As natural disasters increase in scope and devastation, people will want to hold those who are responsible for them liable for the resulting damages. And those damages are significant and skyrocketing: In 2005, Hurricane Katrina was the costliest hurricane on record, causing more than $10 billion in damages. Torrential rains in the Midwest in 2007 caused an estimated $115 million in damages. The western wildfires and extreme heat are causing property damage, injuries, and death. Eroding coastlines are causing losses to homeowners, businesses, and even entire communities. In fact, the U.S. Environmental Protection Agency (EPA) has estimated that a one-meter rise in the sea level could result in costs to the United States of between $270 billion and $450 billion. Climate litigation is brought not only to recover these related damages but also to bring about changes in organizational conduct, as well as the regulation of that conduct, with respect to environmental impact. These organizations will naturally want to shift this cost to their insurers.
The 2007 U.S. Supreme Court case of Massachusetts v. EPA has potentially opened courthouse doors across the country to greenhouse gas emission cases seeking to impose liability on private entities that contribute to climate change. Prior to the Massachusetts decision, climate change suits against private entities were rarely successful and often dismissed without any decision on the merits. Massachusetts v. EPA removed some major obstacles and is in large part responsible for the increase in climate change litigation in the U.S. It is likely that litigation surrounding other environmentally impactful industry conduct will grow as did greenhouse gas litigation. Coverage for those claims should be evaluated in the same manner.
The impact of these suits will be felt by the insurance industry in myriad ways. However, for purposes of this overview, the pertinent question is this: Could there be insurance coverage available for these damages against the companies alleged to be contributing to climate change under current liability policies? The answer is, of course, it depends. As insurance professionals, we need to be aware of where coverage may be triggered, where it may be excluded, and whether or not general liability policies should be revised to expressly exclude these types of claims. This is a much larger topic than this article can cover. Therefore, the focus here is on greenhouse gas litigation, coverage, and how the absolute pollution exclusion, found in almost all general liability policies, may be applied with respect to these coverage claims.
Massachusetts v. EPA
To understand how greenhouse gas lawsuits started to gain traction, it is important to understand the key holdings in Massachusetts v. EPA. This case began as a petition by 19 private organizations asking the EPA to regulate the emissions of greenhouse gasses for new automobiles under the Clean Air Act (CAA). The CAA gives authority to the EPA, in part, pursuant to the following provision:
The Administrator shall by regulation prescribe (and from time to time revise) in accordance with the provisions of this section, standards applicable to the emission of any air pollutant from any class or classes of new motor vehicles or new motor vehicle engines, which in his judgment cause, or contribute to, air pollution which may reasonably be anticipated to endanger public health or welfare.
In addition, the CAA defines an “air pollutant” as “any air pollution agent or combination of such agents, including any physical, chemical, biological, radioactive . . . substance or matter which is emitted into or otherwise enters the ambient air.” The petitioners relied on these provisions as the basis of their request. The EPA ultimately denied the petition, and this suit followed. The questions ultimately certified to the U.S. Supreme Court were “whether EPA has the statutory authority to regulate greenhouse gas emissions from new motor vehicles; and if so, whether its stated reasons for refusing to do so are consistent with the statute.” After the Court determined that Massachusetts had standing to sue, it turned to the authority of the EPA to regulate greenhouse gas emissions under the above-referenced provisions of the CAA. The Court held that the EPA did have the authority to do so.
The effect of this decision on future climate change litigation, and on coverage issues related to such litigation, cannot be understated. But to understand why, it is important to understand the analysis the Court used to reach its decision. The EPA had denied the petition, concluding that it lacked authority to regulate new vehicle emissions because carbon dioxide is not an “air pollutant” as defined in the statute. The EPA believed that “Congress did not intend it to regulate substances that contribute to climate change,” and, the agency maintained, “carbon dioxide is not an ‘air pollutant’ within the meaning of the provision.”
