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, auto, and manufacturing industries are facing are a precursor of what is to come. Various states and eco-friendly organizations have filed lawsuits against government agencies in an effort to regulate corporate emission practices. Other lawsuits are being filed by private individuals, corporations, and eco-friendly organizations against the industries that emit greenhouse gases, alleging torts such as public nuisance, trespassing, and unjust enrichment.

In response, corporations exposed to liability will tender claims to their CGL insurers, seeking coverage for regulatory compliance costs — that is, costs to abate or mitigate emissions pursuant to regulations or compliance orders — and litigation expenses such as defense and indemnity costs for settlements and judgments. Whether such claims are covered will most likely be decided by the courts and, if history is a guide, then different states will probably draw different conclusions. The debate will likely revolve around the pollution exclusion in CGL policies and whether carbon dioxide, the main greenhouse gas emitted by human activity, is a pollutant.

History and Terms of the APE

A typical CGL policy obligates an insurance company to pay “all sums for which [the insured] become[s] legally obligated to pay as damages caused by bodily injury, property damage or personal injury,” subject to exclusions. One exclusion that has evolved over time is the pollution exclusion. This exclusion was initially drafted in response to the marked increase in environmental liability associated with new environmental statutes and disasters.

The typical absolute pollution exclusion (APE) found in CGL policies excludes coverage for damages “arising out the discharge, dispersal, release or escape of smoke, vapors, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere, or any water course or body of water,” including the “sudden and accidental” release or discharge of pollutants.

Room for Interpretation

A pollutant is defined in a typical CGL policy as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis and chemicals.” This also applies to waste, which includes “materials to be recycled, reconditioned or reclaimed.”

Nationwide, there are two lines of authority interpreting the APE. In the 2003 case of MacKinnon v. Truck Ins. Exchange, the court explained that most states apply the exclusion to traditional environmental pollution, but not to injuries involving the negligent use or handling of toxic substances that occur in the normal course of business.

Courts adopting this narrow interpretation have focused on the common meaning of discharge, dispersal, release, or escape as “implying expulsion of the pollutant over a considerable area rather than a localized toxic accident occurring in the vicinity of intended use.” This differs from what is regarded as normal toxic accidents, such as the accidental spraying of insecticides, carbon monoxide leaks from furnaces, or the ingestion of paint chips. A minority of jurisdictions, relying on the plain language of the exclusion, maintain that the exclusion is unambiguous and applies to all manner of negligent acts involving toxic substances, even when outside the scope of traditional environmental pollution.

The courts that apply the narrow interpretation of the APE invoke the reasonable expectations doctrine when the policy language is ambiguous, focusing on the policyholder's state of mind in procuring insurance. (La Jolla Beach & Tennis Club Inc. v. Industrial Indemnity Co., 1994).

In MacKinnon v. Truck Ins. Exchange, the court applied the narrow interpretation and found that the APE was ambiguous in the context of pesticide fumes. In that case, a tenant died from pesticides that were used in a building for pest extermination. The court established coverage on the basis that the APE was intended to exclude coverage for injuries resulting from events commonly thought of as environmental pollution, but not all injuries arising from toxic substances.

In another case, Garamendi v. Golden Eagle Ins. Co. (2005), the insurer denied coverage to an insured that was sued by its employees for silica-related injuries from a sandblasting operation that dispersed silica-containing dust. The court held that the APE precluded coverage because silica dust is an incidental byproduct of an industrial sandblasting operation, which is commonly thought of as environmental pollution.

In Ortega Rock Quarry v. Golden Eagle Ins. Corp. (2006), Ortega was sued for damaging a creek and surrounding property as a result of rocks and dirt in the quarry running downstream when it rained. Ortega submitted a claim to its insurers, who denied coverage based on the APE, asserting that rocks and dirt were “pollutants.” A court of appeal agreed, basing its decision, in part, on the fact that the fill material was defined as a pollutant under the Clean Water Act.

