Extreme weather events such as hurricanes and tornadoes are already regular, if seasonal, hazards for most of North America. As global climate change continues to alter regional weather patterns, a larger number of drastic weather events can be expected. Such increases in extreme weather events focus attention on the role that insurance coverage can play in safeguarding policyholders against damages, both direct and indirect.
According to the National Weather Service, “From extreme drought, heat waves and floods to unprecedented tornado outbreaks, hurricanes, wildfires and winter storms, a record 14 weather and climate disasters in 2011 each caused $1 billion or more in damages—and most regrettably, loss of human lives and property.” Last year was, as the National Weather Service dubbed its report on 2011, “One for the Records.”
The increased frequency and ferocity of hurricanes and other extreme weather patterns has already led to some unexpected indirect consequences. For example, in Louisiana—a state intimately familiar with extreme weather—the state supreme court recently was called on to consider whether to award punitive damages following a weather-related oil spill from a CITGO petroleum refinery. Arabie v. CITGO Petroleum Corp., No. 2010-C-2605, 2012 WL 798758 (La. Mar. 13, 2012). The oil spill was the result of two factors: the combination of negligent construction and maintenance of wastewater storage tanks and a severe rainstorm that caused the tanks to fill beyond capacity, releasing more than 21 million gallons of waste from the tanks. Without the triggering rainstorm, the design and maintenance flaws inherent in the storage tank system may never have been exposed.
Also in Louisiana, the close proximity in both time and place of Hurricanes Katrina (2005) and Gustav (2008) exposed construction flaws that may have otherwise escaped scrutiny. At least one contractor has been sued for faulty workmanship in installing a new roof on a New Orleans-area apartment complex after Hurricane Katrina ripped off the original roof. The faulty workmanship was discovered when Hurricane Gustav tore through the same apartment complex and pulled the new, post-Katrina roof off with it—the new roof had allegedly not been installed to withstand the relatively gentler wind speeds that accompanied the second hurricane. See Baseline Constr. & Restoration Co. of La. v. Favrot Realty P’ship, No. 07-6429 (Orleans Parish Civ. Dist. Ct.) (ongoing).
On a more global scale, numerous lawsuits have been filed against many corporations whose industrial practices emit greenhouse gases (GHGs)—although not for their emission of GHGs itself, which remains legal. Instead, the lawsuits allege that the emission of these gases has led to global climate change, which in turn has caused extreme weather events such as Hurricane Katrina in the Gulf Coast region, as well as other large-scale consequences, such as increases in sea level. Allegations from the now dismissed Comer v. Murphy Oil suit filed in Mississippi, for example, include the following: “Rising sea levels and increasing hurricane intensity are among the observable impacts of this climate shift.” No. 11-222, R. Doc. 1, Class Action Complaint (S.D. Miss.). Major lawsuits percolating their way through various state and federal courts involve claims of tort, trespass, and nuisance by environmental groups, individual citizens, state governments, and Indian villages. See, e.g., Native Vill. of Kivalina v. ExxonMobil Corp., 663 F. Supp. 2d 863 (N.D. Cal. 2009). The Supreme Court last year limited the types of claims that could be brought in these climate-change and hurricane lawsuits but did not foreclose the possibility that such lawsuits—which are essentially claims that the weather has been altered—could still be brought in state courts. Am. Elec. Power Co. v. Connecticut, __ U.S. __, 131 S. Ct. 2527, 180 L. Ed. 2d 435 (2011).
Integral to these climate-change lawsuits is insurance coverage litigation whereby insurance companies hope to avoid defending and indemnifying these claims.
In AES Corp. v. Steadfast Ins. Co., No. 100764, 2012 WL 1377054 (Va. Apr. 20, 2012), the Virginia Supreme Court addressed the question of whether there is insurance coverage for a company sued as a defendant in an underlying climate change lawsuit. The insured, AES Corp., is one of the named defendants in the Native Village of Kivalina v. Exxon Mobile Corp., a climate change lawsuit currently awaiting a decision on an appeal to the U.S. Circuit Court of Appeals for the Ninth Circuit. The underlying Kivalina complaint, which was filed by an Alaskan town threatened by rising sea levels, argue that emitters of GHGs are liable for their excessive carbon dioxide emissions, which cause climate change and corresponding sea level rise.
