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Meaning of "Accident," Preservation of Pollution Exclusion Issue Are Focus of Hearing in Climate Change Coverage Appeal

April 20, 2011

Supreme Court of Virginia justices focused on the role of intent in determining whether an "accident" takes place under commercial general liability (CGL) policies and whether application of the pollution exclusion properly was before them during oral argument held April 19, 2011 in The AES Corporation v. Steadfast Insurance Company (AES),1 the first coverage suit addressing claims for losses allegedly caused by contributions to global climate change.  Depending on how the U.S. Supreme Court assesses the justiciability of such claims in American Electric Power Co. v. Connecticut,2-a global warming suit based on a "public nuisance" theory similar to the underlying suit at issue in AES-these claims could open a new front in the environmental coverage arena.  The Virginia high court will have the first say among U.S. jurisdictions as to whether coverage is available for such claims.

Trial Court Holds That Underlying Suit Does Not Allege an "Occurrence"

In AES, the policyholder, a Virginia-based energy company, is seeking coverage under CGL policies issued by Steadfast for an underlying suit filed against it and numerous other companies by the governing bodies of an Inupiat village located on a barrier island in northwest Alaska.  In the underlying suit, Native Village of Kivalina v. ExxonMobil Corp.,3  the plaintiffs alleged that the companies' energy-generating operations are responsible for a substantial portion of greenhouse gases that have been emitted into the atmosphere.  The Kivalina plaintiffs alleged that these gases trap atmospheric heat and cause global warming, which, in turn, caused Arctic sea ice that protects their village's shoreline from winter storms to form later or melt earlier each year.  As a result, they alleged, the village suffered extensive damage, forcing the community of approximately 400 people to relocate.  As against AES and certain other defendants, the Kivalina plaintiffs asserted claims for public nuisance under federal common law, for public and private nuisance under state law, and for "concert of action."  The district court in Kivalina granted the defendants' motion to dismiss based on the political question doctrine and lack of standing; the case is on appeal.

AES sought coverage from Steadfast for the costs of defending the Kivalina suit and any resulting judgment or settlement.  Steadfast agreed to provide a defense under a reservation of rights and, in June 2008, filed a declaratory judgment action in Virginia state court seeking a determination that it was not obligated to defend AES.  AES counterclaimed, seeking a declaration that Steadfast was required to defend.  Steadfast moved for summary judgment, arguing that it had no duty to defend based on, inter alia, the "occurrence" and pollution exclusion provisions of the CGL policies it issued AES.  In light of the parties' citing to evidence extrinsic to the "eight corners" of the Kivalina complaint and Steadfast's policies, the trial court held that questions of fact existed and denied the motion.  AES subsequently moved for summary judgment on its counterclaim, arguing that Steadfast owed a duty to defend, and Steadfast cross-moved.  With the focus this time only on the "eight corners," the trial court granted summary judgment in favor of Steadfast.  The court held that Steadfast did not owe a duty to defend because the Kivalina complaint did not allege an "occurrence" within the meaning of the CGL policies.  The court did not address whether the pollution exclusion also barred coverage.

Parties Clash Over "Occurrence," Pollution Exclusion Provisions on Appeal

In its appeal to the Virginia high court, AES asserts that the trial court erred because the Kivalina complaint does allege an "occurrence," defined in the policies as "an accident, including continuous or repeated exposure to substantially the same general harmful condition."  AES argues that the Kivalina plaintiffs allege both intentional and negligent conduct on the defendants' part.  In support, AES notes the underlying complaint's assertion that the defendants knew "or should have known" that the impact of their greenhouse gas emissions would contribute to global warming and harm the Kivalina plaintiffs' property; that the defendants intentionally "or negligently" caused a public nuisance; and that the defendants' "negligent acts or omissions" caused a private nuisance; and that the defendants' "negligent" conduct "constitutes a breach of duty."  Under Supreme Court of Virginia precedent, AES argues, "an insurer has a duty to defend where, as here, the insured could potentially be liable for an unintentional tort based on 'should have known' and 'unintentional' tort allegations."  See AES Br. at 10.  Although the trial court determined that inclusion of "the  word 'negligence' is not enough" to allege an "occurrence," AES argues that the Kivalina complaint does not merely use that word but alleges a "highly attenuated 'causal series of events'" indicating that AES did not intend to harm the Kivalina shoreline.  Id. at 12-14.   AES further argues that an "accident" determination must be made from the viewpoint of the insured and that, in this case, the analysis must focus not on whether the greenhouse gas emissions were expected or intended but whether the alleged resulting harm to the village was expected or intended.  As AES states, "for there to be no 'accident,' it is not enough for an insured's conduct to be intentional; the harm  must also be known or expected."  Id. at 11.  AES argues that intentional business activities (here, generating energy that emits greenhouse gases) can cause unintentional and accidental consequences (here, damage to a remote Alaskan village).  Thus, AES argues, "[e]ven assuming AES's conduct was intentional, any harm was not."  Id. at 14.

