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Global Warming: Are You Covered

Is it hot today? Maybe it's too hot. And maybe all that extra heat is causing other problems, like powerful hurricanes, melting ice caps, and rising tides, to name a few.
      As the controversy rages over climate change and its consequences, state and federal authorities are responding to calls to regulate the greenhouse-gas emissions that contribute to global warming.
      Greenhouse gases can be released through natural occurrences such as a volcanic eruption. They also are produced by humans, for example, by the burning of fossil fuels for energy. Carbon dioxide (CO2) is the most prevalent human-produced greenhouse gas. But whatever their source, greenhouse gases come with a consequence: They trap the sun's energy in the atmosphere, thereby causing temperatures around the world to rise.
      While temperatures rise, laws are being passed and lawsuits filed, all with one goal in mind: to curb greenhouse-gas emissions. As a result, greenhouse-gas emitters, ranging from energy companies to toy makers, face liability. To counter such exposure, emitters are tendering claims to their comprehensive general liability (CGL) insurers. And with that, the "global warming insurance claim" has arrived.
      Global-warming insurance claims typically stem from two problems: the cost of regulatory compliance, and the specter of damages to be assessed by a judge or jury. When tort cases are asserted, they generally allege a variety of theories, including personal injury, damage to real property, public nuisance, trespass, and unjust enrichment.
      The individual and corporate targets of global-warming regulations and lawsuits submit claims to their insurers in an effort to defray the costs of compliance and remediation. Whether such claims are covered depends on two things: first, the wording of the "pollution exclusion" in the CGL policy; and second, whether carbon dioxide, the main greenhouse gas emitted by human activity, is determined to be a pollutant.
      A typical CGL policy obligates an insurance company to pay all sums the insured becomes legally obligated to pay as damages caused by bodily injury, property damage, or personal injury, subject to exclusions. In the 1970s, the standard pollution language excluded coverage for losses resulting from the discharge of contaminants or pollutants-unless the loss was sudden and accidental, or occurred over an extended period of time.
      Later, in the mid-1980s, the insurance industry broadened that exclusion by eliminating the "sudden and accidental" exception. The revised version of the exclusion is known as the "absolute pollution exclusion" (APE). The APE is found in most CGL policies today. Thus, there generally is no coverage for the release of pollutants into the environment. The question then becomes what, exactly, constitutes a "pollutant"?
      The definition of pollutant in a typical CGL policy usually includes certain irritants and contaminants. The APE typically excludes losses arising from the discharge of pollutants that are not sudden and accidental, clean-up costs, and government lawsuits pertaining to such pollutants. As we shall see, however, courts have taken more than one approach in interpreting the APE.
      Nationwide, there are two lines of authority interpreting the APE. In MacKinnon v. Truck Ins. Exchange (31 Cal. 4th 635 (2003)), the California Supreme Court explained that most states apply the exclusion to "traditional environmental pollution" but not to negligence claims arising from the use of toxic substances in normal business operations. Courts adopting this interpretation have focused on the common meaning of the phrase "discharge, dispersal, release or escape" and have excluded coverage for the release of a pollutant over a vast area. The policyholder may have a better argument when the case concerns a localized incident, such as the negligent spraying of insecticides, leaks of carbon monoxide from furnaces, or the ingestion of paint chips.
      In contrast, a minority of jurisdictions, relying on the "plain" language of the exclusion, hold that the APE is unambiguous and applies to all manner of negligent acts involving toxic substances, even outside the scope of "traditional" environmental pollution (MacKinnon at 64647).
      Those courts applying this narrow interpretation of the APE invoke the "reasonable expectations" doctrine when the policy language is ambiguous. (See La Jolla Beach & Tennis Club Inc. v. Industrial Indemnity Co., 9 Cal. 4th 27 (1994); Bank of the West v. Superior Court, 2 Cal. 4th 1254 (1992); and Reserve Insurance Co. v. Pisciotta, 30 Cal. 3d 800 (1982).)
      Courts apply the APE differently depending on the context of the case. While the MacKinnon court found the APE to be ambiguous in the context of its application to pesticides, other courts found that the APE was not ambiguous in the context of other loss-triggering events such as contamination by silica, petroleum, and the emission of noxious odors. But a common theme among the cases is the application of the reasonable-expectations doctrine in deciding whether a loss is excluded under the APE. The following decisions should provide guidance in assessing how global-warming insurance claims will be decided.
