Global Warming Litigation Ruling in Favor of Insurers Vacated

As if times weren’t uncertain enough, the Virginia Supreme Court issued a ruling on Jan. 17, 2012, vacating its Sept. 16, 2011, opinion in Steadfast Insurance Co. v. The AES Corp. and granting a rehearing in that case, which was argued on Feb. 27, 2012.

The Steadfast opinion had been a victory for insurers, as the Virginia Supreme Court found — in the first case in the country to decide the issue — that Steadfast had no duty under the CGL policies issued by it to defend its insured, AES Corp., against climate change/global warming-based causes of action.

As a general rule, petitions for rehearing are rarely granted. It is even more surprising that rehearing was granted in the Steadfast case because none of the judges hearing the case disagreed with its ultimate finding in favor of Steadfast, though there was a concurring opinion in which two justices joined. The only obvious thing that has changed in the few months between the original opinion and the order vacating that opinion was the appointment of two new justices who were not involved in the original decision to fill vacancies on the Court.

Certainly, the granting of AES’ petition for rehearing is not an encouraging sign for Steadfast. But, while attempting to divine a court’s thinking in granting a rehearing is always risky business, it should not automatically be concluded that a complete reversal is imminent and that the Steadfast opinion will go from good news to disaster for insurers.

Steadfast Litigation and Virginia Supreme Court

AES Corp. was named as a defendant, along with other parties, in a lawsuit filed in Alaska by the Village of Kivalina, styled Village of Kivalina v. ExxonMobil, et. al. The residents of the Alaskan city of Kivalina alleged that AES and the other defendants were emitting excessive amounts of carbon dioxide and other greenhouse gases that were causing global warming, resulting in the loss of Arctic sea ice that protected the Kivalina coast from winter storms. AES sought defense of this claim under a CGL “occurrence” policy issued by Steadfast. Steadfast agreed to defend under a reservation of rights, but filed suit in Virginia seeking a declaratory judgment that it had no duty to defend AES in the Village of Kivalina lawsuit.

In its declaratory judgment suit, Steadfast filed a motion for summary judgment arguing that the Village of Kivalina claims against AES were not covered by its CGL policy because: (1) the damages alleged were not caused by an “occurrence” within the meaning of the CGL policy, (2) since the damages allegedly began prior to the policy’s issuance date, the “loss in progress” endorsement excluded coverage and (3) coverage was excluded under the policy’s pollution exclusion.

On Feb. 5, 2010, the district court, without providing reasons, granted Steadfast’s motion “because no ‘occurrence’ as defined in the policies has been alleged in the underlying Complaint.” AES appealed the ruling.

In its Sept. 16, 2011, opinion affirming the district court’s ruling, the Virginia Supreme Court began by noting that under Virginia law, Steadfast’s duty to defend was to be determined based solely on the allegations in the Village of Kivalina complaint and the terms of the Steadfast insurance policy.

The Steadfast policy defined “occurrence” as an “accident.” The Virginia Supreme Court observed that for these purposes, Virginia law defined “accident” as an “event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed or reasonably anticipated.”

The Village of Kivalina complaint alleged that AES “intentionally” released “tons” of greenhouse gases into the atmosphere. The Court stated that intentional acts are not “accidents,” but a resulting injury that was out of the ordinary expectation of a reasonable person could nonetheless be covered under an “occurrence” insurance policy even though the insured’s action which started a chain of events was intentional.

Pointing out that the Village of Kivalina complaint alleged that its generation and distribution of electricity caused global warming, leading to the erosion of the coastline near the Village of Kivalina in Alaska, AES argued that this alleged injury was unforeseen and unintended, and thus “accidental,” from its viewpoint.

The Virginia Supreme Court rejected this argument because the Village of Kivalina complaint also alleged there was “a clear scientific consensus” that global warming and the type of damages alleged in the complaint were the natural and probable consequence of the emission of greenhouse gases. As the Court stated:

“Kivalina asserts that the deleterious results of emitting carbon dioxide and greenhouse gases is something that AES knew or should have known about. Inherent in such an allegation is the assertion that the results were a consequence of AES’s intentional actions that a reasonable person would anticipate. Because the Village of Kivalina complaint alleged an intentional act by AES resulting in reasonably foreseeable damages, the Court agreed that the Steadfast ‘occurrence’ insurance policy did not provide coverage of the claims alleged. The Court did not address the other defenses raised by Steadfast.”