AES further argues that Steadfast failed to preserve its right to assert application of the policies' pollution exclusion on appeal and that, in any event, the exclusion does not apply.  As to preservation of the issue, AES notes that the trial court denied the first motion for summary judgment, in which the pollution exclusion was at issue, based on questions of fact.  The trial court never modified that ruling, AES points out.  Moreover, the court's final judgment expressly was confined only to the "occurrence" issue, AES argues, and, on appeal, Steadfast did not assign cross-error to that ruling as to application of the pollution exclusion.  See AES Br. at 18.  In such circumstances, AES argues, Steadfast cannot argue that the pollution exclusion independently applies to bar coverage under the "right for the wrong reason" doctrine.  Id.  As to the merits, AES points out that the policies do not expressly exclude property damage caused by carbon dioxide emissions, unlike express exclusions for other substances.  AES argues that carbon dioxide is not an "irritant" or a "contaminant" but, instead, an odorless and colorless gas emitted into the atmosphere through both natural and artificial processes which, like water, "is an omnipresent substance critical to the survival of animal and plant life." Id. at 20.   At a minimum, AES argues, there is a question of fact as to whether the parties understood carbon dioxide to constitute a "pollutant" at the time of contracting.  According to AES, extrinsic evidence demonstrates that Steadfast underwriters and other employees did not have an understanding that carbon dioxide was a "pollutant" when the policies were formed.

Steadfast argues that there is no coverage because the Kivalina suit does not allege accidental conduct.  According to Steadfast, under Virginia law, "if an ultimate event is the 'natural and probable consequence' of a policyholder's intentional action, it is not an 'accident.'" See Steadfast Br. at 19.  The issue, Steadfast argues, is whether the "ultimate event was a reasonably foreseeable result of the insured's actions-not whether the policyholder intended or wanted the ultimate event to occur."  Id.  Steadfast asserts that the Kivalina complaint alleges such intentional actions and foreseeable consequences.  Specifically, Steadfast notes, the complaint alleges that the defendants "intentionally emitted greenhouses gases into the atmosphere as waste; knew such emissions would change the composition of the atmosphere; and knew that the natural consequence would be that seas would rise, polar ice would melt, and shorelines would erode-especially Arctic shorelines no longer protected by ice, like Kivalina's."  Id. at 20.  Specifically as to AES, Steadfast argues, the complaint asserts that AES volitionally burned fossil fuels, decided to manage and control its carbon dioxide-emitting operations in light of its knowledge of the harmful changes such emissions cause, entered into agreements and pledges to control its carbon dioxide emissions, and acknowledged the risk associated with global warming and its status as one of the largest carbon dioxide emitters in the world.  Id.  Such allegations, Steadfast asserts, "do not constitute occurrences, or accidents" but, instead, "intentional and knowing conduct" that precludes any duty to defend. Id.  Steadfast further stresses that CGL policies are designed to cover fortuitous circumstances, not the foreseeable consequences of business activities.  Steadfast rejects AES' assertion that the "accident" determination must be made from its viewpoint.  Under Virginia precedent, Steadfast asserts, AES' viewpoint is irrelevant; all that matters is that the Kivalina complaint alleges intentional and knowing conduct.  Steadfast also rejects AES' reliance on the complaint's fleeting recitations of "negligence" and "should have known" as taken out of context and, in any event, "naked legal conclusions with no significance."  Id. at 27.  In evaluating whether a complaint alleges an "occurrence," Steadfast argues, a court must examine the character of the "facts and circumstances" alleged, not "the scrivener's legal characterizations."  Id. at 28, 31.  The use of negligence-sounding terms, "without accompanying factual allegations of an accident," does not "constitute allegations of an 'occurrence.'" Id. at 31.

Steadfast also argues that the court may affirm based on the pollution exclusion.  Steadfast notes that it raised the pollution exclusion issue at the trial court level and, because the determination of the duty defend depends simply on an "eight corners" examination, there are no outstanding factual issues.  As to the failure to assign cross-error as to the pollution exclusion, Steadfast explains that the final judgment being appealed only addressed the "occurrence" issue and, therefore, there was no error that could be subject to such an assignment.  Indeed, Steadfast notes, the trial court expressly clarified that its decision rested on the threshold "occurrence" issue and did not address the pollution exclusion.  As to the pollution exclusion's applicability, Steadfast argues that "[t]he Kivalina [c]omplaint is quintessentially a claim alleging environmental pollution."  See Steadfast Br. at 38.  The complaint, Steadfast notes, alleges that AES' emissions of gaseous waste products have harmed "the constitution of the global environment" and characterizes such environmental damage as "pollution." Id.  Steadfast further points out that every "pollutant" need not, not cannot, be itemized in a static list.  Every substance is "proper and benign in its proper place or proper quantity," Steadfast argues, but a substance may act as a "pollutant" when such proper boundaries are violated. Id. at 40.  Here, although carbon dioxide is beneficial and essential at a certain level in the atmosphere, Steadfast argues, Kivalina alleges that AES and other defendants have released so much of it so as to change "the beneficial composition of the atmosphere, becoming harmful instead of benign."  Id. at 40-41.4

