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?

By Rebecca Brenia, McCarter & English, Hartford

No matter the outcome, today’s election is likely to bring about a dramatic shift in climate change policy within the federal executive branch.  Senators John McCain and Barack Obama both support policies to bring about a significant reduction in greenhouse gas emissions over the coming decades.  The candidates’ positions with respect to climate change are quite similar, with different tactical approaches in certain areas.

The candidates both support a mandatory, economy-wide cap-and-trade program to dramatically reduce greenhouse gas emissions from major industrial emitters over the next half-century.  The incremental reductions that will be required can be achieved directly or by purchasing offsets.

Senator Obama proposes auctioning 100% of available emissions allowances to raise an estimated $250 billion each year for federal programs, including a ten-year, $150 billion program to develop low-emission electricity and to create jobs.  The greenhouse gas cap-and-trade bill that Senator McCain co-authored with Senator Lieberman in 2003, 2005, and 2007 tasks the Environmental Protection Agency with determining the best way to allocate emission allowances.  (Senator Obama co-sponsored the two most recent versions of the bill).  Senator McCain advocates the development of low cost-compliance options, and his website states that allowances will eventually be auctioned to support advanced technologies.

During the second presidential debate, the candidates had an exchange about nuclear power.  Senator McCain favors a rapid expansion of nuclear power, which generates minimal greenhouse gases.  He has called for 45 new nuclear reactors by 2030.  Senator Obama has concerns about the safety and security of nuclear fuel, but has stated that nuclear power can be part of the climate change solution if safeguards are put in place.

The candidates both support policies to reduce greenhouse gas emissions associated with building and transportation.  Each candidate pledges to increase the energy efficiency of government-owned or leased buildings, with Senator Obama pledging to require new federal buildings to be carbon neutral by 2025.  Both candidates support a tax credit for consumers who purchase zero-emission vehicles.  Senator McCain proposes a $300 million prize for the development of advanced battery technology for hybrid and fully-electric cars.  Senator Obama calls for a million plug-in vehicles by 2015.  Both candidates support flexible fuel technology.

Senators McCain and Obama also share a commitment to participating in the international dialogue on climate change.  Both will engage in talks as part of the United Nations Framework Convention on Climate Change, and both have expressed an intent to provide incentives for developing nations to reduce greenhouse gas emissions.

Given the candidates’ agreement that climate change is an urgent problem that deserves the government’s immediate attention and resources, the question is not whether climate change policy will advance as a result of today's election.  The question rather is how widespread and rapid the changes will be.  Savvy business leaders, investors and entrepreneurs are planning their responses now.