On September 16, 2011, the Virginia Supreme Court issued its much anticipated decision in The AES Corporation v. Steadfast Insurance Company, No. 100764, slip op. (Va. S. Ct. Sept. 16, 2011). In the nation's first appellate decision addressing insurance coverage issues in relation to claims for global warming, the court held that the emission of carbon dioxide is not an "occurrence" within the meaning of a general liability policy. The court reached this decision despite allegations in the underlying complaint that the insured was negligent because it "knew or should have known" of the hazards of carbon dioxide emissions. One reading of the case is that the court adopted an objective standard in determining whether the underlying injuries arose from an accident. A concurring opinion makes an effort to limit the ruling to the facts of this particular case.
The insured, The AES Corporation (AES) is an energy company that specializes in the generation and distribution of electricity in numerous states. In February 2008, the Native Village of Kivalina and the City of Kivalina (collectively referred to as Kivalina), filed a lawsuit in the U.S. District Court for the District of California against AES and numerous other defendants for injuries allegedly resulting from global warming. Kivalina is located on a barrier island on the northwest coast of Alaska, approximately 70 miles north of the Arctic Circle. The underlying complaint alleged that AES engaged in energy-generating activities using fossil fuels that emit carbon dioxide and other greenhouse gases that contribute to global warming. Kivalina alleged that global warming caused sea ice that protects the island's shoreline to form later or melt earlier in the annual cycle. This allegedly exposed the shoreline to storm surges, resulting in erosion of the shoreline and rendering the village uninhabitable.
Steadfast Insurance Company (Steadfast) issued commercial general liability policies to AES for the years 1996 to 2000 and 2003 to 2008. AES requested defense and indemnification for the claims alleged in the complaint from Steadfast. Steadfast provided a defense under a reservation of rights and filed a declaratory judgment action in state court in Virginia. Steadfast raised three defenses: (1) the underlying complaint did not allege "property damage" caused by an "occurrence," (2) any alleged injury arose prior to Steadfast's policy period, and (3) coverage was precluded by the pollution exclusion in the policies. The trial court granted Steadfast's motion for summary judgment, holding that the underlying complaint did not allege an "occurrence" as that term is defined in the policies. AES appealed to the Virginia Supreme Court.
In its discussion of the underlying complaint, the Virginia Supreme Court focused on allegations relating to AES' knowledge of the hazards of greenhouse gas emissions. Kivalina alleged that AES "intentionally emits" millions of tons of greenhouse gases into the atmosphere annually. The complaint also alleged that AES "knew or should have known" the impact of its emissions, but despite this knowledge of the effect of its emissions, "particularly on vulnerable communities such as coastal Alaskan villages," it continued its contributions to global warming.
The court specifically noted that the underlying plaintiffs dedicated 16 pages and 66 paragraphs of the complaint to explaining global warming. Kivalina alleged that despite the defendants' efforts to mislead the public about global warming, there is an "overwhelming scientific consensus" that global warming is caused by emissions of greenhouse gases, primarily carbon dioxide from fossil fuel combustion and methane released from fossil fuel harvesting. The complaint also described published articles, books, and testimony in which scientists have confirmed the existence of global warming.
In recounting specific allegations against the defendants, the court indicated that Kivalina's complaint included allegations of negligence. For example, Kivalina alleged that the defendants "know or should know" that their emissions of greenhouse gases contribute to global warming and to Kivalina's special injuries. Kivalina also alleged that the defendants "intentionally or negligently" have created, contributed to, or maintained the public nuisance of global warming. Kivalina further alleged that the defendants have engaged in "intentional or negligent acts or omissions" that unreasonably interfere with the use and enjoyment of Kivalina's properties.
The Virginia Supreme Court had awarded an appeal to AES on whether the trial court "erred in summarily ruling that the underlying complaint did not allege an 'occurrence' covered by the insurance policies." As such, the court did not address any other issues, such as whether the complaint alleged "property damage," or whether the pollution exclusion applied. The rules in Virginia with respect to the duty to defend are similar to the rules in most other states. The court compares the allegations of the complaint to the terms of the policy. In addition, the duty to defend is broader than the obligation to pay, and arises whenever the complaint alleges facts and circumstances that would fall within the policy coverage. On the other hand, if it appears clearly that the insurer would not be liable under the policy for any judgment based upon the allegations, then the insurer has no duty to defend.
