Insurance Companies Face Global Warming Claims

The industry is about to enter an era of global warming insurance claims. Scientists have been warning about the impact global warming could have if greenhouse gas emissions are not reduced. Because of a sense of urgency in the need to reverse global warming, pressure has been mounting on the three branches of government at the state and national levels to reduce greenhouse gas emissions. As a result of a public outcry and government actions, corporations that emit greenhouse gases ranging from energy companies to toy makers are becoming increasingly exposed to regulatory orders and lawsuits, for which they will tender claims to their insurance companies.

Global Warming Dangers

Global warming comes from greenhouse gas emissions. Greenhouse gases are emitted from the combustion of nonrenewable sources of energy. Greenhouse gases trap heat in the atmosphere, increasing the earth’s average temperatures. That phenomenon is referred to as climate change, or global warming.

The principal greenhouse gases are carbon dioxide, methane, nitrous oxide and fluorinated gases. Most energy demands are met by the combustion of fossil fuels such as coal, oil and natural gas. When fossil fuels are burned, carbon dioxide is released into the atmosphere. Not surprisingly, carbon dioxide is the most prevalent greenhouse gas emitted by humans.

According to many scientists, the dangers of global warming include:

• An increase in extreme weather-related natural disasters and associated deaths;
• Water and power shortages;
• Rising sea levels, which endanger islands and coastal areas;
• The spread of severe diseases;
• Damage to forests;
• Threat to many animal species;
• Warming ocean waters that kills plankton, the bottom of the food chain;
• Loss of ecosystems and food production;
• Thawing permafrost;
• Disappearing glaciers and coral bleaching; and
• Loss of economic industries such as winter sports industries.

Some claim that, absent emission reductions, it is possible that a catastrophic event will occur, plunging the globe into the next ice age and causing mass extinction. There is a growing movement in favor of regulations and lawsuits aimed at curbing greenhouse gas emissions.

Claims Arising From Global Warming

The energy, auto and manufacturing industries are facing regulations and lawsuits aimed at curbing their greenhouse gas emissions. As those industries incur substantial compliance costs, they will seek to shift the costs to their insurers.

Some lawsuits have been filed by states and eco-friendly organizations against government agencies seeking to compel executive or legislative action to address global warming. Such lawsuits are aimed at curbing corporate emission practices through the enactment of regulations.

Another category of lawsuits is reflected in actions filed by private individuals, corporations and eco-friendly organizations against the industries that emit gases, on the basis that the emitters are causing global warming damage. The tort lawsuits generally allege claims including public nuisance, trespass and unjust enrichment.

In response, corporations that are the objects of the lawsuits and regulatory action will tender claims to their commercial general liability insurers seeking coverage for regulatory compliance costs (i.e., costs to abate or mitigate emissions pursuant to regulations or compliance orders), and litigation costs including defense costs and indemnity for settlements and judgments.

Whether such claims are covered will likely be decided by the courts. If history is a guide, there will probably be different conclusions in different states. The debate will likely revolve around the “pollution exclusion” in CGL policies and whether carbon dioxide, the main greenhouse gas emitted by human activity, is a pollutant.

Absolute Pollution Exclusion

A typical CGL policy obligates an insurance company to pay “all sums for which [the insured] become[s] legally obligated to pay as damages caused by bodily injury, property damage or personal injury,” subject to exclusions. One exclusion that has evolved over time is the pollution exclusion. That exclusion was initially drafted in response to the marked increase in environmental liability associated with new environmental statutes and environmental disasters.

In the 1970s, the standard pollution exclusion excluded coverage for damages “arising out the discharge, dispersal, release or escape of smoke, vapors, fumes, acids, alkalize, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water,” but not the “sudden and accidental” release or discharge of pollutants. That was known as the “qualified pollution exclusion.”

Later, in the mid-1980s, the insurance industry revised the exclusion by eliminating the “sudden and accidental” exception. The revised exclusion is known as the “absolute pollution exclusion.” The APE is found in most CGL policies today.

A “pollutant” is defined in a typical CGL policy as “[a]ny solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”

The APE typically excludes subject to certain exceptions:

In sum, losses caused by pollution are generally excluded under CGL policies. Notwithstanding the changes made to the exclusion, courts in different states still apply the exclusion inconsistently.