The critical question in the Virginia insurance dispute case was whether the insurer is obligated to defend AES Corp. against the allegation that it contributed to global climate change and to pay for consequential environmental damage due to rising sea levels and extreme weather events under a commercial general liability (CGL) policy. The insurer argued that it was not obligated to defend its insured or cover any damages because the environmental problems alleged in the underlying climate-change lawsuit were not “occurrences” as defined in the policy. Agreeing with the insurer, the Virginia Supreme Court determined that the underlying Kivalina complaint’s alleged damages were the “natural and probable consequence” of the insured’s intentional actions. Therefore, AES Corp. could not claim that the emissions of GHGs were an “accident” or “occurrence” under the policy. This meant that insurance company had no duty to defend AES Corp. against the claims in the Kivalina suit. A separately filed concurrence warned of the larger consequences of the decision, somewhat ominously noting that, “Our jurisprudence, developed over more than a century, is leading inexorably to a day of reckoning that may surprise many policy holders” who have relied on Virginia’s practice of defining “accident” as synonymous with “occurrence” but requiring that there be absolutely no negligence involved for either label to attach. But even the concurrence agreed that under the language of this policy, the insurer had no duty to defend AES Corp. in the Kivalina suit.
The AES Corp. case illustrates several, among numerous, insurance issues arising from extreme weather events. These can and should be dealt with, both by the insured entities and by the insurance provider itself—ideally, before an extreme weather event occurs—but this article will focus on three of those issues: (1) whether environmental policies and general liability policies will cover the same weather-related damage; (2) whether an insurance policy’s “choice of law” and “choice of forum” provisions will be enforced in the event of an extreme weather event; and (3) how liability is apportioned or coverage assessed when different elements of the same major weather event—high winds and flooding during a hurricane, for example—cause damage.
Multiple Policies, One Flood
Depending on the jurisdiction, CGL policies may or may not cover the types of sudden environmental releases that can occur during major storms, floods, and hurricanes. There are several types of “environmental insurance policies” commonly available that more or less fill the liability gap created by CGL policy language, which typically excludes coverage for weather-related releases. Types of environmental insurance coverage vary, but include pollution legal liability insurance, “cleanup cost cap” or “cost containment” insurance, contaminated property development insurance, and contractor’s pollution liability and errors and omissions insurance. See Ann M. Waeger, Current Insurance Policies for Insuring Against Environmental Risks, ALI-ABA Course of Studies Materials (2011); Jared Zola, Aisha Henry, Bill Hardin & Steven P. Nassi, Emerging Environmental Risks Under Traditional and Specialty Lines Insurance (2012).
It is often possible that both a CGL policy and an environmental insurance policy will provide coverage after a single event. For both the insured company and the insurance providers, whether one or more policies cover damages arising out of a single event is extremely important but often unclear from the policy language itself. Unfortunately, there seems to be no general rule on whether, following a single incident or release, both environmental/pollution policies and CGL policies apply to cover the damage. Or, more accurately, the only general rule is to check your policy and check your jurisdiction.
“Other insurance” provisions are a standard element of most policies and govern the relationship between overlapping coverage, such as a CGL policy and a pollution policy that could both potentially provide coverage for a hazardous waste release following a violent storm. See Couch on Insurance § 219:1 (3d ed. 2011); Wright-Ryan Constr., Inc. v. AIG Ins. Co. of Can., 647 F.3d 411 (1st Cir. 2011). When other available insurance may cover the same loss, the “other insurance” clauses will limit a provider’s liability by controlling the manner in which each insurer contributes to or shares a covered loss. Each insurer’s liability is (with some exceptions, noted below) determined by the provisions of the respective “other insurance” clauses—even when the various policies are issued to different entities but are tapped to cover the same event. Typically, “other insurance” provisions have one of three forms: (1) an “escape” clause, which completely denies coverage when other insurance is available; (2) “pro rata” clause, which operates to share coverage of a claim loss with other available insurance policies; and (3) an “excess” clause, which extends coverage for a claim only when other insurance available for the claim has been exhausted.
