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Climate change case ruling favors insurer in coverage dispute

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RICHMOND, Va.—The Virginia Supreme Court last week affirmed its ruling that Steadfast Insurance Co. has no obligation to defend or indemnify Arlington, Va.-based AES Corp. in a climate change liability suit.

Meanwhile, another closely followed climate change suit that blamed power and chemical companies for increasing the severity of Hurricane Katrina in 2005 is being appealed for a second time (see related story).

In its Friday ruling, the Virginia high court said a civil complaint against AES by native Alaskans did not constitute an occurrence under the commercial general liability policy Steadfast wrote for AES.

The underlying suit, Village of Kivalina et al. vs. ExxonMobil Corp. et al., alleged that AES and other companies damaged the village by causing global warming. AES vs. Steadfast was considered by many to be the first insurance coverage case involving climate change litigation.

In first ruling last September, Virginia Supreme Court Justice S. Bernard Goodwyn noted that the Steadfast CGL policy's definition of occurrence was “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”

The Kivalina community alleged that AES intentionally released carbon dioxide and

other greenhouse gases into the atmosphere while generating electricity.

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In seeking a rehearing, AES argued that no authority cited by the court supported that finding and argued that the duty to defend is excused only when the complaint alleges a defendant “should have known to a substantial probability” that its conduct would cause the alleged harm.

In omitting the words “substantial probability” from the duty to defend test, AES maintained, the court “radically redefined ‘accident' to exclude coverage in virtually all negligence cases.”

In its second ruling last week, also written by Justice Goodwyn, the Virginia Supreme Court disagreed and applied the “eight-corners rule,” which compares the “four corners” of the underlying complaint with the “four corners” of the insurance policy to determine whether the allegations in the underlying complaint are covered.

“The relevant policies only require Steadfast to defend AES against claims for damages for bodily injury or property damage caused by an occurrence or accident,” the court noted. “Whether or not AES's intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.”

The decision is “a major victory for insurers in the first-ever climate change-related coverage case, with important implications for both insurers and companies with potential exposure to climate change-related tort claims,” said Joanne L. Zimolzak, a partner in the Washington office of McKenna Long & Aldridge L.L.P. who has been following the case.

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“Although policyholders and their counsel may yet attempt to press similar coverage issues in more favorable jurisdictions, the decision nonetheless stands as a significant step toward resolving the question of whether such claims are covered under CGL policies,” Ms. Zimolzak said.

Citing a concurring opinion by Justice William C. Mims that disagreed with the majority's eight-corners reasoning, “He went on to signal his view that the court's decision may have a broader effect on other CGL policies in which the insured risk is defined as an ‘occurrence,' an issue that bears further exploration by both insurers and policyholders,” Ms. Zimolzak said.

Justice Mims wrote: “While I agree with my colleagues that Steadfast had no duty to defend AES in the underlying action based on the CGL policies in this case, I also must acknowledge the broader effect that this conclusion, and the underlying case law that compels it, may have on other CGL policies in which the insured risk is defined as an ‘occurrence.' Our precedents may have painted us into a jurisprudential corner.”

J. Wiley Donald, a Wilmington, Del.-based partner at McCarter & English L.L.P., said the implications of AES could be severe.

“If you are sued based on allegations that you changed lanes without looking, which was negligent because you could reasonably foresee that you would hit someone, don't expect to be insured…Under AES, that kind of accident is not a covered occurrence,” Mr. Donald said.

John Nevius, a policyholder attorney with Anderson, Kill & Olick P.C. in New York, agreed: “They're drawing a distinction between negligence and accidental—it has to be accidental for it to be covered.”