California Courts’ Interpretations

Nationwide, there are two lines of authority interpreting the APE. In MacKinnon v. Truck Ins. Exchange, 31 Cal.4th 635, 3 Cal.Rptr.3d 228 (2003), the court explained that the majority of jurisdictions apply the exclusion to “traditional environmental pollution” but not to “injuries involving the negligent use or handling of toxic substances that occur in the normal course of business.”

Courts adopting that narrow interpretation focused on the common meaning of the term “discharge, dispersal, release or escape” as “implying expulsion of the pollutant over a considerable area rather than a localized toxic accident occurring in the vicinity of intended use,” rather than “normal” toxic accidents such as the accidental spraying of insecticides, leaks of carbon monoxide from furnaces or the ingestion of paint chips.

A minority of jurisdictions, relying on the “plain” language of the exclusion, hold that the exclusion is unambiguous and applies to all manner of negligent acts involving toxic substances even outside the scope of “traditional environmental pollution.” MacKinnon, 31 Cal.4th at 646-47.

Those courts that apply the narrow interpretation of the APE invoke the “reasonable expectations” doctrine, which applies when the policy language is ambiguous. La Jolla Beach & Tennis Club Inc. v. Industrial Indemnity Co., 9 Cal. 4th 27, 37, 36 Cal. Rptr. 2d 100 (1994); Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1264-1265, 10 Cal. Rptr. 2d 538 (1992); Reserve Insurance Co. v. Pisciotta, 30 Cal. 3d 800, 807-808, 180 Cal. Rptr. 628 (1982).

Courts consider the reasonable expectations of the policyholder in deciding whether to resolve an ambiguity in favor of coverage. Notwithstanding the ambiguity requirement, the California Supreme Court has applied the “reasonable expectations” doctrine in a case where the court did not expressly conclude that the policy language was ambiguous. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (1995).

In 2003, the California Supreme Court, in MacKinnon v. Truck Ins. Exchange, applied the narrow interpretation and found that the APE was ambiguous in the context of pesticide fumes and invoked the “reasonable expectations” doctrine. In that case, pesticides used in a building to exterminate bees caused the death of a renter. The court found coverage under a CGL policy that insured the building on the basis that the APE was intended to exclude coverage for injuries resulting from events commonly thought of as environmental pollution, rather than all injuries arising from toxic substances.

The court found that the policy language was ambiguous and applied the “reasonable expectations doctrine” in concluding that coverage existed under the policy. The court explained that because there was a “reasonable expectation” that the insured will have coverage for ordinary acts of negligence resulting in bodily injury, coverage will be found unless the “pollution exclusion conspicuously, plainly and clearly appraises the insured that certain acts of ordinary negligence, such as the spraying of pesticides in this case, will not be covered.”

Under the reasonable expectations doctrine, “the application of pesticides in and around an apartment building does not plainly signify to the common understanding the ‘dispersal’ of a pollutant.” The court also explained that the definition of “pollutant” as including any irritant or contaminant was inconsistent with what a reasonable policyholder would understand it to mean. The court raised the example of carbon monoxide, stating that a reasonable person would view it as a pollutant if it is emitted in an industrial or environmental setting, but not if it is emitted from a malfunctioning home heater. In conclusion, the court found in favor of coverage, explaining that “it is unlikely a reasonable policyholder would think of the act of spraying pesticides under these circumstances as an act of pollution” and the pollution exclusion did not plainly exclude the loss. Id. at 655-656.

In a subsequent case, Garamendi v. Golden Eagle Ins. Co., 127 Cal.App.4th 480 (2005), the insurer, applying the APE, denied coverage to its insured, who was sued by workers for silica-related injuries. The workers alleged that a sandblasting operation dispersed silica-containing dust in a large area, causing injury. The court explained that the APE applied and the insurer had no duty to defend its insured in relation to the silica-related injuries.