The Court disagreed, finding that the statutory text foreclosed the EPA’s interpretation of the statute. The Court stated the CAA’s “sweeping definition of ‘air pollutant’ includes ‘any air pollution agent or combination of such agents, including any physical, chemical . . . substance or matter which is emitted into or otherwise enters the ambient air. . . .” Holding that the statute facially encompasses all airborne compounds whatsoever, the Court stated “[c]arbon dioxide, methane, nitrous oxide, and hydrofluorocarbons are without a doubt ‘physical [and] chemical . . . substance[s] which [are] emitted into . . . the ambient air.’ The statute is unambiguous.” Therefore, even if Congress could not have foreseen climate change when it enacted the CAA in 1970, “[t]he broad language of §202(a)(1) reflects an intentional effort to confer the flexibility necessary to forestall” the obsolescence of the CAA due to changing circumstances and scientific development. Greenhouse gasses, the Court reasoned, “fit well within” the CAA’s broad definition of “air pollutant.”
Even though there remain obstacles to a successful private climate change suit against a company, it is a rapidly growing area for the plaintiffs’ bar. Law firms are forming climate change teams and marketing in that area of law. It can be expected that plaintiffs’ attorneys will continue to file these lawsuits to stretch the bounds of climate change litigation. It is important for the insurance industry, including carriers, that claims professionals, underwriters, and coverage counsel be prepared as well.
Coverage Issues
Just as likely as the increase in climate change suits is that they will be tendered to liability insurers for defense and indemnification. The legal theories that will be asserted in these suits have yet to be clearly defined and are only limited by the imagination. They are likely to include at least negligence, nuisance, trespass, and shareholder claims, implicating general liability policies as well as directors’ and officers’ policies. Given the holding in the Massachusetts case discussed above, that greenhouse gasses are pollutants as defined by the CAA, coverage for these claims may well depend on how courts interpret and apply the pollution exclusions contained in most liability policies.
It is not difficult to imagine how these types of claims could trigger coverage under a general liability policy. No matter the legal theory, they will essentially claim property damage or bodily injury, or both, caused by the defendant’s activities that contributed to climate change. When insurers inevitably receive these claims, they must be evaluated as any other claim to determine coverage. Each individual claim must be evaluated on its own allegations, facts, legal theories, and policy provisions. Of course, this will also include an evaluation as to whether there was an “occurrence” during the policy period that caused the alleged damages. One potential argument against an occurrence is that the emissions at issue are not “accidental” and, therefore, not an occurrence that triggers coverage under a standard liability policy.
However, assuming the insuring agreement provides coverage (or the potential for coverage if the duty to defend is being evaluated), the pollution exclusions in a policy may exclude coverage. These exclusions will almost certainly be the focus of the ensuing coverage litigation across jurisdictions. Most current general liability policies include the absolute pollution exclusion, which was first put forth in 1986. However, because these claims will cover spans of years, a prior version of a pollution exclusion may also be implicated. Careful review of the applicable or potentially applicable policies is critical.
The Absolute Pollution Exclusion—History and Court Interpretations
The passage of two federal laws—the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)—represented the first time businesses were held liable for pollution, environmental protection, and cleanup (in the late 1970s early 1980s). These laws, and state equivalent laws, required not only the prevention of environmental pollution but also cleanup of old waste, even though it had been disposed of legally at the time. These laws imposed liability on those deemed responsible for the pollution, regardless of fault or legality at the time of the disposal. These were strict liability statutes.
At the time, liability policies had a general pollution exclusion that typically excluded pollution that was “sudden and accidental.” When a business received a letter from a government agency alerting it to its responsibility under the new laws, they were submitted as claims to the business’s carriers for defense against the government claims, as well as reimbursement for remediation.
