Monitoring a Growing Storm: The Implications of Climate Change Litigation on Insurers

The London School of Economics and Columbia University Law School recently published a report that stated that the number of climate change–related lawsuits has more than doubled since 2015. According to databases maintained by the London School of Economics and Columbia University, approximately 800 such cases were filed between 1986 and 2014, but more than 1,200 cases have been filed in the last eight years, bringing the total number of cases tracked by the databases to 2,002. Roughly one-quarter of those cases were filed between 2020 and 2022.

Environmental damage allegedly caused by climate change is the subject of a growing number of lawsuits against companies in the energy sector, in particular, those involved in fossil fuel production. Such lawsuits have been brought by a wide range of plaintiffs, including individuals, municipalities, states, cultural groups, and nonprofit organizations. In the past two years alone, more than a dozen climate change–related lawsuits have been filed in U.S. courts against companies in the energy sector.

Unsurprisingly, defendants in climate change lawsuits have sought—and will no doubt continue to seek—coverage for climate change claims from their insurance carriers. Yet while lawsuits seeking damages for losses allegedly caused by climate change continue to proliferate, the number of insurance coverage lawsuits that explicitly involve climate change claims has been relatively low. Only one state’s highest court (the Virginia Supreme Court) has delved into such issues in a decision issued a decade ago. However, recent lawsuits show that these claims and disputes are not going away anytime soon, and it is imperative that insurers understand and closely monitor the risks posed by such claims.

Lawsuits Targeting Petroleum Companies as a Cause of Climate Change

In one such case, the New Jersey City of Hoboken commenced an action against a dozen companies in the energy sector, including Chevron, Shell, BP, ExxonMobil, Royal Dutch, ConocoPhillips, and American Petroleum Institute. The suit claims that these entities contributed to climate change through their production of fossil fuels. The city alleges that this activity has caused it to experience severe storms with increasing frequency, including, for example, Hurricane Sandy. The city claims that to mitigate the effects of these storms, it has developed a $500 million “adaptation and mitigation plan” to combat the effects of storms and flooding. The complaint brings claims sounding in negligence, nuisance, and violation of the New Jersey Consumer Fraud Act for misrepresentations made by the defendants as to the effects of their fossil fuel activity. Though the complaint does not seek a specific amount of damages, it claims compensatory, consequential, and punitive damages. It also seeks an injunction ordering the defendants to cease the activities that have caused the alleged damages.

In October 2022, the State of New Jersey filed a similar lawsuit against the same defendants named by the City of Hoboken. Similar to the suit brought by Hoboken, this suit alleges that ExxonMobil, Shell, Chevron, BP, and ConocoPhillips engaged in a campaign to conceal the effects of their activities on the environment and also hid their knowledge of these effects. Specifically, the state alleges that since the 1950s, the defendants knew that their fossil fuel emissions would cause the environmental harm taking place today, yet intentionally misled the public about this fact. The complaint alleges that the activities of these entities have caused flooding, extreme weather, and rising sea levels, which have greatly damaged the state’s businesses and residents. The complaint asks that the court issue an injunction prohibiting the companies from continuing their deceitful communications with consumers and residents as to the harmful impacts that fossil fuels have had on the state. The complaint also seeks compensation, claiming that New Jersey taxpayers will be burdened by the billions of dollars the state must expend to remedy past environmental damage and to prevent future environmental damage related to storms and flooding. Also, similar to the complaint filed by Hoboken, New Jersey alleges violations of the Consumer Fraud Act, negligence, trespass, nuisance, and impairment of the public trust.

In another case, the State of Delaware commenced an action against 31 fossil fuel companies, including BP, Chevron, ConocoPhillips, and ExxonMobil. Its complaint alleges that these entities have long known that their activities would cause climate change but that they misguided the public through “concealment and misrepresentation of their products’ known dangers—and simultaneous promotion of their unrestrained use.” Delaware alleges that the climate change caused by these companies has caused extensive damage to the state, including but not limited to damage to state property, increased costs pertaining to emergency services, and increased climate-related preparation and planning costs. The lawsuit alleges common-law claims for negligent failure to warn, nuisance, and trespass. It also asserts claims under the state’s Consumer Fraud Act.