The Steadfast policies defined the term "occurrence" as "an accident, including continuous or repeated exposure to the same general harmful conditions." The court stated that under Virginia law, the terms "occurrence" and "accident" are synonymous and refer to "an incident that was unexpected from the standpoint of the insured." The court further stated that the term accident is commonly understood to mean 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."
Kivalina alleged that AES intentionally released tons of greenhouse gases into the atmosphere as part of its electricity generating operations. The court stated that an intentional act is not an occurrence or an accident. The court also stated that "if the result is the natural and probable consequence of an insured's intentional act, it is not an accident." Id. at 10. The court recognized that the dispositive issue is not whether "the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been a reasonably anticipated consequence of the insured's intentional act." Id. (Emphasis in original). As such, the court stated that "resolution of the issue of whether Kivalina alleges an occurrence covered by the policy turns on whether the Complaint can be construed as alleging that Kivalina's injuries, at least in the alternative, resulted from unforeseen consequences that a reasonable person would not have expected to result from AES's deliberate act of emitting carbon dioxide and greenhouse gases."
AES focused on the language in the complaint that it "intentionally or negligently" contributed to global warming, arguing that the complaint alleged both intentional and negligent tortious acts. AES asserted that it is entitled to a defense where negligence is alleged. AES also argued that the allegations that it "knew or should know" that its activities would result in the environmental harm suffered by Kivalina showed that that Kivalina alleged, at least in the alternative, that that the consequences of AES's intentional greenhouse gas emissions was unintended.
The court stated: "We disagree with AES." The underlying complaint "plainly allege[d]" that AES intentionally released carbon dioxide into the atmosphere as a regular part of it activities and that there is a "clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages" such as those suffered by Kivalina. "Whether or not AES's intentional act constitutes negligence, the natural and probable consequence of that intentional act is not an accident under Virginia law." Addressing the allegations that AES should have known the damage that its emissions would cause, the court stated that "allegations of negligence are not synonymous with allegations of an accident." The court concluded that even "if AES were negligent and did not intend to cause the damage that occurred, the gravamen" of the complaint was that the damages sustained were the natural and probable consequences of AES's intentional emissions.
In the concluding paragraph of its opinion, the court used some very broad language to explain why Kivalina's allegations that AES "should have known" require this result.
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. When the insured knows or should have known of the consequences of his actions, there is no occurrence and therefore no accident ... If an insured knew or should have known that certain results would follow from his acts or omissions, there is no 'occurrence' within the meaning of a comprehensive general liability policy ... The Complaint alleges, from the viewpoint of AES, that AES should have anticipated the damages resulting from its emitting carbon dioxide and greenhouse gases. Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur 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.
This broad language appears to set forth an objective standard for determining whether the underlying plaintiff's damages were the result of an accident. In fact, this language seems to preclude coverage for many other types of claims. Most complaints for negligence allege that the insured knew or should have known that injuries could result from the insured's conduct. In the context of pollution-related claims, the insured will often argue that it did not intend the environmental damage resulting from its normal business activities. At least in Virginia, the insurers now have an argument that such claims are not covered because the insured should have known the damage would result. Because Virginia has similar standards to other states, this decision will offer arguments in other jurisdictions as well.
Although the opinion of the court was unanimous, three of the seven justices filed a concurrence seeking to limit the ruling to the "unique language of the allegations" in the Kivalina complaint. The concurrence stated that, "the majority does not adequately explain that the argument which Steadfast makes here would not be applicable to the vast majority of cases where a policyholder seeks to have his insurance company provide him with a defense for an accidental tortious injury." The three justices stressed that in Kivalina the release of greenhouse gases was alleged to have been an intentional act that was done despite knowledge, or presumed knowledge, that damage to the environment would result. The justices believed that this fact distinguished this case from the garden variety tort. Nonetheless, given the majority opinion, insurers can be expected to test the limits of this ruling, particularly in the context of other pollution claims.
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