McCarter & English, LLP : Climate Change Blog

Sunday, March 29, 2009

The First Salvo: Steadfast Insurance Company Moves for Summary Judgment in the First Climate Change Coverage Lawsuit

We wrote in an earlier blog (Nov. 4, 2008) that the climate change coverage wars had begun when Steadfast Insurance Company sued The AES Corporation concerning coverage for the Native Village of Kivalina v. ExxonMobil Corporation climate change liability lawsuit. Steadfast has charged into the fray; it filed its motion for summary judgment on March 5. The insurer seeks judgment that there is no coverage because 1) the emission of carbon dioxide is not an "accident", as required by the policy, 2) the damage at Kivalina is a Loss in Progress excluded by the policy, and 3) the policy's pollution exclusion bars coverage.

There are lots of topics on which to comment but since I don't have AES's opposition yet, it makes sense to wait on many subjects. There is one, however, that jumps to the forefront now. Steadfast asserts that under Virginia law, where the case was filed and AES is located, the “law of the place where an insurance contract is written and delivered controls issues as to its coverage.”

Choice of law is often critical in coverage cases as many times the courts have come out diametrically opposed depending on the jurisdiction. Many will be familiar with the “sudden and accidental” pollution exclusion, which in some jurisdictions permits coverage for unexpected but gradual releases, but in other places bars claims unless the release is abrupt. Here, notwithstanding that AES has carbon dioxide-emitting plants in numerous states, Steadfast may have stolen the game by filing in Virginia - if it succeeds in getting Virginia law to apply.

What Virginia law does Steadfast like? Well, it particularly likes Virginia’s environmental regulations which have broad definitions of contaminant and pollutant. For example, under the air pollution regulations, pollutant “means any substance the presence of which in the outdoor atmosphere is or may be harmful or injurious to human health, welfare or safety … or which unreasonably interferes with the enjoyment by the people of life or property.” Steadfast goes even further and cites to the Virginia Department of Environmental Quality’s web page – which is not even law – for a definition of pollution including substances that “produce[] undesirable environmental … effects.”

We will learn shortly AES’s response to the choice of law argument. As to the expansive Virginia regulations, one argument will surely be that if Steadfast wanted such expansive terminology, all it had to do was write it into its policy – which it did not.

The lesson learned from this, even before there is a ruling of any sort in the Steadfast case, is that potential climate change defendants need to identify the potential jurisdictions where a coverage dispute might be brought, determine which law is good and which bad for their coverage claim, and be prepared to bring suit in the more favorable jurisdiction if the coverage discussions are not going well.

Posted By J. Wylie Donald At 9:04 PM • Comments (0)

Tuesday, March 24, 2009

EPA accelerates action on climate change regulations

With only two months behind it since President Barack Obama took office and even less time since Lisa P. Jackson became the Administrator of the U.S. Environmental Protection Agency, the federal government has launched several significant climate change regulatory developments pending that, taken together, will reverse course and authorize climate change regulations even before the 111^th Congress has a chance to act on the issues.

The key climate change regulatory initiatives underway are as follows:

· On Jan. 26^th, Obama issued a memorandum to Jackson directing her to re-visit the controversial December, 2007 decision of her predecessor declining to authorize the State of California’s application for a waiver under the Clean Air Act (CAA) that would allow California to regulate greenhouse gas emissions (GHGs) from new automobiles. EPA is reportedly preparing to reverse course on the issue. See this link for a copy of Obama’s directive: http://www.whitehouse.gov/the_press_office/Presidential_Memorandum_EPA_Waiver/

· On March 10^th, the EPA proposed the first comprehensive mandatory national system for reporting emissions of GHGs produced by approximately 13,000 facilities that the EPA said account for 85% to 90% of U.S. GHG emissions. This regulation, which is pending for notice and comment, reaches all kinds of industrial facilities. See this link for a copy of the notice of proposed rulemaking: http://www.epa.gov/climatechange/emissions/downloads/MRRPreamble.pdf

· On March 23^rd, EPA sought White House approval for a draft of its endangerment finding under the CAA that would respond formally to the U.S. Supreme Court’s April 2007 decision in Massachusetts v. EPA (which required EPA to issue an endangerment finding and proceed to regulate GHGs from new automobile exhaust unless it can show such exhaust is not harmful to human health and the environment) and lay the foundation for EPA regulation of GHGs under the CAA.