The interplay between different “other insurance” provisions came to the forefront when, after a flood in Kansas, policies with overlapping coverage were tapped to pay for environmental remediation efforts. The Verdrigis River flooded in 2007, following heavy rains throughout southeastern Kansas. See Raging Floodwaters Cause Kansas Refinery Oil Spill, Environment News Service, July 3, 2007. Floodwaters quickly reached the Coffeyville Resources Refinery, a refinery and nitrogen fertilizer plant adjacent to the river, causing the release of “more than 42,000 gallons of crude oil . . . into the overflowing Verdigris River, where a smelly oil slick is now flowing south towards Oklahoma.” Id. The polluted river water flooded into the town of Coffeyville, causing extensive damage to homes and businesses.
The Coffeyville Resources Refinery spent more than $50 million to remediate the contamination caused by the flood, and then sued all its insurers—which included a company that covered “fixed site pollution legal liability claims made” and a company that provided a general liability policy. Coffeyville Res. Ref. & Mktg., LLC v. Liberty Surplus Ins. Corp., 714 F. Supp. 2d 1119 (D. Kan. 2010). Both insurers pointed the finger at the other for coverage. The pollution policy had a “pro rata other insurance” clause, while the general policy had an “excess other insurance” clause.
The district court first determined that both policies applied and offered coverage for this type of claim. The court then declared that the pollution policy coverage would be applied until its limits were reached; then the general policy would be tapped to provide the remaining coverage. This effectively ignored the “pro rata” clause in the pollution policy in favor of treating the CGL policy as an excess policy. In short, when there was a single weather event covered by two overlapping policies, each of which had a different “other insurance” clause, the pollution policy was considered the primary policy and the CGL policy acted as an excess coverage provider.
Coffeyville Resources, however, should not be read as indicating that a pollution policy will always be considered the primary policy when two different policies cover a single pollution event. In another decision that weighed contradictory “other insurance” clauses, the Fifth Circuit determined that “environmental impairment liability” policies would serve as excess insurance when other insurance (a CGL policy) covered the same claim. RSR Corp. v. Int’l Ins. Co., 612 F.3d 851 (5th Cir. 2010).
Although the outcomes were contradictory, the underlying analysis in both Coffeyville Resources and RSR Corp. was the same, turning on the close attention that each of these courts paid to the “other insurance” language in each of the available policies. Clear guidance on how to interpret environmental and CGL policies with overlapping coverage is lacking in many jurisdictions, but Coffeyville Resources and RSR Corp. do show that “other insurance” clauses are extremely important in determining how coverage decisions will be made.
Another key point to check is whether there are any special jurisdiction-specific rules on “priority of coverage.” In New York, for example, if multiple policies cover the same risk and each has “excess” language in its “other insurance” provision, meaning that each claims to be in excess of the other, the excess-coverage clauses are ignored. Instead, each insurer contributes in proportion to its limits as though there were actually pro rata clauses in the policies. See U.S. Fire Ins. Co. v. Fed. Ins. Co., 858 F.2d 882 (2d Cir. 1988). Illinois also has its own special rule, called the “targeted tender” or “selective tender” rule. This rule allows an insured that has coverage from several concurrent policies to choose for itself which of those policies must provide a defense and indemnification. Under this rule, the insured tenders its defense to only one of its several insurers, which relieves all the other providers from any defense obligation. The “targeted” insurer is not able to seek pro rata contribution from the other “non-targeted” insureds. The “targeted tender” rule is intended to protect the insured’s right to bypass a particular insurance provider’s involvement in a suit in order to avoid the risk that that particular provider will then increase premiums or cancel the policy entirely. See John Burns Constr. Co. v. Ind. Ins. Co., 727 N.E.2d 211, 215 (Ill. 2000).
In short, companies attempting to assess their potential liability following extreme weather-induced releases should first review the various “other insurance” provisions presented in any insurance policies that could provide coverage and then look to whether any jurisdictional guidance or controlling local practices will affect how those overlapping policies are applied.