Carriers often denied these claims as the pollution occurred continually over many years and therefore was not “sudden and accidental.” This resulted in litigation across the country asking courts to determine the meaning of “sudden and accidental.” Many courts held that the pollution exclusion was ambiguous with respect to “sudden and accidental.” Other courts held “sudden and accidental” really meant unexpected or unintended. Still other courts held that insurers were essentially estopped from relying on the pollution exclusion unless the pollution was expected or intended. This is because the insurance industry had argued to regulators that adding “sudden and accidental” to the pollution exclusion would not lessen coverage when it was proposed. These courts estopped insurers from enforcing the exclusion unless the release was intentional.
The cost associated with remediation was extreme. At one point, the insurance industry considered not offering any liability coverage as a result of the cost. Instead, insurers decided to attempt to draft a “bullet-proof” pollution exclusion. Hence, the absolute pollution exclusion was born. The standard form exclusion excludes coverage for the following:
f. (1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants: (a) At or from premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured;
* * *
(2) Any loss, cost or expense arising out of any: (a) Request, demand or order that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of pollutants; or (b) Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of pollutants. Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
This exclusion is intended to be broad, but after Massachusetts, there is debate over whether the absolute pollution exclusion applies to exclude coverage for greenhouse gas cases. Prior to Massachusetts, the EPA did not consider greenhouse gasses to be pollutants. However, based on the Supreme Court’s holding that greenhouse gasses are pollutants within the CCA, insurers and coverage counsel will likely take the position that claims for damages caused by greenhouse gasses are excluded under the absolute pollution exclusion. Prior to taking that position, it is important to determine how the courts in a particular jurisdiction interpret and apply the exclusion. Many state courts have had the opportunity to interpret the absolute pollution exclusion.
New Mexico’s Chisholm’s Village—A Case Study of Approaches to the Absolute Pollution Exclusion
A federal district court in New Mexico, sitting in diversity, recently issued a decision on how the absolute pollution exclusion should be interpreted in New Mexico, applying state insurance law. The New Mexico Supreme Court had addressed the prior “sudden and accidental” pollution exclusion but had not addressed the absolute pollution exclusion. In United Nuclear Corp. v. Allstate Insurance Co., the court held that the term “sudden” in the phrase “sudden and accidental” as used in the prior version of the pollution exclusion was ambiguous. The court went on to rule, as a matter of law, that the term “sudden” as used in the exclusion means “unexpected.”
In August 2022, the federal district court in New Mexico issued a ruling in the case of Chisholm’s Village Plaza, LLC v. Travelers Commercial Insurance Co., in which the court was asked to interpret the absolute pollution exclusion under New Mexico law. The opinion provides a thorough examination of the history of the exclusion and the approaches taken in those jurisdictions having issued opinions on the exclusion. It serves as a great reference point for anyone looking at the application of the exclusion.
Chisholm’s Village started as a CERCLA lawsuit filed by the City of Las Cruces and Doña Ana County seeking damages and declaratory relief against Chisholm’s Village and other parties. The suit claimed the defendants’ dry-cleaning operations contaminated the groundwater and land because the defendants “released substances hazardous to human health and the environment into the soil and groundwater in Las Cruces.” Chisholm’s Village tendered the defense of the CERCLA suit to its general liability insurers. The policies both contained an absolute pollution exclusion substantially similar to the standard form exclusion above. Both carriers denied coverage under the policies, refusing to provide a defense. In addition, neither insurer filed a declaratory judgment action seeking a judicial determination of coverage. Chisholm’s Village filed suit against the carriers, alleging breach of contract and bad faith, and the parties filed cross-motions for summary judgment, resulting in this opinion.