Separately, Obama recently named Connecticut Environmental Commissioner Gina McCarthy to join EPA as the Assistant Administrator for Air and Radiation. With McCarthy joining Jackson, formerly New Jersey’s Environmental Commissioner, EPA’s senior leadership contains two of the founding members of the Regional Greenhouse Gas Initiative, which just recently completed its third auction of allowances for the power generation sector as part of a cap-and-trade system in effect in the Northeast region.

The accelerating activity pending at EPA means that regulated industries need to be diligent and participate in the review and comment process as the regulatory notices continue to emerge.

Posted By Stephen J. Humes At 9:11 AM • Comments (0)

Wednesday, March 18, 2009

NAIC Acts to Require Climate Change Disclosures - But Without Any Standards

Yesterday, the National Association of Insurance Commissioners voted to require all insurers collecting more than $500 million in premium to make certain disclosures regarding the effect of climate change on their businesses. Some of you might be saying, "Finally." Others may be critical that not enough is being said. Beyond dispute, however, is that climate change disclosure is now in the mainstream. The NAIC joins, among others, environmental groups such as CERES and Friends of the Earth, investor groups such as the Investor Network on Climate Risk, state attorneys general and state treasurers, all of whom have called for more disclosure.

The lack of disclosure by insurance companies has been publicly criticized for a number of years. One of the first groups to do so was Friends of the Earth, who published an assessment of the climate change disclosures being made by the utility, automobile, energy, petrochemical and insurance industries. Insurance companies were dead last in making disclosures.

A group that has been pursuing and posting disclosures from companies throughout the world, including insurance companies, is the Carbon Disclosure Project (CDP). http://www.cdproject.net/aboutus.asp A search of their database through 2008 shows paltry few American insurers feel it is important to make climate change disclosures. The NAIC, apparently, was acutely aware of this and thus pursued its new rules. (You should also note that many of the disclosures the NAIC now requires can be met by the same disclosures made to the CDP. See 12/8/08 draft disclosure questions at http://www.naic.org/committees_ex_climate.htm). In connection with other issues I have reviewed a large number of CDP responses; the quality of responses varies widely.

The Wall Street Journal reported on the NAIC's decision and stated that two risks were driving the Commissioners. First, the risk of extreme weather events would boost claims. Second, caps on carbon emissions threaten the profitability of industries (such as coal utilities) in which insurers invest. I would add that climate change lawsuits could also be of significant interest to the insurance industry. See Nov. 4, 2008 blog post.

The disclosure rule requires insurers' first good faith qualitative responses on May 1, 2010. All responses will be posted by the NAIC. The goal of the disclosures is to give state regulators more information to understand the financial health of the insurance sector and the availability and affordability of insurance. It remains to be seen whether the goals can be met absent standards by which to measure the disclosures. Just as the CDP's responses have wide variability, absent standards the insurers' disclosures are likely to be equally as varied. Such variation is unlikely to help the Commissioners meet their goals.

Posted By J. Wylie Donald At 7:42 PM •

Tuesday, March 10, 2009

Fears of a Canadian Oil "Sand Storm" Are Overdone

by Paul Cellucci

Forecasts of inevitable conflict between Canadian oil sands development and U.S. (and Canadian) carbon concerns, as expressed in this week's Wall Street Journal ("Sand Storm" by Hyun Young Lee, http://online.wsj.com/article/SB123620661145533445.html) strike me as unrealistic. When I became Ambassador to Canada, the two countries had already been working for years to harmonize policies, and the working groups have continued working to this day. In fact, it seems pretty clear from the recent Ottawa summit that Prime Minister Harper wants to take a North American approach to climate change and that President Obama has no interest in cutting off imports of oil sands oil.