Court Focuses on Policyholder Intent, Preservation of Pollution Exclusion Issue

At oral argument, L. Steven Emmert of Sykes, Bourdon, Ahern & Levy, P.C. arguing on behalf of AES, first addressed the pollution exclusion issue.  He noted that the only ruling by the trial court addressing the pollution exclusion was its summary judgment denial.  Therefore, at a minimum, he argued, Steadfast owes a duty to defend because factual issues remained as to whether the pollution exclusion applies.  Thus, the pollution exclusion issue was "foreclosed" to Steadfast, he asserted.  As to the "occurrence" issue, Emmert reiterated AES' argument that the "unplanned nature of the harm caused" must be viewed from the insured's standpoint.  Moreover, he argued, the issue is whether the resulting harm is accidental, not whether the act causing the harm is.  A driver may intentionally change lanes without carefully checking the review mirror, he explained, but a resulting collision with an unnoticed car would still constitute an accident.  Emmert argued that the Kivalina complaint asserted such accidental harm in alleging that the defendants "knew or should have known" about the injurious effects of their emissions and that they acted either intentionally or negligently.  When a plaintiff alleges such alternative grounds for relief falling within an insurer's coverage obligations, "Virginia law is clear," Emmert argued.  "The insurer has to give us a lawyer to defend."

Leah W. Sears of Schiff Hardin LLP, arguing on behalf of Steadfast, began by asserting that "insurance does not and should not cover harm resulting from ordinary business operations," as a company otherwise "would have no incentive to correct its [harmful] behavior whatsoever."  She stressed that the court had before it a "simple case," requiring only an application of the eight corners rule.

Justice William C. Mims indicated that the essential issue, for him, was what does and does not constitute an "accident."  Justice Mims said that he understood Steadfast's position to be that if an intentional act (such as energy generation) causes known consequences, no "accident" has taken place.  Sears clarified that the consequences only need to be "reasonably anticipated."  Chief Justice Cynthia D. Kinser put Emmert's driving example to Sears, who agreed that causing a crash following an intentional lane change might constitute negligence, but suggested it does not constitute an "accident" as the term is used in CGL policies.  "'Negligence' is not synonymous with 'accident,'" Sears argued.  In any event, she argued, the Kivalina complaint alleges knowing harm even if viewed from AES's standpoint, Sears argued.  The complaint alleges "volitional conduct with known foreseen or reasonably foreseen" consequences, she said, adding that "the label 'negligence' is not sufficient" to allege an occurrence.  "It's not the mere words that matter, but the facts and circumstances of the underlying complaint," she argued.  Regarding the viability of the pollution exclusion argument on appeal, Chief Justice Kinser noted the trial court, in its only ruling addressing the exclusion, determined that questions of fact precluded its application.  Justice Mims noted that no cross-error had been assigned as to the pollution exclusion, and Chief Justice Kinser indicated that the "right for the wrong reason doctrine" would not be viable in the absence of such an assignment.  In response, Sears explained that the trial court's ruling on the second motion for summary judgment was at issue.  In that ruling, she noted, the trial judge explained that there was no need to address the pollution exclusion because he had determined that Kivalina did not allege an "occurrence."

Justice LeRoy F. Millette Jr. again raised the pollution exclusion preservation issue during Emmert's rebuttal on behalf of AES.  Emmert argued that AES had prevailed on the pollution exclusion issue in light of the trial court's ruling on the first motion for summary judgment.  That ruling, he noted, had never been appealed and, therefore, precludes Steadfast from further arguing for its application. 

As to whether insurance should be available for the harmful results of ordinary business practices, Emmert also discussed evidence showing that Steadfast underwriters had carefully examined AES' operations before issuing the policies.  In response to Mims, Emmert acknowledged that such material was beyond the "eight corners" but argued that it was permissible to cite on appeal, given that Steadfast had previously cited to extrinsic material during the case.

The court is expected to issue its decision in June.

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1 Record No. 100764 (Va.).

2 Connecticut v. Am. Elec. Power Co., Inc., 406 F. Supp. 2d 265 (S.D.N.Y. 2005), rev'd, 582 F.3d 309 (2d Cir. 2009), cert. granted, No. 10-174 (U.S. Dec. 6, 2010).

3 663 F. Supp. 2d 863 (N.D. Cal. 2009), appeal docketed, No. 09-17490 (9th Cir. 2010).

4 The Complex Insurance Claims Litigation Association (CICLA) and the American Insurance Association (AIA), represented by Wiley Rein LLP, filed an amicus curiae brief, emphasizing that insurance is designed to cover only fortuitous "occurrences" and arguing that the Kivalina allegations do not satisfy this fortuity requirement.  CICLA and AIA also argued that the pollution exclusion independently applies to bar coverage.