Location, Location, Location
An extreme weather event knows no border and can cause damage in multiple jurisdictions. Therefore, choice of law and choice of forum are important provisions in coverage cases. These provisions are typically found in an insurance contract and are sometimes combined and expressed as a single provision. But depending on the relationships among the forum, the parties, and the insurance-triggering event in question, as well as the interests of the local jurisdiction in hearing the dispute, the contractually agreed-upon choice of law and choice of forum may or may not be honored by the court.
One issue is whether the choice of forum is couched in mandatory or permissive terms. A forum-selection clause will be enforced only if venue is specified with mandatory language. To be mandatory, a forum-selection clause must contain language that clearly and unambiguously designates a jurisdiction or court as the “exclusive” forum. If that language is missing, do not expect the forum-selection clause to be enforced.
When forum-selection clauses are interpreted by courts as nonbinding or permissive, those courts will look at a variety of other factors to determine whether to enforce a forum-selection clause. These factors can include convenience to the insured, ease of access to sources of evidence, and the state’s own interest in regulating pollution and remediating contamination within its own borders.
Once again, the potential enforceability of a choice-of-law or forum-selection clause will likely turn on the jurisdiction where the question is raised. Texas, for example, has a reasonably consistent history of enforcing choice-of-law and choice-of-forum provisions, notwithstanding the presence of other factors that other courts would consider as militating against enforcement. See, e.g., In re AIU Ins. Co., 148 S.W.3d 109, 112, 114 (Tex. 2004).
Other jurisdictions, particularly New Jersey, weigh a variety of factors, but often focus most on the state’s own interest in protecting the environment within its borders. In Param Petroleum Corp. v. Commerce & Ind. Ins. Co., 686 A.2d 377, 380 (N.J. Super. Ct. 1997), the New Jersey court determined that in situations where pollution occurred in New Jersey, but the insurance policy contained a New York choice-of-law and forum-selection provision, “choice-of-forum and choice-of-law agreements in liability insurance policies should generally be ignored at least when the insured risk is in this State.” (Emphasis added.)
Thus, if extreme weather triggers a release of chemicals or wastes—as seen in the Louisiana CITGO refinery oil spill following rainstorms, and the Coffeyville Resources refinery flood—the location where the insured actually conducts business, and where the environment is subsequently impacted, is extremely important, as the states clearly fall along a wide spectrum regarding the potential enforcement of various policy provisions.
When Is a Flood Not a Flood? Lessons from Hurricane Katrina
One result of Hurricane Katrina was an explosion of litigation—followed by significant developments in case law—on extreme weather issues. Many of the post-Katrina lawsuits named insurance companies as defendants and involved hotly contested claims about what “caused” the damage to the homes and properties of the Gulf Coast region. This determination was incredibly important because most CGL policies cover damage caused by wind but exclude damage caused by flood. (The development of the National Flood Insurance Program was in fact spurred by the flood damage following 1965’s Hurricane Betsy and was intended to encourage homeowners in floodplains to purchase adequate flood coverage, in light of the fact that CGL policies did not cover flood damage.) In addition, the flooding of the majority of the area was caused by levee failures, which were in turn caused by engineering defects—or suspected defects. Could such a series of events properly be characterized as the “flood” defined in and excluded by CGL policies?
In the aftermath of the hurricane, as floodwaters receded, insurance adjusters were faced with a problem. A hurricane is not a simple, single event in terms of potential insurance coverage and exclusions from coverage. A hurricane can damage a property through wind, rain, flooding, or some combination. In many instances the determination of which factor caused the observed damage was difficult: Was a restaurant’s interior damage caused by wind, because the wind ripped the roof off and exposed the interior to the soaking rainstorms, or by flood, because at the same time rain was coming in from above, floodwaters were seeping through the doors? Or was a house that had been reduced to a slab hit by tornado-strength winds generated within the hurricane and decimated, or swept away by floodwaters—or both? See Dep’t of Homeland Security Office of Inspector General, OIG-8-97, Hurricane Katrina: Wind Versus Flood Issues, Sept. 2008, at 1 (recognizing “the difficulty of distinguishing wind versus water damage—especially when there is nothing remaining of a property except for a foundation”).
