By Christina M. Carroll and Christopher Baker, McKenna Long & Aldridge LLP
Christina M. Carroll is a partner in the Washington, D.C., office of McKenna Long & Aldridge LLP. She represents insurance companies in coverage and bad faith litigation and counsels clients, including insurers, on climate change and sustainability issues. She is a co-author of the forthcoming ABA book Climate Change and Insurance. Christopher Baker is an associate in the Washington, D.C., office of McKenna Long & Aldridge LLP. His practice focuses on litigation and insurance.
This article does not represent the opinions of Bloomberg BNA, which welcomes other points of view.
On a petition for rehearing, the Supreme Court of Virginia once again held that an insurer has no duty to defend a utility company against a lawsuit alleging property damage resulting from greenhouse gases (GHGs) emitted in the regular course of business. In AES Corporation v. Steadfast Insurance Company,1 the court arrived at the same conclusion it did last fall, holding that the underlying climate change liability claims did not constitute an “occurrence” under AES’s commercial general liability (CGL) policy.2 The court concluded that there can be no “occurrence” giving rise to coverage where the underlying complaint alleges that AES intentionally emitted GHGs and the “natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered.”3 Given the court had granted rehearing and the composition of the court had changed, some had predicted a drastically different outcome. But only the concurrence, which questioned whether there can ever be CGL coverage for negligence in Virginia, changed significantly on rehearing. Because the court again decided the case on the occurrence issue, the court did not reach the issue of whether the pollution exclusion might apply in this context.
The decision in AES has important implications for both insurers and companies with potential exposure to climate change-related tort claims. Although policyholders and their counsel are likely to now press coverage issues in more favorable jurisdictions, the decision nonetheless stands as a significant step toward resolving the question of whether such claims are covered under CGL policies. Future coverage litigation in this area in other states could also focus on the occurrence issue as well as on the pollution exclusion and known loss issues not reached in the AES case. Given recent decisions in climate change tort cases, further climate change coverage litigation may emerge in the errors and omissions (E&O) insurance and directors and officers (D&O) liability insurance contexts instead of, or in addition to, the CGL context.
The AES case also has significance beyond the climate change context because of the Virginia court’s conclusion that there is no coverage for an occurrence under a CGL policy when it is alleged that the insured “subjectively intended or anticipated the result of its intentional act or that objectively, the result was a natural or probable consequence of the intentional act.”4 In his concurring opinion, Justice William C. Mims voiced concern that such a standard would necessarily preclude coverage of any negligence claim because negligence claims require that injury be reasonably foreseeable.5 His concurrence noted that the court’s jurisprudence regarding the interpretation of “occurrence” in CGL policies “is leading inexorably to a day of reckoning that may surprise many policy holders.”6 He went on to state that while he agreed with the outcome, “[o]ur precedents may have painted us into a jurisprudential corner.”7 Justice Mims’ apparent reservations highlight diverging views of the interpretation of “occurrence” in coverage dispute litigation.
This article first takes a detailed look at the AES coverage litigation, including the underlying Kivalina action, original decision in the fall of 2011, the parties’ arguments on rehearing, and the court’s decision on rehearing. Ultimately, it examines how two different approaches used by courts to interpret an “occurrence” (objective and subjective) can have a major effect on whether or not courts find coverage under a CGL policy.
THE AES COVERAGE DISPUTE
AES Corp. is one of the defendants in Native Village of Kivalina v. ExxonMobil Corp., one of the first climate change nuisance cases brought in federal court.8 The Kivalina plaintiffs, an Inupiat village located off the coast of Alaska, allege that GHG emissions from AES and other oil, energy, and utility companies have contributed to climate change, which in turn has eroded the village’s coastline and rendered it uninhabitable. The complaint alleges that AES intentionally emits millions of tons of carbon dioxide and thereby “intentionally or negligently” created a nuisance, in the form of global warming. The complaint further asserts that AES “knew or should have known” that its activities would result in the alleged harm.
