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Following the close of COP29, the global insurance market has never been more aware of the potential challenges posed by climate change. In 2023 alone, the US experienced 28 separate weather and climate disasters costing at least $1bn – the highest number in a calendar year. It is widely accepted that climate change has resulted in a higher frequency of more extreme weather-related disaster events.
For casualty insurers, climate change litigation is likely to dominate headlines in the years to come. At least 230 new climate change lawsuits were filed in 2023 alone. Whilst insurers should not underestimate the potential risks posed by climate change litigation, the underlying plaintiffs are likely to continue to face significant hurdles in establishing legal liability for climate change claims.
This article explores the coverage issues considered by the Hawaii Supreme Court in the recent case of Aloha Petroleum v. National Union Fire Ins. Co. of Pittsburgh, PA, [07.10.24] which may provide a preview of how future coverage disputes will play out in the US.
Current trends in climate change litigation
Over the past five years, a number of high-profile lawsuits (the US Climate Lawsuits) have been filed in various US courts by local government bodies – cities, counties, States and Native American Tribes (the Climate Change Plaintiffs). The defendants are typically entities involved in the extraction, production, refinement, distribution, marketing, promotion and/or sale of fossil fuel products (the Fossil Fuel Defendants).
These US Climate Lawsuits typically allege that, despite knowing that greenhouse gas (GHG) emissions would have a significant adverse impact on the Earth’s climate and sea levels, the Fossil Fuel Defendants sought to conceal the dangers associated with the growing use of fossil fuel products and engaged in campaigns to promote the extraction and sale of those products at greater volumes.
The Climate Change Plaintiffs further allege that the Fossil Fuel Defendants’ actions have contributed substantially to the buildup of GHGs in the Earth’s atmosphere that is said to drive global warming and its physical, environmental, and socioeconomic consequences.
The Climate Change Plaintiffs assert that climate change and its consequences will result in damage/destruction to facilities and property, increased planning and preparations costs for adaptation and resiliency to the effects of climate change, decreased tax revenue, increased spending on public health, and ecosystem harm.
The Aloha court therefore held that the complaints, which claim that Aloha “acted with conscious disregard for the probable dangerous consequences of their conduct’s and products’ foreseeable impact”, allege an “accident” under Hawaii law.
Coverage for climate change claims – Aloha Petroleum v. National Union Fire Ins. Co. of Pittsburgh, PA
In October 2024, the Supreme Court of Hawaii addressed the coverage available for climate change claims made against Aloha Petroleum LLC (Aloha).
Specifically, the court was asked to consider two questions relevant to coverage: (1) whether an “accident” (a requirement for coverage) includes an insured’s allegedly reckless conduct; and (2) whether GHGs are “pollutants” for the purposes of the policies’ pollution exclusions.
Aloha had demanded a defence from its Commercial General Liability (CGL) insurers in respect of two underlying lawsuits brought by the City and County of Honolulu and the County of Maui, which allege that the fossil fuel industry knew (beginning in the 1960s) that its products would cause catastrophic climate change. Rather than mitigate their emissions, the underlying plaintiffs allege that Aloha concealed its knowledge of climate change, promoted climate science denial, and increased its production of fossil fuels. Aloha’s actions, the complaints allege, increased carbon emissions, which have caused and will cause significant damage to the local government plaintiffs.
On the first issue, the court held that an accident may occur despite a policyholder’s knowledge of the risks of harm associated with its conduct. Under Hawaii law, when an insured perceives a risk of harm, its conduct will constitute an “accident” unless it intended to cause harm or expected harm with practical certainty. The Aloha court therefore held that the complaints, which claim that Aloha “acted with conscious disregard for the probable dangerous consequences of their conduct’s and products’ foreseeable impact”, allege an “accident” under Hawaii law.
However, considering the applicability of the policies’ pollution exclusions, the Aloha court ruled in insurers’ favour, holding that GHGs are “pollutants” for the purposes of the policies’ pollution exclusion. The pollution exclusion therefore barred coverage for Aloha’s liability for the emission of GHGs.