These distinctions in cause may seem meaningless to an observer who, for example, is the homeowner staring at an empty slab—but they are extremely significant because of both the flood exclusions and the “anti-concurrent causation” clauses that appear in many CGL policies.
Most property-damage policies have standard flood exclusions effectively denying coverage for any damage caused by a flood—hence the existence of separate flood insurance. In addition, many policies include an “anti-concurrent causation” clause that may, for example, read as follows: “We do not insure for loss caused directly or indirectly by any of the following excluded events. Such loss is excluded regardless of any other cause of even contributing concurrently or in any sequence to the loss.” See id. at 11. If a CGL policy has an anticoncurrent-causation clause, it will cover damage caused only by wind but will exclude coverage of damage that is caused by both wind and flooding.
Typically, in a hurricane, extreme winds and rains (and potential tornadoes) are quickly followed by a storm surge that causes flooding. Typically, in a CGL policy, the wind damage is covered but the flood damage is not. The “storm-surge flooding that follows on the heels of a hurricane’s landfall” exemplifies the very kind of concurrent damage causation that the anti-concurrent-causation clause addresses. Arctic Slope Reg’l Corp. v. Affiliated FM Ins. Co., 564 F.3d 707, 712 (5th Cir. 2009) (quoting Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 430 (5th Cir. 2007)).
The Fifth Circuit has had several opportunities to address and clarify the applications of the anti-concurrent-causation clause in the aftermath of Katrina and Hurricane Rita. The Arctic Slope opinion cited above is one such example. Following Rita, the Arctic Slope corporation filed a claim with the provider of its “all risks” insurance policy. Arctic Slope admitted that its property had been flooded by the Rita storm surge, but argued that the damage should still be covered by the policy because the storm surge could also be appropriately characterized as “water driven by wind” and that type of damage was covered by the wind/hail provisions in the policy. 564 F.3d at 709, 711. The Fifth Circuit found that due to the anticoncurrent causation clause in the policy, it did not even need to address whether a storm surge could be characterized as both a flood and a wind/hail event: “The exclusion of storm surge as a flood event cannot be reversed by its possible inclusion as a wind/hail event.” Id. at 711. The exclusion trumps any potential coverage. As the Fifth Circuit previously found in Leonard, a Hurricane Katrina case, “The only species of damage covered under the policy is damage caused exclusively by wind. But if wind and water synergistically caused the same damage, such damage is excluded.” Leonard, 499 F.3d at 430.
The assumption underlying the courts’ strict enforcement of these clauses may be that flood damage will necessarily be paid for by the issuer of the flood insurance policy, whether the damage was caused entirely by flood or only in part. Congress was in fact concerned enough about whether flood insurers were unfairly picking up the tab following Hurricane Katrina that it commissioned a study by the Department of Homeland Security to investigate whether insurers “improperly attributed damages from Hurricane Katrina to flooding rather than to windstorms covered under homeowner policies or wind insurance pools.” Homeland Security ultimately found that this had not in fact been a major issue.
As with most other insurance-related issues, there are jurisdictional differences in how strictly anticoncurrent clauses are enforced. While the Fifth and Eighth Circuits, as well as several state and district courts, have all relied on anticoncurrent-causation clauses in insurance policies to preclude coverage for damage caused by a combination of covered and excluded events, both Washington and West Virginia will not allow anti-concurrent-causation language in an insurance policy to overcome a “proximate cause” analysis. Leonard, 499 F.3d at 434 n.10. In addition, California and North Dakota require efficient proximate causation by statute, regardless of anticoncurrent-causation language in a policy. See id. at 434–35. In these four states, the opposite of the Arctic Slope and Leonard rules apply: causation by an excluded event such as a flood will not defeat recovery when damage is also proximately caused by a covered event such as wind. Interestingly, none of these four states tends to experience hurricanes.