After being sued, AES asked its insurer, Steadfast, to defend pursuant to its CGL policies. In the at-issue CGL policies, Steadfast has a duty to defend AES against lawsuits seeking damages resulting from bodily injury or property damage caused by an “occurrence.” Steadfast denied coverage and thereafter filed a declaratory judgment action in the Circuit Court of Arlington County in Virginia (where AES is headquartered). Steadfast denied coverage based on three grounds: (1) the Kivalina complaint did not allege “property damage” caused by an “occurrence” as those terms were defined in its policies; (2) the alleged injuries arose before Steadfast’s coverage incepted; and (3) the GHG emissions alleged in Kivalina were “pollutants,” excluded from coverage by virtue of the policies’ pollution exclusion.
On cross-motions for summary judgment, Steadfast argued, among other things, that the Kivalina complaint did not allege “property damage” caused by an “occurrence” because the complaint asserted that AES “knew or should have known” that its intentional activities would lead to the global warming that damaged the village.9 An “occurrence” is defined in the policies as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.”10 The policies do not define “accident.” AES argued that any alleged harm resulting from climate change must be considered an “accident” because it was unintended or unexpected, as acknowledged by the “should have known” language in the Kivalina complaint.11 The trial court granted summary judgment in favor of Steadfast, finding it had no duty to defend AES because the Kivalina complaint did not allege an “accident” or “occurrence.” AES appealed the case to the Supreme Court of Virginia.
THE VIRGINIA SUPREME COURT’S INITIAL DECISION
In its initial September 2011 opinion authored by Justice Bernard Goodwyn, the court held that an allegation of negligence does not equal an occurrence.12 The court found that there is no accident when the alleged harm is the “natural and probable consequence” of an intentional act. Under Virginia law, the court’s evaluation was limited by the “eight corners rule,” which only allows the court to look to the four corners of the complaint and the four corners of the policy to determine coverage. The complaint in Kivalina did not allege an “occurrence” because it alleged that AES “knew or should have known” that its actions would lead to global warming and the alleged harm. Therefore, Steadfast had no duty to defend AES under the CGL policies.
AES’S PETITION FOR REHEARING
AES petitioned the Virginia Supreme Court for rehearing arguing that the authorities cited by the court did not support the court’s ruling which was in conflict with longstanding precedent.13 AES argued that the court’s interpretation of “accident” served to foreclose coverage in practically all negligence cases.14 According to AES, the proper standard should evaluate whether the defendant knew or should have known to a “substantial probability” that its conduct would cause harm.15
AES urged the court to differentiate between allegations that a defendant should have known that harm was “reasonably foreseeable” and allegations that a defendant should have known that there was a “substantial probability” that harm would occur.16 AES cited to the Ostrager and Appleman treatises and City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052 (8th Cir. 1979) in support of applying a “substantial probability” or “substantial certainty” standard.17 AES, however, did not cite any Virginia case law applying a “substantial probability” or “substantial certainty” standard. AES instead argued that the Virginia court had, until the AES decision, treated negligence allegations as accidents except where the insured’s conduct resulted in harm that was the “natural or probable consequence” of the allegedly negligent act.18 In such cases, the causal chain was short and the likelihood of harm was indisputable.19 Here, by contrast, the causal chain was extended and contingent in AES’s view.20
In January 2012, the court issued an order setting aside its prior decision and granting AES’s petition for rehearing. Interestingly, the Virginia Supreme Court rarely grants petitions for rehearing—the most recent State of the Judiciary Report found that of 440 petitions for rehearing filed in 2009, the court granted only 12.21
THE VIRGINIA SUPREME COURT’S DECISION ON REHEARING
On rehearing, the Supreme Court of Virginia again affirmed that Steadfast has no duty to defend AES in connection with the Kivalina claims. In a second opinion by Justice Bernard Goodwyn, the court again held that the underlying complaint against AES did not allege an “occurrence.”22 The court held that coverage is precluded under a CGL policy where the underlying complaint alleges that the result of the insured’s intentional act “was a natural or probable consequence of the intentional act.”23 The court explained that even if an insured is negligent and did not intend to cause the alleged damage, if a policyholder knew or should have known that certain results were the “natural or probable consequences of intentional acts or omissions,” there is no accident or occurrence under a CGL policy.24
The court found that the Kivalina complaint alleged that climate change-related harm was “the natural or probable consequence” of the intentional release of carbon dioxide into the atmosphere. The Kivalina complaint also asserts that the climate change-related harm of the intentional release of carbon dioxide is something that AES knew or should have known about.25 Given the court follows the eight corners approach, it had to take the climate change allegations at face value for purposes of this coverage analysis.
