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Virginia High Court Mulls Distinction Between "Accidental" Negligence and "Non-Accidental" Negligence in AES Corporation v. Steadfast Insurance Company Rehearing

February 28, 2012

The justices of the Supreme Court of Virginia considered how to draw a line between covered and non-covered negligence claims during a rehearing oral argument held February 27, 2012, in The AES Corporation v. Steadfast Insurance Company (AES).1 The court issued its initial opinion in AES—the first case to address coverage for suits alleging harm caused by global climate change—on September 16, 2011. The court granted rehearing last month, however, to consider AES's argument that the approach it took in its September 16 opinion might bar CGL policy coverage for all negligence claims.

In AES, the policyholder, a Virginia-based energy company, is seeking coverage under CGL policies for a lawsuit filed against it by the governing bodies of an Inupiat village located on a barrier island in northwest Alaska. The underlying suit, Native Village of Kivalina v. ExxonMobil Corp.,2 charged AES and other companies with contributing to a chain of events that destroyed the village and forced the community of approximately 400 people to abandon their homes. According to the Kivalina plaintiffs, the companies' energy-generating operations are responsible for a substantial portion of greenhouse gases emitted into the atmosphere. These gases trap atmospheric heat, causing global warming. As a result, the plaintiffs alleged, the Arctic sea ice surrounding their village freezes later or melts earlier each year, leaving the land vulnerable to winter storms and erosion. With the village now uninhabitable, the plaintiffs asserted claims against the energy companies for public nuisance under federal common law and for private nuisance under state law. In 2009, the U.S. district court dismissed the plaintiffs' claims, holding that both the political question doctrine and the plaintiffs' lack of standing foreclosed the lawsuit. That ruling is now on appeal to the Ninth Circuit.

After being served with the Kivalina complaint, AES sought insurance coverage from Steadfast Insurance Company for the costs of defending against the suit and payment of any resulting judgment or settlement. Steadfast agreed to provide a defense under a reservation of rights and sought a declaration in Virginia state court that the CGL policies did not require it to defend AES. AES counterclaimed, seeking a contrary declaration. After the parties filed cross-motions for summary judgment, the trial court ruled in Steadfast's favor. Because the Kivalina complaint alleged no covered "occurrence," the court held, the CGL policies did not obligate Steadfast to defend AES.

The Supreme Court of Virginia: Round 1

On appeal to the Supreme Court of Virginia, the parties disputed whether the Kivalina complaint alleged a covered "occurrence," defined in the CGL policies as an "accident."3 The parties generally agreed that, under Virginia law, an accident is "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." AES Br. at 8 (quoting Lynchburg Foundry Co. v. Irvin, 16 S.E.2d 646, 648 (Va. 1941)). But they contested whether the Kivalina complaint alleged such an event.

The Supreme Court of Virginia concluded in its initial opinion that the Kivalina complaint did not allege an "occurrence" covered under the CGL policies. 715 S.E.2d 28 (Va. 2011). That AES's act of emitting greenhouse gases was alleged to have been intentional did not, of course, automatically foreclose coverage, the court noted. Rather, the availability of coverage turned on whether the harms alleged to have resulted from the company's acts were "the natural and probable consequence" of its conduct. Id. at 32. This demanded an objective inquiry: only "when the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person would an injury be considered a covered accident," the court held. Id.

The Virginia Supreme Court then examined the Kivalina complaint, which alleged that AES knew or should have known that its greenhouse-gas emissions would cause global warming. "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," the court noted. Id. at 33. Thus, it concluded that "[i]f an insured knew or should have known that certain results would follow from his acts or omissions," those results would have been expected by a reasonable person and thus "there is no 'occurrence' within the meaning of a comprehensive general liability policy." Id. at 34.

