by John G. Nevius, Esq., P.E.

On Tuesday, April 19, 2011, two separate oral arguments were held that will help determine the future of climate-change litigation – and whether and how insurance coverage is available to defend against certain climate-change claims.

The first oral argument involved Connecticut v. AEP and the U.S. Supreme Court. This case is considered a bellwether on the issue of the viability of tort claims involving climate change. It is one of three closely-watched cases in this area, the other two being Comer v. Murphy Oil and The Village of Kivalina case. In Connecticut, the Court heard arguments from a group of states that sought to reduce emissions made by a handful of coal-burning utilities that represent a significant percentage of national carbon monoxide sources. Much has changed since the suit was initially filed in 2004. Among other things, an “endangerment” finding on CO2 was issued by the EPA, paving the way for federal regulation under the Clean Air Act, and subsequent steps have been taken to implement rules on emissions. This regulatory action led the Obama Administration to argue against the states. The EPA action also undermines the states’ arguments that the federal courts must fill the vacuum left by the Legislative and Executive Branches’ alleged failure to act, and supports those who argue in favor of dismissal and application of the so-called Political Question Doctrine.

Initial reports on the oral argument refer to the justices’ “seemingly unanimous skepticism” (Wall Street Journal), with Justices Ginsberg and Roberts both questioning the extent to which U.S. District Court judges should get involved in complex and far-reaching disputes like this one over air emissions from multiple sources. In an ironic twist, Justice Sotomayor had been on the Second Circuit panel that allowed the case to proceed and from which appeal was taken. In recusing herself, Judge Sotomayor left open the possibility of a split court. In the event of a 4-4 tie, the Court typically issues a per curiam decision essentially affirming the lower court’s holding. Such decisions generally are terse and are deemed not to set Supreme Court precedent. The Justices, however, may attach dissenting opinions.

The second oral argument, concerning insurance coverage for global warming claims, garnered a much lower profile. It was held before the Supreme Court of Virginia and involved a dispute over whether a defendant in the above-referenced Kivalina case (presently on appeal to the Ninth Circuit, having been dismissed by the lower federal court) is entitled to a defense by its general liability insurance company. See Steadfast Ins. Co. v. AES. There are two central arguments that no duty to defend exists. First, the Virginia trial court granted summary judgment to Steadfast, a Zurich subsidiary, holding that the allegations against the energy company AES involving CO2 emissions and climate change did not constitute an “occurrence.” This holding was reached after an earlier round of summary motions from both sides in which judgment was denied because of questions of fact related to each side’s reliance on extrinsic evidence. An appeal ensued of the decision in the second round of summary judgment. One of the central issues on appeal involved the second central argument against coverage, i.e., the “pollution” exclusion. The parties disputed whether this issue was properly before the Court because it had been rejected in the initial round of summary judgment and was not assigned as cross-error after appeal of the results of the second round of summary judgment. The issue of whether and how CO2 emissions might be excluded from coverage as “pollutants” is hotly debated. Steadfast argued that every substance “is proper and benign in its proper place and proper quantity”, but can become a pollutant when such boundaries are exceeded. AES took the view that CO2 was not identified specifically in the insurance policy as some other substances are and is an “omnipresent” and naturally-occurring “odorless and colorless gas” “critical to the survival of animal and plant life”. Chief Justice Kinser noted that the trial judge had identified questions of fact surrounding application of the exclusion and that no cross-error had been assigned.

Turning back to the central issue of an “occurrence”, Justice Mims indicated that a key issue for him was whether and how an “accident” could be identified from within the allegations in the Village of Kivalina’s complaint against AES. Several issues were identified and argued over on this point. First, there was a question about from who’s perspective the accident determination should be made – an objective standard or from the subjective viewpoint of the policyholder? Second, is the conduct at issue the intentional business activity or the unintended consequences thereof? On this point, Steadfast argued the former and that “insurance does not and should not cover harm resulting from ordinary business operations”. Steadfast also countered AES’s related traffic-“accident” analogy by arguing that a motorist intentionally changing lanes after glancing in the rear view mirror, could not then have an “accident” with a car behind it as that term is used in Commercial General Liability insurance policies.

It is impossible to predict how the Virginia Court will decide these issues. The Court previously has refused to overturn a trial-court ruling that naturally-occurring organic compounds arising from chlorination of drinking water are excluded “pollutants”. This earlier ruling may explain why the coverage litigation involving a case filed in Northern California brought by Alaskan residents was initiated in Virginia. However, the Virginia Justices appeared to be less skeptical of the policyholder’s position than the Supreme Court Justices were of the states’. One thing is certain: legal disputes related to climate change and the insurance industry’s obligations related thereto will be with us for some time to come.

Both the United States Supreme Court and the Supreme Court of Virginia are likely to issue their respective opinions some time in June.