While the majority of climate change lawsuits have been commenced in the U.S., such actions are also being pursued globally. For example, in July 2022, the council for the Canadian city of Vancouver passed a motion to allocate up to C$700,000 to support a class action lawsuit against fossil fuel companies that have contributed to climate change and the alleged disruption to Western Canada’s ecosystem. The decision came after a series of wildfires and other natural disasters rocked the province of British Columbia in the summer of 2021, after temperatures reached a record 121.3°F (49.6°C)—the highest temperature ever recorded in Canadian history. The heat wave also reportedly caused hundreds of deaths. A Vancouver city councillor has estimated that Vancouver would need to spend approximately US$39 million (C$50 million) in order to repair the environmental damage. Currently, there is no timeline for the filing of the lawsuit, and it is not clear which entities will be named as defendants. Such suit is believed to be the first of its kind in Canada.

In another international suit, a Peruvian farmer, with the help of a German-based environmental group, sued RWE AG, a German energy company, seeking costs incurred related to flooding prevention in his Peruvian hometown. The farmer contended that the company’s activities and carbon emissions caused the glacial lake to rise, thereby threatening damage to both the environment and property. His suit sought approximately €17,000, or a little over US$18,000. Though this action sought a relatively small sum of money compared to the suits brought by municipalities and nonprofit organizations, it still warrants attention. Should this type of litigation gain traction, energy companies may face a multitude of small-sum suits from a large number of individuals, the culmination of which could be significant.

Coverage Lawsuits Involving Climate Change–Related Claims

Some of these climate change disputes have led to insurance coverage litigation. Monitoring coverage cases such as these is particularly important in light of the relative dearth of case law regarding whether climate change claims may be covered under general liability policies.

In one such recent lawsuit, Aloha Petroleum commenced suit against National Union Fire Insurance Co. in the U.S. District Court for the District of Hawaii. The suit seeks coverage for two separate lawsuits brought against the company by the City of Honolulu and the County of Maui. In the underlying actions, the governmental entities claim that Aloha Petroleum, among other entities, deceived the public “about the reality and consequences of the impacts of their fossil fuel pollution,” thereby causing increased carbon emissions that contributed to climate change. The underlying lawsuits seek damages sustained from 1965 until the present, while in the coverage action, Aloha Petroleum alleges that National Union issued four policies during the 1980s that are responsive to the claims. Aloha Petroleum seeks a declaratory judgment that the insurer must defend and indemnify it with respect to the underlying actions. National Union, for its part, has denied the material allegations in its answer and asserted multiple affirmative defenses, including the fact that three of the four policies alleged to be at issue have never been located.

Meanwhile, in another recently filed action, Everest Premier Insurance Co. and Everest National Insurance Co. sought a declaration that they have no obligation to defend or indemnify Gulf Oil Limited Partnership in connection with an underlying lawsuit brought by Conservation Law Foundation, an environmental conservation group. The underlying action accused Gulf Oil of failing to prepare a New Haven, Connecticut, bulk petroleum terminal for the impact of climate change weather events, thereby putting the New Haven community at great risk. The group’s complaint claimed violations of the Resource Conservation and Recovery Act as well as the Clean Water Act. It also sought civil penalties and an order that Gulf Oil’s facilities be properly fortified to prevent the spread of pollution in the future. According to the court’s docket system, the parties settled the suit in October 2022, and the case was dismissed without prejudice.

In 2014, Illinois Farmers Insurance Co. filed a proposed class action lawsuit against the City of Chicago and nearby towns, accusing the municipalities of failing to adequately increase stormwater storage capabilities, thereby causing heavy rains to flood hundreds of dwellings in 2013. The insurance company claimed that the cities should have increased stormwater storage capacity to accommodate foreseeable heavy rainfall linked to climate change. The complaint alleged that the failure to properly increase stormwater capacity caused damage to Illinois Farmers and other similarly situated insurance companies that had to make flood-related payouts to homeowners and renters. Illinois Farmers claimed negligent maintenance liability, failure to remedy known conditions, and violations of the Illinois and U.S. Constitutions. Illinois Farmers discontinued the case in 2014.

The first major insurance coverage decision concerning climate change claims, AES Corp. v. Steadfast Insurance Co., went all the way to Virginia’s highest court in 2012. The electric company AES sought insurance coverage from Steadfast in connection with an underlying action in which the Native Village of Kivalina, Alaska, sued AES and other electric companies. Kivalina claimed that AES and other electric companies caused global warming through their emission of greenhouse gases, which, in turn, damaged their village. The crux of Kivalina’s complaint was that due to increasing amounts of melting ice and rising sea levels, its village, which is located on a narrow strip of land on the Arctic Ocean, was essentially being washed away. It was in the face of these allegations that AES commenced a declaratory judgment action against its insurer, Steadfast Insurance Co., which issued several commercial general liability (CGL) policies to AES between 2003 and 2008. Steadfast moved for summary judgment and for dismissal of AES’s claims on the basis that (1) the complaint did not allege an occurrence, (2) any alleged injury arose prior to the inception of the Steadfast policies, and (3) the claims alleged in the complaint fell within the scope of a pollution exclusion contained within the policies.