Responding to AES’s argument that negligence claims should automatically trigger coverage, the court reasoned that negligence is not synonymous with “accident.” The court also distinguished the Kivalina action from other negligence actions because the Kivalina complaint asserted only that the defendants “knew or should have known” that a particular harm would result, not that the intentional acts were done negligently.26
The decision did not address AES’s “substantial probability” argument. Instead, the court articulated a different standard. The court stated: “For coverage to be precluded under a CGL policy because there was no occurrence, it must be alleged that the result of an insured’s intentional act was more than a possibility; it must be alleged that the insured subjectively intended or anticipated the result of its intentional act or that objectively, the result was a natural or probable consequence of the intentional act.”27
Perhaps most interesting was Justice Mims’ concurrence in which he agreed with the result but noted the broader effect of the holding:
[U]nder the reasoning of our precedents, allegations of negligence and allegations of accident must be mutually exclusive… Because ‘accident’ is synonymous with ‘occurrence,’ which is what these CGL policies cover, I concur with the majority that our precedents require us to conclude that they do not provide coverage for AES’s allegedly negligent acts. However, there is no rationale to distinguish these policies from other CGL policies in which the insured risk is defined as an ‘occurrence.’28
Although not addressed directly, Justice Mims’ concurrence highlights the split between jurisdictions on how to interpret “occurrence.” Specifically, some courts, like the Virginia Supreme Court, hold that CGL policies do not cover liability for the natural and probable consequence of an insured’s negligence; other courts find coverage for harm resulting from negligence where, from the insured’s perspective, the harm was not intended or foreseen.29
“OBJECTIVE” AND “SUBJECTIVE” APPROACHES TO INTERPRETING “OCCURRENCE”
Courts have applied a range of “objective” and “subjective” approaches to determining whether there is an occurrence. The court in AES follows a line of cases that interpret CGL policies’ “occurrence” language to exclude coverage of damages resulting from “the actual and probable consequence of the insured’s action.” The jurisdictions holding that the natural and probable consequences of negligence cannot be an “accident” adhere to a so-called “objective” interpretation of “occurrence.” This approach concludes that “everyone is constructively held to intend the natural and probable consequences of his acts.”30 Some courts applying this approach consider whether a reasonably prudent person would have foreseen the results of the negligent acts.31
Some jurisdictions, however, take an alternative approach. These jurisdictions employ a “subjective” approach when construing “occurrence,” and assess only the policyholder’s “knowledge and intent.”32 Some of these courts have declined to apply an objective standard because, in their view, the objective approach “so greatly restricts the insurer’s liability as to render the policy valueless or even meaningless, and denies coverage for what is the predicate of any likely liability against the insured.”33 Unlike “objective” jurisdictions that consider whether the harm was the “natural and probable” result of a policyholder’s actions, courts applying a “subjective” test look to the policyholder’s state of mind. Rather than assess whether the policyholder “should have known” the likely outcome of its act, these jurisdictions look to the policyholder’s actual perception of the likely outcome.
