The “Global Warming” Insurance Claim by kfm14657



       The “Global Warming”
          Insurance Claim                                              By: Jay N. Rosenblatt

                                                  By: Suzanne Badawi

         cientists have been warning us        auto and manufacturing industries are        be decided by the courts and, if history is
         about the devastating impact          facing are a precursor of what is to come.   a guide, then different states will probably
         global warming could have if          Various states and eco-friendly organiza-    draw different conclusions. The debate
         human-made greenhouse gas             tions have filed lawsuits against govern-    will likely revolve around the pollution
emissions are not reduced, and many            ment agencies in an effort to regulate       exclusion in CGL policies and whether
believe that these impacts are being felt      corporate emission practices. Other          carbon dioxide, the main greenhouse gas
now. Because of this sense of urgency          lawsuits are being filed by private indi-    emitted by human activity, is a pollutant.
to reverse global warming, pressure has        viduals, corporations and eco-friendly
been mounting on the three branches of         organizations against the industries that
government at state and national levels        emit greenhouse gases, alleging torts        History and Terms
to take action to minimize greenhouse
gas emissions. As a result, corporations
                                               such as public nuisance, trespassing and
                                               unjust enrichment.                           of the APE
that emit greenhouse gases, ranging                In response, corporations exposed to        A typical CGL policy obligates an insur-
from energy companies to toymakers,            liability will tender claims to their CGL    ance company to pay “all sums for which
are becoming increasingly exposed to           insurers, seeking coverage for regula-       [the insured] become[s] legally obligated
regulatory orders and lawsuits for which       tory compliance costs — that is, costs to    to pay as damages caused by bodily injury,
they will tender claims to their insurers.     abate or mitigate emissions pursuant to      property damage or personal injury,” sub-
Enter an era of “global warming” insur-        regulations or compliance orders — and       ject to exclusions. One exclusion that has
ance claims.                                   litigation expenses such as defense and      evolved over time is the pollution exclu-
   In this article, we’ll focus on the         indemnity costs for settlements and          sion. This exclusion was initially drafted
global warming phenomenon, how it will         judgments. Whether such                                       in response to the marked
trigger insurance claims, and whether          claims are covered                                                   increase in
such claims are excluded under a typical       will most                                                               environmental
“absolute pollution exclusion” found           likely                                                                        liability
in commercial general liability (CGL)

Present Dangers
   The phenomenon commonly
referred to as “global warming”
comes from greenhouse gas
emissions. Emitted from the
combustion of non-renewable
sources of energy, greenhouse
gases trap heat in the
atmosphere, causing a rise in
the earth’s average temperature.
The principal greenhouse gases
are carbon dioxide, methane,
nitrous oxide and fluorinated
gases. Most of our energy
demands are met by the
combustion of fossil fuels such as
coal, oil and natural gas, which
release carbon dioxide into the
atmosphere. Not surprisingly, carbon
dioxide is the most prevalent greenhouse
gas released by humans.
   As the underlying science progresses,
so does the growing movement in favor
of regulations and lawsuits aimed at
curbing emissions. In fact, the
regulations and lawsuits that the energy,