In Legarra v. Federated Mutual Ins. Co. (1995), the plaintiffs tendered a claim to their insurer for costs related to underground contamination from their petroleum plant. The insurer denied coverage by applying the APE, and the insured sued. A court of appeal applied the APE to preclude coverage, holding that the insured could not have reasonably expected coverage for damage caused by petroleum contamination.

In Cold Creek Compost, Inc. v. State Farm Fire and Cas. Co. (2007), the insured operated a composting facility and was sued for nuisance because of noise and noxious odors emitted from its facility. The insured submitted a claim to its insurers, who denied coverage. Cold Creek filed a bad faith lawsuit. A court of appeal held that the widespread dissemination of offensive and injurious compost odors is clearly and plainly excluded from coverage under the APE.

The courts apply the APE differently depending on the facts of the case. Notwithstanding the different applications, these court decisions and the principles of law applied should provide guidance in assessing how the issue of coverage for global warming insurance claims will be decided.

Is Carbon Dioxide a Pollutant?

A recent U.S. Supreme Court case, not involving insurance, may impact how state courts will decide the issue of whether greenhouse gases are pollutants, the emissions of which may be excluded under the APE.

In Massachusetts v. Environmental Protection Agency (2007), the U.S. Supreme Court addressed the phenomenon of global warming. The Court explained that “[t]he harms associated with climate change are serious and well recognized.” The issues were (1) whether a state had standing to sue the EPA for not promulgating regulations to reduce greenhouse gas emissions, and (2) whether the EPA's decision not to regulate carbon dioxide emissions under the Clean Air Act was “arbitrary and capricious.”

The EPA is required to regulate emissions of air pollutants that endanger the public health and welfare under the Clean Air Act. However, the EPA argued that carbon dioxide is not considered a pollutant under the statute. The Court disagreed, maintaining that carbon dioxide is an “air pollutant” within the meaning of the statute, and that the EPA's refusal to promulgate regulations was based on “impermissible considerations” and was therefore “arbitrary and capricious.”

The Court remanded the case, giving the EPA a small window through which to avoid regulating emissions if it determined that greenhouse gases do not contribute to climate change or if it provided a reasonable explanation as to why it could not or would not exercise its discretion to determine whether they do. Notwithstanding this small window, it is difficult to imagine how the EPA could avoid promulgating regulations when it has already conceded that man-made greenhouse gas emissions cause global warming. Moreover, global warming causes damage to the environment. Consequently, it is likely that carbon dioxide emissions will soon become regulated by the EPA, thereby triggering corporate liability and more lawsuits that will result in global warming insurance claims.

None of the cited cases address whether the APE in insurance policies precludes coverage for liability stemming from greenhouse gas emissions. A corporation submitting a global warming claim to its insurer will argue that the APE does not apply in light of the following:

• Carbon dioxide is not “traditional environmental pollution” and is “not commonly thought of as pollution.”
• A policyholder has a “reasonable expectation” of coverage for liabilities (including greenhouse gas emissions) arising out of normal business operations.
• Greenhouse gas emissions have never been regulated by the EPA.
• The insurance companies did not contemplate carbon dioxide emissions when drafting the pollution exclusion.

Notwithstanding these arguments, losses arising from greenhouse gas emissions may be deemed by the courts to be excluded under the APE for several reasons.

• 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-pollution laws.
• They are regulated by the Department of Transportation.
• The U.S. Supreme Court, in Mass v. EPA, concluded that carbon dioxide is a “pollutant” under the Clean Air Act.

Whether carbon dioxide and other greenhouse gases are pollutants excluded under a CGL policy will ultimately be decided by the courts. In the meantime, the energy, auto, and manufacturing industries are facing regulations and lawsuits aimed at curbing their emissions, for which they will incur substantial costs. As these corporations seek to shift such costs to their insurers, an era of “global warming” insurance claims is sure to be on the horizon.

Suzanne Badawi is a partner of Luce, Forward, Hamilton & Scripps LLP in the Insurance Litigation Practice Group. Badawi may be reached at [email protected].