Up in Smoke? Insurance Coverage for Global Warming Issues

December 9, 2009

In the last three months, a lot has happened in the world of climate change litigation, which may signal the start of a new avalanche of lawsuits. On the heels of three different federal courts issuing rulings with respect to global warming, a dispute has broken out in the scientific community questioning the validity of global warming science.

This dispute, using the term broadly, arises from the recently leaked e-mails exchanged among global warming scientists. Of course, all these developments come just before the United Nations Climate Summit in Copenhagen going on right now. For those business entities involved in heavy manufacturing, long-haul transportation, and energy production, these developments raise concerns for them as insurance policyholders.

As many know by now, the U.S. Court of Appeals for the 2nd Circuit issued its ruling in the State of Connecticut v. American Electric Power Company, Inc. The court revived the plaintiffs’ claims against various energy companies based on global warming issues. It ruled that the plaintiffs have standing and that such claims are not pre-empted.

The 5th Circuit Court of Appeals did the same thing in Comer v. Murphy Oil USA. Going the other way, the U.S. District Court in San Francisco dismissed global warming claims brought by the Alaskan native village of Kivalina against oil, coal and power companies. See Native Village of Kivalina v. ExxonMobil Corp. That trial court concluded that the question of global warming’s damage to the environment is best left to the political sphere. The reversal of two dismissals and the almost certain appeal to the 9th Circuit can only lead to the conclusion that global warming litigation against certain business entities is likely to continue, if not increase in the near future. Only time will tell.

Insurers are already responding to the threat of global warming claims against policyholders. Some have begun to withdraw from perceived risky markets, such as coastal areas, due to claims of the rising sea level. Insurers are also reducing the writing of new risks in these geographical areas or raising premiums to cover the perceived increase in exposure. Some insurers are apparently encouraging governmental entities to adopt stronger building codes in an effort to help reduce property loss claims related to natural disasters.

In an effort to encourage consumers to be more energy conscious, various insurers are providing discounts for the use of hybrid autos and encouraging construction with green technology. All these efforts certainly seem aimed at reducing the risk of exposure to climate change claims against policyholders, while encouraging the insureds to become more proactive.

At this point in the history of the litigation, it is hard to know how various insurers may respond more specifically to actual claims based on global warming. To date, it appears there is only one coverage case actively pending between an insurer and an energy producer. That coverage action was spawned from the Kivalina matter.

Several possible responses exist that are currently foreseeable from insurance companies. These responses would be aimed at denying coverage for claims based on global warming.

  • First, insurers may raise the fortuity requirement found in CGL policies. Courts are split as to interpretation of this requirement, and those jurisdictions that follow the “purposeful act” interpretation are more likely to be favorable to an insurer’s argument.
  • The loss in progress rule is also an issue that policyholders should remain mindful of when analyzing coverage for global warming claims. Generally, this rule precludes coverage for damage beginning prior to the inception of an insurance policy. The current trend among courts is to apply this rule more broadly against policyholders than in the past.
  • Of course, it will come as no surprise to anyone that the pollution exclusion clauses in various insurance policies will remain “front and center” in any insurance coverage matter concerning climate change damages. Carbon dioxide is likely to be one of the more important substances involved in climate change cases, in light of the Supreme Court’s recognition of carbon dioxide as a pollutant in Massachusetts v. EPA. This exclusion will be more important in future coverage actions over global warming.
  • Other issues certain to be raised in any coverage litigation in this area will include: (a) trigger of coverage issues; (b) allocation; (c) punitive damages coverage; (d) anti-stacking provisions; and (e) D&O issues. For those companies in businesses riding the wave of green technology, errors and omissions issues remain of concern.

Companies involved with possible claims of greenhouse gas emissions should take note in order to have their insurance coverage in order. Analysis is required so that coverage for defense costs is possible at the earliest possible stage. Policyholders knowing what coverage arguments are likely can have their responses ready.

To learn more about this issue, watch for an announcement regarding McGuireWoods’ upcoming webinar in early 2010. Speakers from the firm, along with those from MARSH, will cover many insurance issues related to climate change concerns.