The Supreme Court of Virginia: Round 2

AES petitioned for rehearing, arguing that the court's reasoning in its initial opinion could be interpreted to foreclose liability coverage for all negligence claims—a result AES called "radical" since liability policies exist largely to insure against suits for negligence. Contrary to the court's analysis, AES argued, allegations that a defendant "should have known" that his acts might cause a harmful result are not necessarily equivalent to allegations that the harmful result is the reasonably expected or "natural and probable consequence" of the defendant's acts.

AES maintained that the court should have divided the universe of negligence claims into two categories to distinguish between claims that allege accidents and claims that do not. Looking to precedent from other jurisdictions, AES suggested that the analytical line between accidents and reasonably expected harms turns on the size of the risk alleged in the complaint. If the risk alleged to have been disregarded is so high that a reasonable person would have recognized the "substantial probability" that his acts would cause harms, the claim is not an accident and thus not an "occurrence," said AES. AES Pet. for Reh'g at 5. But AES contended that, if the risk alleged to have been disregarded was only high enough that the resulting harm would have been "reasonably foreseeable," the harmful result is not "expected" and thus is a covered accident. The Virginia Trial Lawyers Association filed an amicus brief urging rehearing and advancing similar arguments to those developed by AES.

The Supreme Court of Virginia granted rehearing and withdrew the September 16 opinion, directing Steadfast to file a responsive brief "address[ing] only the issue raised in the petition for rehearing." In response, Steadfast argued that the September 16 opinion was not as radical as AES urged. Steadfast Reh'g Br. at 7. First, Steadfast noted, AES's proposed distinction between "reasonably foreseeable" and "substantially probable" harms finds no support in Virginia precedent. Id. at 11. And, second, even if such a distinction were adopted in Virginia, the Kivalina complaint still would not allege a covered "occurrence" because the "harm [alleged] was not only probable but inevitable." Id. at 14.

The Complex Insurance Claims Litigation Association, the American Insurance Association, and the Property Casualty Insurers Association of America, represented by Wiley Rein LLP, filed an amici curiae brief, urging that the distinction between "substantially probable" and "reasonably foreseeable" risks of harm is not relevant here, where the underlying complaint alleged that the harm at issue was inherently certain to result from the policyholder's intentional acts.

Yesterday, the Virginia high court held oral argument on the "occurrence" issue it accepted for rehearing. During argument by AES's counsel, the court appeared sympathetic to AES's concerns about the possible effect of the initial opinion on negligence claims. Whether the court would adopt the proposed "substantial probability" standard wholesale was less apparent, though, with one justice noting that Virginia courts had never endorsed the standard. And even if the court agreed with AES on the need for a distinction between accidents and acts linked with substantially probable harm, the justices did not reveal their thoughts on whether such a distinction would change the outcome of the current dispute.

Counsel for Steadfast received the brunt of the court's questioning. Like AES, a number of the justices appeared to read the prior opinion's analysis as calling into question coverage for all claims alleging reasonably foreseeable harm. One member of the court wondered whether a complaint's boilerplate recitation of the elements of negligence might "automatically plead someone out of coverage" under the approach of the initial opinion. Another justice asked whether the court's September 16 opinion would render negligence claims "mutually exclusive" from covered accidents.

Counsel for Steadfast agreed that insurance covering an "occurrence" or "accident" is not designed to bar coverage for all claims seeking relief for "reasonably foreseeable" harms. As a result, Steadfast's counsel concurred with AES that, as a general matter, distinguishing between accidental and non-accidental negligence claims requires a standard based on the magnitude of the risk alleged to have been disregarded. In light of the justices' questions and the parties' positions, it seems likely that the court will clarify on rehearing the standard for what constitutes an "occurrence" or "accident."

But this type of risk-measuring standard should not change the result in the current dispute, counsel for Steadfast emphasized. Unlike a garden-variety negligence claim—in which the plaintiff alleges that the defendant unreasonably disregarded the risk that his acts would cause the complained-of harm—the Kivalina plaintiffs alleged that AES unreasonably disregarded the certainty that emitting greenhouse gases inherently causes global warming. For this reason, Steadfast's counsel urged that, whatever risk-measuring standard the court might adopt, it cannot allow for coverage where a defendant's acts are alleged to have caused inevitable, rather than simply probable, harm.

