The First Climate Change Coverage Case: Steadfast Insurance Co. v. The AES Corp.

The First Climate Change Coverage Case: Steadfast Insurance Co. v. The AES Corp.

November 4, 2008 16:36
by J. Wylie Donald

On the day of this historic election I should attempt to link insurance to some great electoral issue, but I cannot.  Instead you will have to just slog through with me some of the import of the first climate-change insurance coverage case:  Steadfast Ins. Co. v. The AES Corp., Case No. 2008-858 (Cir. Ct. Arlington Cty., Va.). This case arises out of the climate change nuisance case, Native Village of Kivalina v. ExxonMobil Corp., CV 08-1138 SBA (N.D. Cal.).  In Kivalina, claimants asserted that 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.  In Steadfast the insurer (Steadfast) of one of the Kivalina defendants (AES) sought a declaratory judgment that it was not obligated to defend or indemnify its insured. 

Steadfast’s complaint is thoughtful.  Because the carbon dioxide allegedly causing harm has been emitted over the course of the last two centuries, commercial liability insurance policies from the beginning of the twentieth century and onward may be implicated.  Steadfast carefully avoids putting all of its (and its affiliates’) policies at risk, however, and draws a line in 2003, despite having issued policies to AES in the 1990s.  Steadfast’s argument derives from policy language requiring that the covered “property damage” occur during the policy period.  Presumably an expert is lined up to opine that there was no property damage in other Steadfast policy periods. 

While Steadfast asserts there is no coverage, AES asserts otherwise and has asserted a crossclaim seeking coverage.  The cross-claim is written with verve.  Steadfast is accused of basing its claim for declaratory relief on a “broad reading of narrow policy exclusions” and a “narrow reading of the broad allegations of the Kivalina complaint.” AES has some muscle behind its contention.  Exclusions are construed narrowly.  Transcontinental Ins. Co. v. RBMW, Inc., 262 Va. 502, 512, 551 S.E.2d 313, 318 (2001)  And the duty to defend “arises whenever the complaint alleges facts and circumstances, some of which, if proved, would fall within the risk covered by the policy.” Brenner v. Lawyers Title Ins. Corp., 240 Va. 185, 397 S.E.2d 100, 102 (1990).

In the end coverage likely will hinge on the application of the policies’ pollution exclusion.  Steadfast asserts that excluded from coverage is “any injury or damage which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants at any time.”  Steadfast asserts that carbon dioxide is a pollutant and the exclusion applies.  That is not self-evident.  The Supreme Court’s decision in Massachusetts v. EPA, 127 S. Ct. 1438 (2007), holds no more than that carbon dioxide is a pollutant within the meaning of the Clean Air Act.  Such a conclusion cannot bind the parties to a private insurance contract, particularly where the doctrine of reasonable expectations is applied, where ambiguities are construed in favor of coverage, and where exclusions are construed narrowly.

Nor, obviously, does AES agree that carbon dioxide is a pollutant.  The relevant policy defines a pollutant as an “irritant or contaminant.”  However, as we have written before, carbon dioxide in the atmosphere does not irritate nor contaminate.  Accordingly, Steadfast’s argument is misplaced.  See previous posting of June 27, 2008 (Carbon Dioxide - Irritant or Contaminant? - Application of the Absolute Pollution Exclusion (Part 1)); also J. Wylie Donald & Craig W. Davis, Carbon Dioxide: Harmless, Ubiquitous and Certainly Not a “Pollutant” Under a Liability Policy’s Absolute Pollution Exclusion, 39 Seton Hall L.R. (2009) (to be published).

Last, as evidence of the ambiguity inherent in the policy’s pollution exclusion, AES points out that Steadfast has regularly identified specific substances as pollutants, such as PCBs, lead paint, and asbestos.  At the very least, it is unclear whether carbon dioxide is a pollutant and Steadfast has never chosen to clarify the point and specifically state that carbon dioxide is a pollutant.  (The author is monitoring insurance wordings, anticipating the moment when the insurance industry “clarifies” its policy language to specifically exclude carbon dioxide.)

Whether Steadfast will lead to some actual jurisprudence on climate change coverage is an open question.  Motions to dismiss the Kivalina complaint are to be heard on December 9.  My prognostication is that if AES succeeds in getting the underlying claims thrown out, then the coverage dispute will quietly go away.  My crystal ball is murky, however, with regard to what happens if Kivalina continues.  Is Steadfast the case the insurance industry wants for the first climate change coverage ruling?

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