Initially, the court of first instance, the Virginia Circuit Court of Arlington County, granted Steadfast summary judgment on its claims. AES appealed the decision to the Virginia Supreme Court, which affirmed the lower court’s order. AES then petitioned the Virginia Supreme Court for a new hearing on grounds that the previous decisions were overly broad and might potentially hinder the administration of insurance claims concerning negligence in the state of Virginia. The Virginia Supreme Court granted this motion. Finally, after the new hearing, the Virginia Supreme Court reaffirmed the prior decisions in favor of Steadfast.

Specifically, the Virginia Supreme Court ruled that the damages allegedly caused by AES’s emission of greenhouse gases were foreseeable and therefore were not an “accident” that could constitute an “occurrence” within the meaning of the CGL policies Steadfast issued. The court based this decision on the fact that the underlying complaint alleged that AES intentionally released tons of carbon dioxide and greenhouse gases into the atmosphere as part of its electricity-generating operations. This allegation of intentionality meant that the alleged activities were not an accident and therefore could not be covered under the policies. The Virginia Supreme Court held that regardless of whether AES’s intentional act constituted negligence, “the natural or probable consequence of that intentional act is not an accident under Virginia law.” The court further stated:

Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur, Kivalina alleges its damages were the natural and probable consequence of AES’s intentional actions. Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies.

The court did not reach the other two arguments brought by Steadfast concerning whether the claims fell within the policy periods of the Steadfast policies and whether the pollution exclusion applied.

The AES decision is now more than 10 years old, but it appears unlikely that AES will be the last word regarding climate change–related coverage disputes as more and more climate change lawsuits are filed against energy companies.

Coverage Considerations

While few would refute the assertion that climate change is a leading emerging risk, some of the coverage issues that climate change claims raise are not so new and are analogous to ones that insurers have seen before in connection with long-tail claims involving asbestos-related losses and environmental losses, for example. In such cases, policyholders often seek coverage under multiple policies spanning many years, similar to the way claimants in some climate change suits have alleged conduct or damage spanning many years. Traditional long-tail claims inherently raise a myriad of coverage issues, including, for example, what trigger of coverage applies; the allocation of losses across multiple policies and policy periods; the treatment of lost, missing, or incomplete policies; whether policy exclusions apply; and whether claims for generalized harm such as public nuisance may be covered. Some of these coverage considerations are discussed below.

Trigger of coverage. With respect to occurrence-based policies such as general liability policies, a significant coverage issue is whether there has been an “occurrence” sufficient to implicate coverage. As indicated above, that was the critical (and dispositive) issue in AES under Virginia law. If a plaintiff such as the one in AES were able to overcome that obstacle, another key coverage issue could be trigger of coverage.

As one court has stated, “‘[t]rigger of coverage’ is a term of art whereby the court describes what must occur during the policy period for potential coverage to commence under the specific terms of an insurance policy.” Because the alleged effects of climate change occur over time, the issue of what insurance policy or policies might be implicated is a particularly consequential one. The issue of what trigger of coverage might apply to any given claim can vary by jurisdiction, the type of claim at issue, and the policy language at issue.

Courts have applied the following triggers of coverage in non–climate change cases: the exposure trigger, which provides that coverage is triggered when the initial exposure to an injury-causing condition takes place; the injury-in-fact theory, which provides that coverage is triggered when real personal injury or actual property damage first occurs, regardless of whether that damage or injury is ascertainable at the time; the manifestation theory, which provides that coverage is triggered at the time that personal injury or property damage becomes known to the victim or property owner; and the “continuous” or “multiple” trigger theory, which provides that coverage is triggered many times during the relevant period from exposure through manifestation. It remains to be seen whether courts will apply these same triggers of coverage to climate change–related claims.

Policy exclusions. While policy exclusions can vary by line of coverage and other factors, many policies contain pollution exclusions in one form or another. As noted above, the insurer in AES argued that a pollution exclusion barred coverage for AES’s climate change claim, but the court did not reach the issue because it held that the policyholder had failed to establish that there had been an “occurrence” under the policy. Just as they have done in other contexts, policyholders will likely attempt to advance various arguments that such exclusions do not apply to climate change claims.