The court first noted that the MacKinnon court limited the scope of the APE “to injuries arising from events commonly thought of as pollution, i.e., environmental pollution.” Applying MacKinnon, the Garamendi court explained that silica dust is within the broad definition of “any solid, liquid, gaseous, or thermal irritant or contaminant,” federal regulations identify silica dust as an air contaminant, and the widespread dissemination of silica dust as an incidental by-product of industrial sandblasting operations is commonly thought of as pollution and environmental pollution. The court noted that “[c]ontrary to claimant’s suggestion, there need not be ‘wholesale environmental degradation, such as occurred at, for example, Love Canal or the Stringfellow Acid Pits’ to constitute pollution.”

In Ortega Rock Quarry v. Golden Eagle Ins. Corp., 141 Cal.App.4th 969 (2006), the Ortega Rock Quarry placed fill dirt along a washed out access road after heavy rainfall. In response, the EPA issued an administrative order alleging that the fill along the road resulted in the discharge of fill material into the Lucas Canyon Creek. The EPA ordered Ortega to cease the discharge of all fill material, and to submit an interim erosion plan and site restoration plan, alleging a violation of a statute, which made it unlawful for any person to discharge a pollutant into the U.S. waterways without a permit. Ortega’s lessor filed suit against Ortega alleging that Ortega had damaged the creek and surrounding property, and Ortega submitted the claim to its insurers. The insurers denied coverage based on the APE asserting that rocks and dirt were “pollutants” within the policy definitions and thus subject to the pollution exclusion. The trial court granted the insurers’ motions for summary judgment and the appeal court affirmed. The court rejected Ortega’s assertion that dirt and rocks are not pollutants because they are naturally occurring, noting that dirt and rocks were considered pollutants within the meaning of the Clean Water Act.

In Legarra v. Federated Mutual Ins. Co., 35 Cal.App.4th 1472 (1995), the plaintiffs purchased a property that was used as a petroleum bulk plant. A governmental agency learned that there likely had been fuel releases at the property and advised the plaintiffs that they might be responsible for certain costs for investigating and monitoring the property. The plaintiffs tendered the claim to their insurer, which declined coverage based upon the APE. The trial court granted summary judgment in favor of the insurer, concluding that it had no duty to defend or provide indemnification based upon the APE, and the court of appeal affirmed. On appeal, the insureds argued that it was not clear whether petroleum was a pollutant under the APE, but the appellate court disagreed, explaining that pollutants included any liquid irritant or contaminant and the exclusion clearly excluded coverage for the property damage resulting from such groundwater contamination. The court held that an insured could not have reasonably expected coverage for the property damage resulting from the petroleum contamination.

In Cold Creek Compost, Inc. v. State Farm Fire and Cas. Co., 156 Cal.App.4th 1469 (2007), the California Court of Appeal addressed an issue of first impression as to whether the APE applies to odors. Cold Creek, the insured, was an operator of a composting facility that was sued by neighbors for nuisance because of noise and injurious, noxious odors emitted from its facility. The insured lost at trial, and then submitted a claim for defense costs and the judgment amount under its commercial liability policies. After the insurer denied coverage, Cold Creek filed a bad faith lawsuit. The insurer prevailed and Cold Creek appealed. The Court of Appeal affirmed, holding that “[t]he widespread dissemination of offensive and injurious compost odors as occurred in this case is environmental pollution, which is clearly and plainly excluded from coverage by the words of the pollution exclusion understood in their ordinary and popular sense.”

Those decisions show that the courts apply the APE differently depending on the context of the case. While the MacKinnon court found that the APE is ambiguous in its application to pesticides, other lower courts found that the APE was not ambiguous in the context of other loss-triggering events such as silica, the emission of noxious odors and petroleum. But one important, common theme among the cases is the application of the “reasonable expectations” doctrine in deciding whether a loss is excluded under the APE. The APE-based decisions should provide guidance in assessing how the issue of coverage for global warming claims will be decided.

