tipping Point report identifies the impacts each of these scenarios will have on insurance.  For example, for rising sea levels "[t]he critical issue is the impact that a hurricane in the New York region would have.  Potentially the cost could be 1 trillion dollars at present, rising to over 5 trillion dollars by mid-century.  Although much of this would be uninsured, insurers are heavily exposed through hurricane insurance, flood insurance of commercial property, and as investors in real estate and public sector securities."  There are several important points in these three sentences.  First, the size of the risk:  trillions of dollars.  Second, the insurance sector has a substantial exposure.  Third, much of the loss would be uninsured, meaning that the non-insurance sector (everybody else?) would bear the bulk of the loss. We blogged last month about the amount of money washing around in insurance company coffers - $4 trillion in premium and nearly $20 trillion under management.  Climate change threatens all of that.  If hurricanes and floods drive loss ratios up, insurance companies will falter.  If real estate investments and public infrastructure are literally under water, the financial debacle will make the demise of Bear Stearns and Lehman Brothers (mere tens of billions of dollars) seem quaint.  Accordingly, insurance companies (and other businesses) are looking for action at Copenhagen so they can start planning where to put their assets and make their business plans. That is why we need action at Copenhagen.  Business and industry need to plan; they can't do that if our leaders do not lead.  To paraphrase that Danish prince, "to lead, or not to lead, that is not the question."

Climate Change | Climate Change Litigation | Insurance | Weather

AbCDE - Thoughts on an "Absolute" Carbon Dioxide Exclusion

October 27, 2009 17:28
by J. Wylie Donald
We trust that those of you following climate change litigation have heard the veritable tap dance of decisions emanating out of the federal courts in the last month.  First, Connecticut v. American Electric Power was reversed by the Second Circuit.  That was followed by the District Court for the Northern District of California dismissing Native Village of Kivalina v. ExxonMobil and rejecting the Second Circuit’s analysis.  The Fifth Circuit, not to be outdone, reversed the Comer v. Murphy Oil decision, but also provided a special concurring opinion where the judge advised that he would have affirmed on alternative grounds.  All of these cases are thoroughly discussed in the blogosphere. What has been less thoroughly ventilated, however, are the implications for insurance coverage for climate change liability claims.  We have discussed before the Steadfast v. AES coverage case filed in Virginia where the insurer seeks to avoid coverage for the Kivalina suit.  We thought originally that Kivalina’s dismissal might have made that suit go away.  However, with two climate change suits now headed back to the trial court (barring further appeal), we will be surprised if Kivalina is not appealed, and further surprised if Steadfast does not provide some law on climate change coverage. One subject that will not be addressed in Steadfast, however, is the efficacy of an "absolute"1 carbon dioxide exclusion.  Yes, you heard that correctly:  the AbCDE.  I regularly ask my insurer colleagues about their thinking on this and just as regularly am told that it is not in the works or even discussed.  The spoken reason is fairly straightforward:  if carbon dioxide is a pollutant under the terms of the policy, and damage from pollution is excluded, then claims arising from carbon dioxide emissions are already excluded by the so-called absolute pollution exclusion and the AbCDE is not needed.  The unspoken reason reflects the converse:  if a carbon dioxide exclusion is necessary, it must be the case that a policy without such an exclusion provides coverage for carbon dioxide liability - even if it has a pollution exclusion.  From an insurer’s perspective, that could be an expensive outcome and suggests a reason to avoid implementing the AbCDE.  History and policyholder experience suggest, however, a different outcome.  Many will recall the time when coverage for asbestos-related loss was hotly debated.  Where insurers lacked express asbestos exclusions, they sought refuge in pollution exclusions.  Success was mixed.  The New York Court of Appeals’ decision in Continental Casualty Co. v. Rapid-American Corp., 593 N.Y.S.2d 966 (N.Y. 1993), is typical.  Although the court concluded that asbestos could be a pollutant, irritant or contaminant within the meaning of the liability policy, it determined the policy’s pollution exclusion to be ambiguous in context and coverage for asbestos loss was found.  Ultimately, the insurance industry recognized the solution to its asbestos problems and decisions like Rapid-American was to adopt universally what is referred to by some as an absolute asbestos exclusion.  Just as with asbestos, there are infirmities in the pollution exclusion as applied to carbon dioxide (such as the doctrine of reasonable expectations, whether carbon dioxide is reasonably understood to be an irritant or contaminant, whether an agency’s classification of carbon dioxide as a “pollutant” has any relevance to a contract between two private parties, among others).  Indeed, one state supreme court has found that exhaled carbon dioxide was not a pollutant, and thus was not excluded by a comprehensive general liability policy’s absolute pollution exclusion.  Donaldson v. Urban Land Interests, Inc., 564 N.W.2d 728, 732 (Wis. 1997).  Unless carbon dioxide liability suits disappear (and the last month is not auspicious in that regard), it is inevitable that more coverage disputes will unfold and that policyholders will secure coverage victories in some cases.  Against the backdrop of those victories, can it be doubted that a carbon dioxide exclusion will take shape? 1We note that the term “absolute “ is somewhat of a misnomer for any exclusion.  A valuable discussion of this can be found at Ira Gottlieb, The Decline of the So-Called ‘Absolute’ Pollution Exclusion, Mealey’s Litig. Rep. (Feb. 12, 2002).

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