      In the MacKinnon case discussed above, a tenant died as a result of a pesticides spray, leading to a negligence suit against the landlord and a pest-control company. The landlord submitted a claim, which the insurer denied under the APE. The court found coverage, explaining that under the reasonable-expectations doctrine, negligently spraying pesticides around an apartment building is not what is commonly thought of as "dispersal of a pollutant." The court also explained that defining pollutant to include any irritant or contaminant was inconsistent with what a reasonable policyholder would understand it to mean. The court raised the example of carbon monoxide, stating that a reasonable person would view it as a pollutant if it is emitted in an industrial or environmental setting, but not if it is emitted from a malfunctioning home heater. In conclusion, the court found in favor of coverage, explaining that "it is unlikely a reasonable policyholder would think of the act of spraying pesticides under these circumstances as an act of pollution" and that the pollution exclusion did not plainly exclude the loss (MacKinnon at 655656).
      In a subsequent case, Garamendi v. Golden Eagle Ins. Co. (127 Cal. App. 4th 480 (2005)), the insurer, applying the APE, denied coverage to a policyholder who was sued by workers for silica-related injuries. The workers alleged that a sandblasting operation dispersed silica-containing dust, causing injury. The court ruled that the APE applied, and therefore the insurer had no duty to defend its insured in relation to the silica-related injuries. Applying MacKinnon, the court explained that silica dust comes within the broad definition of "any solid, liquid, gaseous, or thermal irritant or contaminant"; federal regulations identify silica dust as an air contaminant; and the widespread dissemination of silica dust as an incidental by-product of industrial sandblasting is what is commonly thought of as pollution and environmental pollution.
      In another case, the Ortega Rock Quarry placed fill dirt along a washed-out access road after heavy rainfall. After getting sued by the Environmental Protection Agency (EPA) for allegedly damaging a creek and surrounding property, Ortega submitted a claim to its insurers. The insurers denied coverage, asserting that rocks and dirt were excluded pollutants. The trial court granted the insurers' motions for summary judgment and the appeal court affirmed, holding that the APE applied and was not ambiguous. The court rejected Ortega's assertion that dirt and rocks are not pollutants because they are naturally occurring, noting that dirt and rocks were considered pollutants within the meaning of the Clean Water Act (33 U.S.C. § 1311). (Ortega Rock Quarry v. Golden Eagle Ins. Corp., 141 Cal. App. 4th 969 (2006).)
      Plaintiffs in a 1995 case owned property that was used as a petroleum bulk plant that may have caused underground contamination of the water supplies of neighbors. A government agency required monitoring. The plaintiffs tendered a claim to their insurer, and the claim was denied under the APE. The plaintiffs sued and the trial court granted summary judgment in favor of the insurer, concluding that it had no duty to defend or provide indemnification. The court of appeal affirmed, explaining that pollutants include any liquid irritant or contaminant, and that an insured could not have reasonably expected coverage for property damage caused by petroleum contamination. (Legarra v. Federated Mutual Ins. Co., 35 Cal. App. 4th 1472.)
      Last year the court of appeal addressed whether the APE applies to odors. Cold Creek, the insured, operated a composting facility. The company was sued by neighbors for nuisance because of noise and injurious, noxious odors emitted from its facility. Cold Creek lost at trial, and then submitted a claim for defense costs and indemnity under its commercial liability policies. After the insurance company denied coverage, Cold Creek filed a bad faith lawsuit. Affirming judgment for the carrier, the court of appeal held that "[t]he widespread dissemination of offensive and injurious compost odors as occurred in this case is environmental pollution, which is clearly and plainly excluded from coverage by the words of the pollution exclusion understood in their ordinary and popular sense." (Cold Creek Compost, Inc. v. State Farm Fire and Cas. Co., 156 Cal. App. 4th 1469 (2007).)
      What about CO2? As noted, it is the most common greenhouse gas produced by human activity. None of the above cases, however, addressed the APE in the context of CO2 emissions. As a result, at least with respect to insurance coverage, there appears to be a gaping hole in the legal atmosphere, and a substantial question looms: How will courts analyze a claim for coverage involving CO2?