The court granted summary judgment for Chisholm’s Village and denied both carriers’ motions. The court reviewed national case law and recognized that jurisdictions addressing the absolute pollution exclusion fall into two camps: the literal camp and the situational camp. Most jurisdictions fall into the literal camp. This view holds the exclusion is clear and unambiguous and, therefore, enforceable. In these jurisdictions, where a substance is acting in any manner as an “irritant or contaminant,” damage caused thereby is excluded from coverage. Despite the popularity of this approach, several courts, including the Tenth Circuit, to which the District of New Mexico belongs, have opined on the “absurd results” that could conceivably follow from a literal application of the absolute pollution exclusion. Chisholm’s Village cited several examples from case law. The Tenth Circuit hypothesized:
To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the spilled contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in a public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterize these events as pollution.
A federal case applying Alabama law held that the aroma of curry escaping from an Indian restaurant and damaging merchandise in an adjacent fur salon was a “contaminant” under the pollution exclusion and the damage was therefore not covered. Yet another federal case, applying Texas law, held that there was no coverage for injuries from a truck explosion fed by combustible vapors released during unloading of the truck’s oilfield waste cargo because the cargo and vapors constituted a “solid, liquid, gaseous or thermal irritant or contaminant including . . . fumes . . . and waste.” Relying on these potentially “absurd” results, the court determined the New Mexico Supreme Court would not follow the majority view, rejecting the literal approach. The court stated that New Mexico would not follow this approach “because it contravenes the insured’s reasonable expectations of coverage and leads to ‘absurd results.’”
The court then reviewed the situational approach to the exclusion, followed by a minority of jurisdictions. The situational approach requires courts to undertake an analysis of the absolute pollution exclusion’s ambiguity as applied to the facts of a particular case, not in a vacuum. The court determined the New Mexico Supreme Court would reject the situational approach as well. The primary reasoning for this was “the need to undertake a case-by-case factual analysis makes the pollution exclusion clause inherently ambiguous, and New Mexico courts construe ambiguities in the insured’s favor.”
Rather than either of these approaches, the court located a single jurisdiction with a third approach—Indiana. The Chisholm’s Village court predicted the New Mexico Supreme Court would adopt the Indiana approach to the absolute pollution exclusion, which requires that the insurer specify what falls within its pollution exclusion, stating:
The Court predicts, however, that New Mexico would follow Indiana’s unique approach: as the Supreme Court of Indiana notes, the situational approach is “still . . . problematic because the concept of what is a ‘traditional’ environmental contaminant may vary over time and has no inherent defining characteristics,” which “leaves courts in the awkward and inefficient position of making case-by-case determinations as to the application of the pollution exclusion.”
The Court predicts that the Supreme Court of New Mexico would conclude that a pollution exclusion which requires judicial interpretation and factual analysis on a case-by-case basis is inherently ambiguous and ambiguous as applied to the facts of a particular case.
The Indiana approach also requires insurers to specifically list the materials or substances they intended to be excluded under the absolute pollution exclusion (arguably rendering the term “absolute” meaningless). The insured argued, and the court agreed, there is ambiguity whether the “hazardous substances” at issue in the CERCLA complaint fall within the policy’s definition of “pollutants” and, thus, within its pollution exclusion. The court held that the absolute pollution exclusions in both policies were per se ambiguous. Furthermore, both policies were ambiguous as applied to the facts of the case because they failed to identify with specificity which hazardous substances were or might be found by the EPA in the CERCLA investigation for which the insured may be liable. In addition, the policies did not list any hazardous substances with specificity sufficient to put the insured on notice of what substances were excluded under the policies. Thus, there was potential coverage and a duty to defend, which both insurers failed to provide, and they therefore breached the insurance contract.
Conclusion
Litigants in climate change suits still face several uphill battles. As in many emerging areas of law, however, they will likely find ways around or through the various obstacles. As these suits gain traction, they will only continue to rise, along with a rising tide of insurance claims and tenders. While it is too early to know or anticipate all coverage issues that may be implicated, it is never too soon to start thinking about where coverage might be triggered and what steps can be taken to clarify what risks are covered.
Amy Headrick is managing partner of the New Mexico Office of Tyson & Mendes, LLP, with her practice focused on coverage and bad faith matters.