 TODAY’S INSURANCE PROFESSIONALS • FALL 2008                                                                                          8
associated with new environmental                  expectations doctrine when the policy          insured operated a composting facility
statutes and disasters.                            language is ambiguous, focusing on the         and was sued for nuisance because of
   The typical absolute pollution exclusion        policyholder’s state of mind in procur-        noise and noxious odors emitted from its
(APE) found in CGL policies excludes               ing insurance. ( La Jolla Beach & Tennis       facility. The insured submitted a claim to
coverage for damages “arising out of the           Club Inc. v. Industrial Indemnity Co. ,        its insurers, who denied coverage. Cold
discharge, dispersal, release or escape of         1994).                                         Creek filed a bad faith lawsuit. A court of
smoke, vapors, fumes, acids, alkalis, toxic           In MacKinnon v. Truck Ins. Exchange,        appeal held that the widespread dissemi-
chemicals, liquids or gases, waste materi-         the court applied the narrow interpreta-       nation of offensive and injurious compost
als or other irritants, contaminants or pol-       tion and found that the APE was ambigu-        odors is clearly and plainly excluded
lutants into or upon land, the atmosphere,         ous in the context of pesticide fumes. In      from coverage under the APE.
or any water course or body of water,”             that case, a tenant died from pesticides          The courts apply the APE differently
including the “sudden and accidental”              that were used in a building for pest          depending on the facts of the case. Not-
release or discharge of pollutants.                extermination. The court established cov-      withstanding the different applications,
                                                   erage on the basis that the APE was            these court decisions and the principles
                                                   intended to exclude coverage for injuries      of law applied should provide guidance
Room for                                           resulting from events commonly thought         in assessing how the issue of coverage
Interpretation                                     of as environmental pollution, but not all
                                                   injuries arising from toxic substances.
                                                                                                  for global warming insurance claims will
                                                                                                  be decided.
   A pollutant is defined in a typical CGL            In another case, Garamendi v. Golden
policy as “any solid, liquid, gaseous or           Eagle Ins. Co. (2005), the insurer denied
thermal irritant or contaminant, including         coverage to an insured that was sued by        Is Carbon Dioxide a
smoke, vapor, soot, fumes, acids, alkalis
and chemicals.” This also applies to waste,
                                                   its employees for silica-related inju-
                                                   ries from a sandblasting operation that        Pollutant ?
which includes “materials to be recycled,          dispersed silica-containing dust. The             A recent U.S. Supreme Court case,
reconditioned or reclaimed.”                       court held that the APE precluded cover-       not involving insurance, may impact
   Nationwide, there are two lines of              age because silica dust is an incidental       how state courts will decide the issue of
authority interpreting the APE. In the             byproduct of an industrial sandblasting        whether greenhouse gases are pollutants,
2003 case of MacKinnon v. Truck Ins.               operation, which is commonly thought of        the emissions of which may be excluded
Exchange, the court explained that most            as environmental pollution.                    under the APE.
states apply the exclusion to traditional en-         In Ortega Rock Quarry v. Golden                In Massachusetts v. Environmental
vironmental pollution, but not to injuries         Eagle Ins. Corp. (2006), Ortega was sued       Protection Agency (2007), the U.S. Su-
involving the negligent use or handling of         for damaging a creek and surrounding           preme Court addressed the phenomenon
toxic substances that occur in the normal          property as a result of rocks and dirt in      of global warming. The Court explained
course of business.                                the quarry running downstream when it          that “[t]he harms associated with climate
   Courts adopting this narrow interpreta-         rained. Ortega submitted a claim to its        change are serious and well recognized”.
tion have focused on the common meaning            insurers, who denied coverage based on         The issues were (1) whether a state had
of discharge, dispersal, release or escape         the APE, asserting that rocks and dirt         standing to sue the EPA for not promul-
as “implying expulsion of the pollutant            were “pollutants”. A court of appeal           gating regulations to reduce greenhouse
over a considerable area rather than a             agreed, basing its decision, in part, on the   gas emissions, and (2) whether the EPA’s
localized toxic accident occurring in the          fact that the fill material was defined as a   decision not to regulate carbon dioxide
vicinity of intended use.” This differs from       pollutant under the Clean Water Act.           emissions under the Clean Air Act was
what is regarded as normal toxic acci-                In Legarra v. Federated Mutual Ins.         “arbitrary and capricious”.
dents, such as the accidental spraying of          Co. (1995), the plaintiffs tendered a             The EPA is required to regulate emis-
insecticides, carbon monoxide leaks from           claim to their insurer for costs related to    sions of air pollutants that endanger the
furnaces or the ingestion of paint chips.          underground contamination from their           public health and welfare under the Clean
A minority of jurisdictions, relying on the        petroleum plant. The insurer denied cov-       Air Act. However, the EPA argued that
plain language of the exclusion, maintain          erage by applying the APE, and the in-         carbon dioxide is not considered a pollut-
that the exclusion is unambiguous and              sured sued. A court of appeal applied the      ant under the statute. The Court dis-
applies to all manner of negligent acts            APE to preclude coverage, holding that         agreed, maintaining that carbon dioxide
involving toxic substances, even when              the insured could not have reasonably          is an “air pollutant” within the meaning
outside the scope of traditional environ-          expected coverage for damage caused by         of the statute, and that the EPA’s refusal
mental pollution.                                  petroleum contamination.                       to promulgate regulations was based on
   The courts that apply the narrow inter-            In Cold Creek Compost, Inc. v. State        “impermissible considerations” and was
pretation of the APE invoke the reasonable         Farm Fire and Cas . Co. (2007), the            therefore “arbitrary and capricious”.

   The Court remanded the case,                 • The U.S. Supreme Court, in Mass v.
giving the EPA a small window through           EPA , concluded that carbon dioxide is a
which to avoid regulating emissions if          “pollutant” under the Clean Air Act.
it determined that greenhouse gases do             Whether carbon dioxide and other
not contribute to climate change, or if it      greenhouse gases are pollutants excluded
provided a reasonable explanation as to         under a CGL policy will ultimately be
why it could not or would not exercise its      decided by the courts. In the meantime,
discretion to determine whether they do.        the energy, auto and manufacturing in-
Notwithstanding this small window, it is        dustries are facing regulations and
difficult to imagine how the EPA could          lawsuits aimed at curbing their
avoid promulgating regulations when             emissions, for which they will incur
it has already conceded that man-made           substantial costs. As these corporations
greenhouse gas emissions cause global           seek to shift such costs to their insurers,
warming. Moreover, global warming               an era of “global warming” insurance
causes damage to the environment.               claims is sure to be on the horizon.
Consequently, it is likely that carbon
dioxide emissions will soon become
regulated by the EPA, thereby triggering                       Suzanne Badawi is a
corporate liability and more lawsuits that                     partner of Luce,
will result in global warming insurance                        Forward, Hamilton &
claims.                                                        Scripps LLP in
   None of the cited cases address                             California who
whether the APE in insurance policies                          specializes in insurance
precludes coverage for liability stemming                      litigation and
from greenhouse gas emissions. A corpo-         coverage disputes. Badawi may be
ration submitting a global warming claim        reached at
to its insurer will argue that the APE does
not apply in light of the following:

• Carbon dioxide is not “traditional envi-
ronmental pollution” and is “not com-
monly thought of as pollution”.
• A policyholder has a “reasonable expec-
tation” of coverage for liabilities (includ-
ing greenhouse gas emissions) arising out
of normal business operations.
• Greenhouse gas emissions have never
been regulated by the EPA.
• The insurance companies did not con-
template carbon dioxide emissions when
drafting the pollution exclusion.

   Notwithstanding these arguments,
losses arising from greenhouse gas emis-
sions may be deemed by the courts to
be excluded under the APE for several
• They are chemical compounds and
waste products, which are pollutants
under the APE.
• They are man-made emissions that
cause environmental harm barred by the
APE which was intended to limit liability
arising out of enforcement of anti-pollu-
tion laws.
• They are regulated by the Department
of Transportation.

  TODAY’S INSURANCE PROFESSIONALS • FALL 2008                                                 10

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