      A recent U.S. Supreme Court case, while not involving insurance, may shed light on the issue. In Massachusetts v. Environmental Protection Agency (549 U.S. 1438 (2007)), the nation's high court addressed the phenomenon of global warming for the first time. The Court acknowledged "respected scientific opinion that a well-documented rise in global temperatures and attendant climatological and environmental changes have resulted from a significant increase in the atmospheric concentration of 'greenhouse gases.' " The Court also observed that "[t]he harms associated with climate change are serious and well recognized" (549 U.S. at 1442). Given this reality, the Court noted, many states and organizations are seeking to force the EPA to begin regulating greenhouse-gas emissions under the Clean Air Act (42 U.S.C. § 7521) (549 U.S. at 1440).
      Among the issues decided by the Supreme Court was whether the EPA's decision not to regulate carbon dioxide emissions under the Clean Air Act was arbitrary and capricious. In resolving that question, the Court addressed whether pollution includes greenhouse-gas emissions.
      For its part, the EPA acknowledged in the litigation that, under the Clean Air Act, it is required to regulate emissions of "air pollutants" that endanger the public health and welfare. But the EPA claimed that carbon dioxide is not an air pollutant. In a 54 decision, the Supreme Court rejected that argument and held that greenhouse gases, including CO2, are indeed air pollutants within the meaning of the Clean Air Act. As a result, the EPA "has statutory authority to regulate emission of such gases" (549 U.S. at 1443). Consequently, the Court concluded that the EPA's refusal to promulgate regulations was based on "impermissible considerations" and was therefore "arbitrary and capricious" (549 U.S. at 1443).
      The Court remanded the case, giving the EPA a small window through which it could avoid regulating emissions-either by determining that greenhouse gases do not contribute to climate change, or by providing a reasonable explanation as to why it could not or would not exercise its discretion to determine whether they do. But because the EPA has conceded that there is a causal connection between man-made greenhouse-gas emissions, global warming, and harmful consequences, it is difficult to imagine how, under the circumstances, the agency can avoid regulating carbon dioxide emissions.
      Does Massachusetts v. EPA mean that CO2 emissions are in fact a pollutant under the APE? Only time-and new litigation-will tell. However, it is safe to assume that an insurance company disputing coverage under a CGL policy will answer that question in the affirmative based on what the nation's highest court has concluded under the Clean Air Act.
      What about policyholders? California case law provides guidance in predicting how the courts will decide the issue of coverage for a global-warming claim based on CO2 emissions.
      Policyholders will probably contend that the APE does not preclude coverage because carbon dioxide is not "traditional" environmental pollution and is "not commonly thought of as pollution" (applying MacKinnon). They will also assert there is a reasonable expectation of coverage for liabilities arising out of normal business operations (which include emissions of greenhouse gases), and note that the EPA has never regulated greenhouse-gas emissions. Finally, insureds will contend that the insurance companies never contemplated CO2 emissions in drafting the APE.
      The insurance carriers disputing coverage will take a different position. In addition to relying on Massachusetts v. EPA and policy language to argue that greenhouse-gas emissions are pollutants, the carriers will point out that they are man-made emissions that cause environmental harm and, under MacKinnon, the APE's intent was to "address the enormous potential liability resulting from anti-pollution laws enacted between 1966 and 1980" (31 Cal. 4th at 653). In addition, the insurance companies will point out that the EPA has not regulated CO2 emissions, because it took the position that such regulations were within the purview of the Department of Transportation.
      It will be interesting to see how California's courts treat Massachusetts v. EPA. Some may invoke the case to support a conclusion that CO2 is an excluded pollutant under the APE. On the other hand, courts may distinguish the case on the basis that the definition of pollutant under the Clean Air Act differs from the definition under a CGL policy, and the reasonable-expectations doctrine requires a different analysis.
      Whether greenhouse gases will be considered pollutants excluded under a CGL policy remains to be seen. In the meantime, insurance claims are on the rise, as the energy, auto, and manufacturing industries face regulations and lawsuits aimed at curbing their greenhouse-gas emissions, for which they will incur substantial costs. As those industries seek to shift these costs to their insurers, an era of global-warming insurance claims is on the horizon.
      Suzanne Badawi is partner and insurance litigator at Luca, Forward, Hamilton & Scripps in Los Angeles.
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