The Supreme Court’s Holding

While none of the California cases cited addressed the APE in the context of carbon dioxide emissions, a recent U.S. Supreme Court case, not involving insurance, may impact how California and other state courts will decide the issue. In Massachusetts v. Environmental Protection Agency, 549 U.S. 1438 (2007), the U.S. Supreme Court, for the first time, addressed the phenomenon of global warming. In that case, the U.S. Supreme Court acknowledged, in a 5-4 decision, that “[t]he harms associated with climate change are serious and well recognized.” Massachusetts, 549 U.S. at 1442. The high court decided whether a state had standing to sue the EPA for not promulgating regulations to reduce greenhouse gas emissions and whether the EPA’s decision not to regulate carbon dioxide emissions under the Clean Air Act was “arbitrary and capricious.” In resolving those questions, the court addressed whether “pollution” includes greenhouse gas emissions.

In the Mass case, the EPA acknowledged that under the Clean Air Act, it is required to regulate emissions of “air pollutants” that “endanger the public health and welfare.” But the EPA claimed that carbon dioxide is not an “air pollutant.” It further claimed that it could not regulate such emissions because the Department of Transportation was already assigned the job of regulating such emissions by Congress, such regulations would impair the President’s ability to negotiate with developing nations to reduce emissions and impede on voluntary programs to reduce emissions, there was scientific uncertainty surrounding climate change, and regulations would do little to reverse global warming.

The court rejected the EPA’s arguments, holding that carbon dioxide is an “air pollutant” within the meaning of the Clean Air Act, and that the EPA’s refusal to promulgate regulations was based on “impermissible considerations” and was therefore “arbitrary and capricious.”

The court remanded the case giving the EPA a small window through which it could avoid regulating emissions if it determined that greenhouse gases do not contribute to climate change or if it provided a reasonable explanation as to why it could not or would not exercise its discretion to determine whether they do.

It will likely be virtually impossible for the EPA to justify not promulgating regulations. The court took note of the fact that the EPA conceded that there is a causal connection between manmade greenhouse gas emissions, global warming and harmful consequences, but the EPA’s own Web site states that “[t]he atmospheric buildup of CO₂ and other greenhouse gases is largely the result of human activities such as the burning of fossil fuels…[i]ncreasing greenhouse gas concentrations tend to warm the planet,” and further identifies the effects of climate change as including rising sea levels, damage to ecosystems, more extreme weather, and harm to human health.

Indeed, the court noted that the EPA did not dispute that global warming has caused damage. It is difficult to imagine how, under the circumstances, the EPA can continue to not regulate carbon dioxide emissions.

Applying APE to CO₂ Emissions

None of the cited California cases discuss the application of the APE in the context of carbon dioxide emissions. However, they do provide guidance. A policyholder seeking to invoke coverage for a global warming claim will argue that the APE does not preclude coverage because: (1) carbon dioxide is not “traditional environmental pollution” and is “not commonly thought of as pollution” (applying MacKinnon), (2) there is a “reasonable expectation” of coverage for liabilities arising out of normal business operations which include emissions of greenhouse gases, (3) greenhouse gas emissions have never been regulated by the EPA, and (4) the insurance companies did not contemplate carbon dioxide emissions in drafting the APE.

Notwithstanding those arguments, losses arising from carbon dioxide and other greenhouse gas emissions may be deemed by the courts to be excluded under the APE because: they are chemical compounds and waste products which are defined as pollutants in the APE; they are man-made emissions that cause environmental harm and, under MacKinnon; the APE’s intent was to “limit liability arising out of enforcement of anti-pollution laws;” and they are regulated by the Department of Transportation.

The Mass v. EPA case may affect how state courts will decide the issue. Some courts may cite to Mass v. EPA to support a conclusion that carbon dioxide is a “pollutant” in the insurance context. On the other hand, courts may distinguish Mass. v. EPA on the basis that the definition of “pollutant” under the Clean Air Act is different from the definition under a CGL policy and the “reasonable expectations” doctrine requires a different analysis. The impact that Mass v. EPA will have on the state courts interpreting the APE under a CGL policy is yet to be seen.

Whether carbon dioxide and other greenhouse gases are pollutants excluded under a CGL policy will ultimately be decided by the courts. In the meantime, the energy, auto and manufacturing industries are facing regulations and lawsuits aimed at curbing their greenhouse gas emissions for which they will incur substantial costs. As those corporations seek to shift such costs to their insurers, a wave of “global warming” insurance claims may be rolling in.