Global Warming, An Evolving Liability Your Company Can Survive

Policyholder Advisor & Alert

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PUBLISHED ON: October 14, 2009

The previous issue of the Policyholder Advisor addressed the increase in companies’ employment practices liability likely to result from the Lilly Ledbetter Fair Pay Act of 2009, as well as the insurance strategies that could help cover those risks. In this space, we want to briefly highlight another emerging legal challenge that can increase your company’s liability risks — lawsuits for the nuisance caused by a corporation’s greenhouse gas emissions (GHG’s).

State of Connecticut v. American Electric Power Co., Inc. and Its Insurance Implications

The United States Court of Appeals for the Second Circuit recently reinstated a 2004 lawsuit by eight states and the city of New York against five of the largest U.S. coal-burning electric utilities. These government entities brought suit because of defendants’ documented CO2 emissions and the alleged impact on climate change. A two-judge panel of the Second Circuit, vacating and remanding a District Court judgment, held “that the district court erred in dismissing the complaints on political question grounds; that all of the Plaintiffs have standing; that the federal common law of nuisance governs their claims” and that such claims are not preempted by existing environmental law.

This decision effectively gives states and other plaintiffs the green light to sue companies from other states alleging nuisance from CO2 emissions. Until now, industry largely has been protected under the “political question” doctrine and by lack of plaintiffs’ standing, both of which knocked out similar prior suits. The Court of Appeals rejected those protections in this case. In fact, this decision potentially enables every state and municipality in the country to bring nuisance suits against an almost limitless range of CO2 emitters.

It is generally accepted that the biggest hurdle for plaintiffs to clear in litigation over climate change is establishing causation. In this case, the Second Circuit held that plaintiffs had pleaded a sufficiently close connection between CO2 emissions from burning coal and evidence of rising global temperatures. One might say that the Second Circuit found the missing causal link.

However, there is no humor in this decision for companies involved with significant CO2 emissions or facing lawsuits similar to this case, particularly those companies looking to their liability insurance policies for a defense and indemnity. Insurance companies can be expected to contest GHG-related coverage based upon pollution exclusions in many policies, setting the stage for high stakes coverage battles involving survival of the fittest.

To the extent there is a silver lining, it may be that the long-term and evolving nature of greenhouse gas emissions and global warming damages should trigger decades of historic insurance coverage. For many companies, detailed insurance archaeology and reconstruction of corporate insurance coverage history by experienced professionals may uncover millions of dollars in hidden coverage assets.

Older commercial general liability (CGL) insurance policies are generally occurrence-based, meaning that they are triggered by events that occurred during the policy period regardless of when the event is discovered or becomes a cause of action. They therefore effectively never expire — and they often prove especially valuable because of the absence of exclusionary language involving pollution. Moreover, the global nature of the alleged damages may enable some policyholders to pursue coverage in alternative states with progressive coverage law supporting policyholder/consumer rights.

While many companies may think of “nuisance” suits alleging harm from their GHG emissions as unlikely to survive, the cost of defending such suits can dwarf the costs of indemnification. Insurance companies’ duty to defend is broader than their duty to indemnify and companies facing such suits should move quickly to obtain coverage for defense costs.

In many claims stemming from GHG lawsuits, insurance companies are likely to invoke the so-called pollution exclusions that were added to standard-form CGL policies in the 1970s and became more restrictive in the 1980s. Historically, however, typical releases of GHGs have often not been regulated or otherwise treated as pollution by the government.

Until an asteroid strikes the earth and raises a cooling dust cloud, global warming will be very much with us as a focal point of legislation and litigation. Policyholders facing potential liability from GHGs would do well to understand their coverage rights before litigation sea levels start to rise.