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As part of its reasoning, the court held that
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The key issues for future climate change coverage disputes
In view of the reasoning in Aloha, we explore below the issues on which climate change coverage disputes may turn in the future.
CGL and Commercial Umbrella insurance policies generally provide cover for “bodily injury” and “property damage” caused by accidents (occurrences). US courts do not, however, take a uniform approach to the concepts of “occurrence” and “accident.”
In Hawaii, as demonstrated in Aloha, an insured’s conduct will be considered an accident unless it either intended the resulting harm or expected that harm with practical certainty, irrespective of the insured’s perception of the risk of that harm occurring.
This is notably different to the reasoning adopted by the Virginia Supreme Court in 2012 in Steadfast Ins. Co. v. AES Corp (AES). The underlying plaintiff alleged that AES (an energy company specialising in the generation and distribution of electricity) “intentionally emits millions of tons of carbon dioxide and other greenhouse gases into the atmosphere annually”, that AES “knew or should have known of the impacts of [its] emissions” of those GHGs, but that AES “continued [its] substantial contributions to global warming.”
Applying Virginia law, the AES court held that there was no covered “occurrence” (i.e. accident) because the “the gravamen of [the underlying plaintiff’s] nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.”
It is therefore likely that the US state(s) in which future climate change coverage actions are fought will be highly influential in determining the outcome of those disputes. In some states, the fact that solely intentional conduct is alleged – for example, the emission of GHGs and/or the sale and marketing of fossil fuel products – may be sufficient for insurers to resist coverage for climate change claims.
CGL policies typically require that the “bodily injury” or “property damage” for which coverage is sought is “neither expected nor intended from the standpoint of the insured”. As with the need for losses to be accidental, US courts do not apply a uniform approach to the nature of expectation or intent required to bar coverage. In some US states – for example, California, where the courts focus their inquiries on the “injury-producing acts of the insured”, rather than the consequences of those acts – insurers may have good grounds for asserting “Expected or Intended” defences to coverage for climate change claims.
Bermuda Form policies may also provide insurers with an “Expected or Intended” defence to coverage for climate change liabilities. The standard Bermuda Form wording bars coverage for injury or damage which is of a similar nature and/or at a similar level or rate as that historically experienced and/or expected by an insured. This could provide Bermuda Form insurers with a coverage defence in circumstances where, as alleged by many underlying plaintiffs, insureds involved in the fossil fuel supply chain may have had access to significant historical data demonstrating a level or rate at which fossil fuel products have contributed to climate change and the resulting “Personal Injury” or “Property Damage”. Any such defence would necessarily be very fact-sensitive.
In Aloha, the Hawaii Supreme Court found that pollution exclusions barred coverage for claims relating to the emission of GHGs. Reasoning that a substance is a “contaminant” or “pollutant” if it causes damage due to its presence in the environment, the court concluded that GHGs produce “traditional” environmental pollution as they accumulate in the atmosphere and trap heat:
“Because they are released into the atmosphere and cause harm due to their presence in the atmosphere, GHGs are pollutants.”
Similarly-worded pollution exclusions are likely to be found in CGL and Commercial Umbrella Insurance from the mid-1970s onwards and insurers should remain mindful of their potential application to climate change claims under historic policies.
Comment
As far as coverage under general liability and/or product liability policies for climate change claims is concerned, casualty insurers should not expect uniform reasoning to be adopted by courts in the US. This is clearly illustrated by the contrasting reasoning in the climate change cases of AES and Aloha, but is also evidenced by recent judicial divergence on coverage issues arising out of the US “opioid epidemic” and lead paint litigation.
The Aloha court’s decision on the applicability of “traditional” pollution exclusions is, in our view, likely to be significant and may influence other US courts in future disputes regarding the coverage available for alleged climate change liabilities under general liability and/or product liability policies. Whilst casualty insurers will be rightly concerned with mitigating the risk of climate change litigation at future renewals, the decision in Aloha indicates that traditional pollution exclusions may continue to shield insurers from such claims under historic policies.
Insurance and reinsurance