If the court does not adhere to its September 16 opinion, then the Virginia Supreme Court could set a new standard for the trial court to apply in determining whether an "occurrence" was alleged. Alternatively, if the court determined that the Kivalina complaint alleged an "occurrence" within the meaning of the Steadfast coverage, then it presumably would remand the case for further proceedings, including a determination of the effect of the pollution exclusion. Although the AES rehearing argument was expedited under the Rules of the Supreme Court of Virginia, it is unknown when the court will issue a ruling on rehearing.

Thoughts on the Court's Rehearing of "Occurrence"

AES's discharge of greenhouse gases allegedly made it inevitable that they would cause global warming. According to the complaint, it allegedly knew or should have known that its business practices resulted in routine releases of greenhouse gases and that the release of such gases inevitably would contribute to global warming. The courts correctly found in their opinions to date that these allegations do not constitute an insured "occurrence."

On rehearing, AES and its amicus attacked the Virginia Supreme Court's use of an objective standard under which an insured is deemed to expect the "natural and probable" consequence of its intentional acts. But many courts have held that where harm arises from the regular course of a policyholder's business operations, it is necessary to conclude that the resulting injury and damage should have been expected from the standpoint of the insured within the meaning of occurrence-based policies. AES should not be allowed to shift responsibility to its insurer for its ordinary practice of releasing greenhouse gases by seeking coverage for the consequence of those intentional acts as an "occurrence," here defined as an "accident."

AES protests that the court's standard would render its insurance protection illusory because coverage for negligence would be eliminated. This argument misapprehends the character of liability insurance. Negligence generally is ascertained by a common law standard of reasonably prudent behavior. Liability insurance coverage, in contrast, is governed by the policy's terms and conditions. The Kivalina plaintiffs alleged that AES's routine, deliberate conduct caused the harm at issue. According to the complaint, AES did not merely engage in practices that risked global warming; rather, AES reasonably should have known that the discharge of greenhouse gases and resulting global warming were inevitable, everyday consequences of its actions. Thus, this is not the hypothetical "hard" case in which a difficult line must be drawn. The intentional nature of AES's discharges, combined with the alleged certainty of harm, means that there is no "accident" or "occurrence" at issue.

Proper interpretation of an "occurrence" will not exclude most coverage liability for negligence. Of course, where the insured knew or should have known of a substantial probability of harm, his conduct may still be legally characterized as "negligent" (i.e., not rising to the level of an intentional tort), but the loss would be excluded by the occurrence definition because it is "expected." See R. Keeton & A. Widiss, Insurance Law, ยง 5.4(g) at 545 ("[C]overage which is based on an 'occurrence' seems to establish or describe a boundary between covered and non-covered losses that would preclude coverage for some 'expected' losses for which liability is imposed under the law of gross negligence, or even the law of negligence."); see also Rynearson, Exclusion of Expected or Intended Personal Injury or Property Damage Under the Occurrence Definition of the Standard Comprehensive General Liability Policy, 19 Forum 513, 521 (1983) ("[W]hether or not negligent conduct is covered depends on the degree of certainty present that such conduct will result in damage").

As the Virginia high court considers the meaning of "occurrence" on rehearing now, it should not be swayed by the protestations of the Virginia Trial Lawyers Association amicus brief or AES's desire to shift responsibility for its routine business practices. Misinterpreting insurance policies to supply coverage for events they were not intended to cover threatens the insurance system. If insurers cannot rely on policy language and established coverage limitations, they cannot perform their function.

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1 Record No. 100764 (Va.).

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

3 The parties also disputed whether the CGL policies' pollution exclusion barred the claim. The Supreme Court of Virginia did not address this alternative argument in its opinion, and the question on rehearing is confined to the "occurrence" issue.