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Steadfast Insurance has no duty to defend in climate suit

Steadfast Insurance has no duty to defend in climate suit

RICHMOND, Va.—A Virginia Supreme Court ruling that an insurer does not owe a defense to a company accused of climate change-related damage is based on commonly used commercial general liability language and could affect similar litigation elsewhere, legal experts say.

In the Sept. 16 ruling, the state high court upheld a lower court decision that Steadfast Insurance Co. has no obligation to indemnify AES Corp. in climate change litigation, saying there was no “occurrence” under the CGL policy Steadfast wrote.

The underlying suit, Native Village of Kivalina et al. vs. ExxonMobil Corp. et al., was brought in 2008 by residents of an Alaskan barrier island, alleging AES and other companies damaged the village by causing global warming.

“As a result of the decision having gone the insurer's way, that could potentially affect others as to whether they want to even try to go forward with a coverage claim in this area,” said Joanne L. Zimolzak, partner at McKenna Long & Aldridge L.L.P. in Washington, who represents insurers.

Going forward, the decision may chill future climate change coverage litigation, she said.

“In large part, it'll depend on what happens with these climate change cases generally,” Ms. Zimolzak said. “I wouldn't predict that this is the last coverage case we're going to see in this area. But nonetheless, if you're the insurance industry, certainly it's better to have a win in your hip pocket than the reverse.”

Laura Foggan, partner at Wiley Rein L.L.P. and leader of the law firm's insurance appellate group in Washington, said policyholders face a significant hurdle if they decide to litigate climate change coverage issues.

“Though, obviously, this is one case involving one policy, the decision was made based on widely used policy language in general liability policies; and it was premised on the occurrence requirement of commercial general liability policies,” Ms. Foggan said. “That's a fundamental point that goes to all CGL policies.”

Writing for the unanimous court, Virginia Supreme Court Justice S. Bernard Goodwyn said “Kivalina alleges its damages were the natural and probable consequences of AES's intentional actions. Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies,” the justice wrote.

“Because the court ruled on the occurrence issue, it mooted the need to address the pollution exclusion question at all,” Ms. Foggan said.

Pollution exclusions are routinely included in newer policies, but older policies that may be implicated in global warming or climate change-related cases might not have included pollution exclusions, she said.

“The occurrence ruling is broader because it sweeps in the earlier time frame prior to the introduction of pollution exclusions,” Ms. Foggan said.

However, J. Wylie Donald, partner at McCarter & English L.L.P. in Wilmington, Del., and chair of the law firm's climate change and renewable energy specialty group, said the decision won't influence coverage claims because it's specific to Virginia, which is “insurer-friendly.”

“It's one decision in one jurisdiction on one policy against one complaint. It doesn't really tell us a lot about how things will evolve. It tells us what happened in Virginia,” said Mr. Donald, who represents policyholders.

Businesses should consider buying a specific environmental liability policy for their operations as a result of the ruling in AES Corp. vs. Steadfast Insurance Co., said Matthew J. Pateidl, vp of environmental risk for Lockton Cos. L.L.C. in Kansas City, Mo.

Risk managers should review their exposure to climate change-related litigation; their internal controls; their compliance with local, state and federal regulations; and what risk-transfer tool could mitigate those exposures, Mr. Pateidl said.

Several utility companies that Lockton represents are reviewing their exposures related to global warming and climate change to determine if an environmental liability product would protect their operations, he said.

“To date, no carrier that I've discussed with is looking at a greenhouse gas exclusion on their environmental policy,” he said.

Policyholders with potential climate change-related liabilities should expect this ruling to have a significant impact on the way they secure coverage for this exposure, said John Nevius, shareholder at Anderson Kill & Olick P.C. in New York and chair of the firm's environmental law group.

“Climate change is on a lot of people's minds from the standpoint of business interruption, defending against lawsuits, and potential directors and officers liability involving business decisions,” he said.

“It puts risk managers in a difficult position because no one can tell us yet whether climate change is going to be the next tobacco, asbestos or millennium bug,” Mr. Nevius said

“I've spoken to some brokers who say that under certain existing pollution legal liability policy forms, there should be coverage for global warming-related litigation,” Mr. Nevius said. “I know for a fact that some of the defendants in these recent global warming cases...are getting a defense now.”

He said insurers are likely to cite the Virginia ruling in asserting that there is no duty to defend similar claims.

“Coverage for environmental liabilities has always been a controversial area rife with litigation. This decision is only the first round in what likely will be a long fight over policyholder rights,” Mr. Nevius said.