When it comes to how each nation will approach climate change, the Journal article makes much of the distance between the United States' proposed straight-ahead cap-and-trade system and Canada's concept of reducing emissions intensity. But I suspect that as the conversation continues there will be adjustments on both sides. The likeliest outcome by far is a single continental carbon-control system, bringing in Mexico as well.

As for U.S. attitudes to oil sands, the Journal implies that the President played it close to the vest in Ottawa. But in a CBC interview the night before, he was quite explicit in placing oil sands in the same category as coal. He acknowledged that coal generates half our electricity and that phasing coal out overnight would shut down our whole economy. The President emphasized the need to develop alternative sources of energy and to work together on technologies like carbon sequestration to contain the environmental damage of old sources.

There is a lot of room now for these two countries to work together. And there's been a steady history of doing so. The North American Energy Working Group has been working since 2001, the Security and Prosperity Partnership since 2005. In fact, there's a lot of institutional momentum for all three NAFTA countries to come together on climate change and energy policy. The Trilateral Agreement explicitly speaks of clean energy research.

The Canadians' commitment to research is serious. They've set aside $400 million for what they call "Green Infrastructure" spending over the next two years, $1 billion over the next five. Canada has already invested heavily to develop the oil sands industry. We can expect them to protect that investment.

Posted By J. Wylie Donald At 2:27 PM • Comments (0)

Friday, March 06, 2009

Green Building Insurance - Unique?

One can often tell when a subject has hit the mainstream by the trend in courses and webinars one finds in one's email. By that metric, green construction is now front and center. Two emails greeted me this week. One addressed best practices for "green" leases, the other was more general and took on "green" construction in its entirety.

I scanned through the materials looking for information on insurance. One brief mention indicated that the "unique" issues would be addressed. That piqued my interest. "Unique" - one of a kind - original. Was there something new under the sun here?

Well, yes and no. Many green building materials are new, but at one time so was asbestos. More recently the housing industry has had problems with EIFS (Exterior Insulation and Finish System). E.g., Pulte Home Corp. v. Parex, Inc., 942 A.2d 722 (Md. 2008). Well then, how about design issues like grass roofs and geothermal heating? Also new, but also paralleled by the shift to controlled building envelopes which gave us (some believe) Sick Building Syndrome.

LEED certification is new, as are building codes and contracts requiring LEED certification to one level or another. But Underwriters Laboratory has certified electrical equipment for years, and been sued in connection with its certifications many times as well, e.g., Peacock's Inc. v. Shreveport Alarm Co., 510 So. 2d 387 (La. App. Ct. 1987), and there are dozens of ASTM standards and building and fire codes that have been relied on as the standard of care in numerous design and construction malpractice cases. In many of those cases, insurance companies paid for the defense and indemnified the insured.

I conclude from all that, that green building coverage issues will be analogized to what has gone before, and that there will be plenty of precedent to guide a court. Will there be new twists? Certainly, but, at least so far, green building insurance issues are not unique.

The issue is not that green building has unique insurance issues, but that there are risks associated with green building that need to be identified and addressed. Insurance will be part of the solution but not the entirety of the solution. Let's take one brief example.

Owner wants a LEED certified building. It intends to market the building as LEED Platinum, will charge premium rents, and apply for tax benefits and code exemptions. Who will bear the risk if Platinum is not obtained, or is only obtained after an extra year, or that damages result from the failure or delay? This is not an idle question. See Shaw Development, Inc. v. Southern Builders LLC, Dkt. No. 19-C-07-011405, Somerset Cty., Maryland (claim that green tax credits not obtained).

An architect's malpractice insurance generally will exclude warranties of performance, but expressly cover loss arising out of the negligent performance of professional services. If the claim is the architect designed the building in breach of an applicable standard of care, the architect may have malpractice coverage; if the claim is that the architect promised LEED Platinum, the odds against coverage are high. Thus Owner's contract with the architect should be designed to support claims of professional negligence in order to access insurance policies. (Owner should also consider where indemnities might be available and what kind of promises it can make that will not come back to haunt it if the Platinum certification is not obtained. But that topic is for a future blog.)

Posted By J. Wylie Donald At 2:04 PM • Comments (0)