Addressing causes of hurricane damage—and whether multiple, overlapping causes could affect coverage decisions—was one aspect of the post-Hurricane Katrina insurance litigation. Another dealt with whether the inundation of the city following the hurricane could properly be considered a “flood,” when in fact most of the levee breaches were caused, at least in part, by human negligence rather than excessive forces of nature.
As is now fairly well known, Hurricane Katrina did not strike New Orleans directly, saving most of the city from suffering major wind damage. See, e.g., Team Louisiana, The Failure of the New Orleans Levee System During Hurricane Katrina, Dec. 2006. Levees all across New Orleans and southeastern Louisiana failed following the hurricane’s passage, however, flooding huge swaths of the metropolitan area. In the City of New Orleans, some of the most significant “hurricane” damage occurred when levees along three major canals ruptured, permitting water from the flooded canals to rush into the low-lying city. At one point in the hurricane’s aftermath, approximately 80 percent of the city was submerged in water. At the same time these levees were breaching, Katrina’s storm surge was also being funneled through the Mississippi River Gulf Outlet (MRGO) navigational channel, designed by the U.S. Army Corps of Engineers (Corps), causing levees in New Orleans East and adjacent St. Bernard Parish to breach and flood those areas.
With regard to the MRGO navigational channel, it was determined by a Louisiana district court (later upheld by the Fifth Circuit) that the Corps was negligent in failing to maintain and operate the MRGO properly and that this negligence “was a substantial cause for the fatal breaching” of the levees that flooded New Orleans East and St. Bernard Parish. In re Katrina Canal Breaches Consol. Litig., 647 F. Supp. 2d 644, 697 (E.D. La. 2009), aff’d, 2012 WL 678135 (5th Cir. Mar. 2, 2012). In no uncertain terms, the district judge excoriated the Corps for its many failures: “The Corps’ lassitude and failure to fulfill its duties resulted in a catastrophic loss of human life and property in unprecedented proportions. The Corps’ negligence resulted in the wasting of millions of dollars in Congressional outlays to help this region recover from such a catastrophe.” 647 F. Supp. 2d at 711. Negligent levee design, construction, and maintenance were also suspected as the cause of other breaches.
So, while damage was clearly caused by water flooding into homes and commercial properties, it was initially less clear whether “levee breaches caused by negligence or incompetence “ should be considered equivalent to “flood” under the flood-exclusion language in most standard insurance policies. Seeking clarification, a number of policyholders filed suit, contending “that the massive inundation of water into the city was the result of the negligent design, construction, and maintenance of the levees and that the policies’ flood exclusions in this context are ambiguous [and thus unenforceable] because they do not clearly exclude coverage for an inundation of water induced by negligence.” In re Katrina Canal Breaches Litig., 495 F.3d 191, 196 (5th Cir. 2007). The question was promptly and decisively answered by the Fifth Circuit, which concluded that a flood is a flood, regardless of whether it occurred from natural forces alone or was triggered by the negligent construction of an inadequate flood-protection system. And a flood, once so defined, is excluded from coverage. As the Fifth Circuit stated:
Even if the plaintiffs can prove that the levees were negligently designed, constructed, or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs’ policies unambiguously preclude their recovery. Regardless of what caused the failure of the [levees], their failure resulted in a widespread flood that damaged the plaintiffs’ property. This event was excluded from coverage under the plaintiffs’ insurance policies . . . .
Insurance-law-related cases from Hurricane Katrina—and, to a lesser extent, Rita and Gustav—continue to be decided by numerous courts throughout the Gulf Coast region, making it a judicial hotbed worth keeping a close eye on for its evolving standards on insurance issues arising out of extreme weather events.
The Calm Before the Storm
There are many other important aspects of insurance law that extreme weather events implicate, and this article has touched on only a few. Given the significant variations in enforcement and interpretation that occur from jurisdiction to jurisdiction, few overarching statements of general applicability can be made with certainty other than this: Extreme weather events are increasing in number and ferocity. Knowing this, any insured entity has the responsibility to assess the risks it faces, obtain adequate coverage, account for exclusions in coverage, and understand the important jurisdiction-specific rules that could affect future claims for damage.