The Petition for Rehearing

In its petition for rehearing, AES argued that the Virginia Supreme Court erred in “failing to distinguish between allegations that a defendant should have known that harm was reasonably foreseeable and allegations that a defendant should have known that there was a substantial probability that harm would occur.” AES asserted that “the scientific consensus on which [the Alaskan village] relies does not state that harm to the village was inevitable or eminently foreseeable. The scientists rather use subjective language suggesting only that CO2 emissions ‘could’ result in global warming which, in turn, ‘could’ or ‘should’ or ‘may’ result in harm.”

AES also asserted that: “This court’s opinion departs from precedent and basic principles of insurance law by treating allegations that a defendant ‘should have known’ (i.e. foreseen) a particular harm as equivalent to allegations that the insured should have known to a substantial probability that the insured’s acts would cause the harm.” AES argued that the Court’s opinion “collapses the ordinary negligent standard into the intentional act standard. If allowed to stand, it would eliminate insurance coverage in most cases. Insureds and plaintiffs alike will suffer, because they will be unable to depend on insurers to provide a defense or coverage in most tort cases.”

What Will The Court Do?

To restate the obvious, what the Virginia Supreme Court decides to do on rehearing won’t be known to the public until its opinion is issued, particularly since there are two new justices on the Court who were not part of the original opinion. However, the criticisms raised in AES’ petition for rehearing seem to have been anticipated, at least to some degree, in the concurring opinion issued by senior Justice Koontz and joined by senior Justice Carrico.

In setting forth the reasons for concurring, Justice Koontz stated: “That argument [by Steadfast] focuses on the allegations of the Kivalina complaint which assert that AES’ actions were intentional and had foreseeable consequences about which AES ‘knew or should have known’ and, thus, that the resulting ‘occurrence’ was not an ‘accident’ within the meaning of the CGL policies even if those actions were, as the complaint alleges, also ‘negligent.’ I share the concern expressed by AES that this argument paints with too broad a stroke.”

She therefore wrote her concurring opinion to “make clear and emphasize that theholding in this case is limited to the unique allegations of [the Kivalina complaint] and the particular definitions of an insured ‘occurrence'” in the Steadfast CGL policies.

She agreed with the majority that the Kivalina complaint alleged that AES’ actions, and the damages caused thereby, were intentional and were negligent “only in the sense that” AES’ actions would cause damage no matter how they were performed. She concluded that:

“Under the CGL policies, Steadfast would not be liable because AES’s acts as alleged in the complaint were intentional and the consequence of those acts was not merely foreseeable, but inevitable. In other words, where the harmful consequence of an act are alleged to have been eminently foreseeable, choosing to perform the act deliberately, even if in ignorance of that fact, does not make the resulting injury an ‘accident’ even when the complaint alleges that such action was negligent.”

It is possible the Court granted rehearing to address the concern raised by the concurring opinion and to explain its reasoning in greater detail in order to narrow the impact of its holding. Of course, such a revised opinion could presumably have been issued without vacating the original opinion and allowing additional briefing and argument.

Even if the Court does reverse itself on the issue of whether the Kivalina complaint alleges an “accident” within the meaning of the Steadfast policies, Steadfast raised several other defenses which were not addressed by the district court or the Supreme Court and which could result in the judgment nonetheless being affirmed on different grounds.

For example, Steadfast argued that coverage of the claims against AES was excluded under its policy’s pollution exclusion. This is a key defense likely to be available to and raised by most insurers if faced with potential coverage of climate change-related causes of action. If the Virginia Supreme Court does go this route, the rehearing, which is presently a cause for concern, would prove to be a boon for not only Steadfast, but the insurance industry as a whole.

Whatever analysis one chooses to apply to determine the meaning of the decision to vacate the Sept. 16, 2011, Steadfast opinion, the answer should be forthcoming from the Virginia Supreme Court soon and we will all know for sure.