For example, years before the AES case, the Court of Appeals of Maryland expressed the same disfavor for the objective approach as Justice Mims in his concurrence. In Sheets v. Brethren Mutual Insurance Co., the underlying complaint alleged that Robert Sheets had intentionally and negligently misrepresented the condition of a septic system before selling his farm. The complaint further alleged that Mr. Sheets knew or should have known that the septic system would not support the needs of the purchaser. After examining courts’ varying approaches to interpreting “occurrence,” the Maryland court adopted the “subjective” approach. The court noted that cases following an “objective” interpretation of the term “occurrence” severely limit the applicability of general liability policies.34 The court ultimately rejected the “objective” approach because it found that it would render liability policies virtually meaningless. The court criticized the objective standard noting that it excluded “coverage for negligent acts resulting in objectively foreseeable or expectable damage.”35 The court reasoned that an insured would likely not be held liable for unforeseeable harm. “Thus, interpreting ‘accident’ as encompassing only negligent acts resulting in unforeseeable and unexpectable damages would leave the insured covered against only those damages for which he or she is not likely to be held liable.”36 To avoid preclusion of coverage for any negligent act, the Maryland court adopted the “subjective” approach, looking not to whether a harm is the “natural and probable consequence of an insured’s act” but rather looking to whether the insured himself foresaw the ultimate harm.
Similarly, in Coregis Insurance v. Elizabeth Township, the Western District of Pennsylvania applied a subjective standard in determining whether there was an occurrence.37 The case considered whether the insurer had a duty to defend six police officers in a claim for false arrest and malicious prosecution by a fellow officer. To establish an occurrence, the court held that “[i]t is not enough  that the insured intend his actions, the insured must have intended to cause harm.”38 Although the conduct as alleged in the underlying complaint was undeniably intentional, the court found that the harm was not subjectively intended where the testimony of the defendant police officers in the underlying litigation showed “a good-faith effort to bring a police officer, who they perceived as corrupt, to justice.”39 Thus, the court concluded there was no occurrence.40
Interestingly, in a case relied upon by AES in its Petition for Rehearing, the Eighth Circuit, like Justice Mims and the court in Sheets, was wary that an approach that strictly assessed whether a harm was reasonably foreseeable would preclude coverage for negligent acts by the insured. In City of Carter Lake v. Aetna Cas. and Sur. Co., the Eighth Circuit, applying Iowa law, concluded that adopting such an approach “would mean that only in a rare instance would the comprehensive general liability policy be of any benefit to [the insured].”41 Still, the court applied a variation of the “objective” standard and ultimately found there was no occurrence.42 The court looked at whether the harm was substantially probable as opposed to reasonably foreseeable.43 The underlying claims in City of Carter Lake involved allegations that city personnel acted negligently and thus caused sewer backups into homes of city residents. After initial backups, there was a substantial probability of additional backups due to equipment failure.44 Thus, in the coverage case, the court held that the “totality of the circumstances” showed that there was no “occurrence” because the insured was aware that flooding was a “substantial probability” if the defective equipment was not replaced.45 The Virginia Supreme Court, however, declined to apply this probability approach as part of its occurrence test, and focused on whether the alleged harm was the “natural and probable consequences” of the insured’s actions. Thus, in similar litigation, counsel for both insurers and policyholders should consider the relevant jurisdiction’s approach to the question of whether there is an “occurrence” for purposes of a CGL policy and the effect an insured’s state of mind has on the approach.
The Virginia Supreme Court decision in AES is an important step toward resolving key issues in climate change coverage litigation. In future climate change-related coverage litigation, both insurers and policyholders should be mindful of whether the relevant jurisdiction applies an eight corners approach and an objective or subjective approach to interpreting the term “occurrence.” The pollution exclusion and known loss issues also may still need to be litigated depending on if or when new climate change tort claims and related coverage lawsuits are filed in other jurisdictions. In Virginia, the AES decision also has significant implications for the question of coverage in negligence actions inside and outside the climate change context. Both insurers and policyholders should stay abreast of the ongoing development of the jurisprudence in this evolving area of the law.
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