Policyholders have successfully argued in a handful of jurisdictions that such exclusions only apply to “traditional” environmental pollution. For example, Illinois’s highest court held that the accidental release of carbon monoxide due to a broken furnace did not “constitute the type of environmental pollution contemplated by [the pollution exclusion at issue].” Policyholders in such jurisdictions may similarly attempt to argue that climate change claims do not involve “traditional” environmental pollution. Policyholders may also point to a 1997 Wisconsin Supreme Court ruling that held that excessive accumulation of carbon dioxide in an improperly constructed building was not a pollutant within the meaning of the pollution exclusion at issue in the case. However, the emission of greenhouse gases into the environment at large is factually distinguishable from carbon dioxide conditions within a closed space, and notably, the U.S. Supreme Court has held that greenhouse gases such as carbon dioxide are “air pollutants” in the context of the Clean Air Act.

Whether coverage is available for public nuisance. Many underlying climate change lawsuits allege nuisance, which, in its broadest terms, arises when an action interferes with a right commonly held by the public at large. The above-referenced cases brought by New Jersey, Delaware, and the City of Hoboken all allege nuisance among the other various claims asserted. For example, in its complaint, the City of Hoboken alleges that Chevron and the other defendants “caused adverse effects on a common right in the State of New Jersey” by effectuating a material deprivation of or interference with the use of public property and loss of access to cultural, historical, and economic resources.

Such climate change allegations raise a parallel to similar allegations made in the context of opioid litigation against pharmaceutical companies, where nuisance is also commonly alleged. For example, in 2022, the attorney general for the state of Wisconsin announced that Johnson & Johnson, along with several opioid distributors, reached a $26 billion settlement concerning opioid claims, including claims for public nuisance. Meanwhile, the Supreme Court of Delaware rejected such public nuisance claims in a coverage dispute involving a pharmaceutical company on the ground that there had been no “bodily injury” as required by the policies at issue. The court held that the claims brought by the government entities were not covered because the entities did not seek damages for injuries caused to any specific person. Instead, their claims of nuisance were based on general public harm. Thus, the court held that there were no “bodily injury” claims giving rise to a duty to defend.

Nuisance allegations are equally dubious in the context of climate change cases. The AES case discussed above sought coverage for nuisance. However, that claim, like the others, was dismissed because the complaint against AES alleged that it had “intentionally” caused the nuisance. Thus, any damages flowing from said nuisance were not an “accident” as required by the policy at issue. Opioid claims and climate change claims that allege public nuisance attempt to hold entire industries liable for widespread social problems—circumstances that insurers that issued liability policies never intended to cover.

Allocation of losses. Where damages such as those resulting from climate change are alleged to have taken place over many years, another significant coverage issue is how such claims should be allocated to (or divided among) multiple policies that may be implicated. As with trigger of coverage, the answer has traditionally varied from state to state and depends on factors such as the type of loss, the type of coverage, and what the relevant policy language provides.

Some courts have held that damages for claims that span multiple policy periods should be allocated based on a pro rata basis, for example. Under this method, an insurer’s liability is limited to amounts incurred by the insured during the policy period; in other words, each insurance policy is allocated a pro rata share of the total loss representing the portion of the loss that occurred during the policy period.

Other courts have adopted an “all sums” allocation approach in apportioning liability among multiple implicated carriers. Under the all sums approach, an insured faced with a long-term exposure may turn to any one of its implicated carriers to pay 100% of a particular loss. The selected carrier would then have the ability to pursue a contribution action against the other implicated carriers “to allocate a paid loss among all insurers on the risk on the basis of contractual other-insurance provisions or equitable considerations.”

The issue of allocation has been heavily litigated in the context of asbestos and environmental claims over the years, and it raises many issues, for example, what happens during years when a company had no insurance or during years where it is alleged that no insurance was available, such as during periods in or around 1986 when insurers began including an absolute pollution exclusion in their policies. Some courts have held that losses spanning multiple policy periods should not be allocated to policyholders for periods in which insurance was not available. That approach, however, is inequitable as it penalizes those insurers who issued coverage.

The allocation of any climate change losses will necessarily be fraught with additional complexity since, as certain claimants have alleged, “the genesis of the global warming phenomenon dates back centuries and is a result of the emission of greenhouse gases by a multitude of sources other than the Defendants.”

Conclusion

The recent spate of climate change cases focus on cutting-edge questions such as whether those impacted by damages allegedly caused by climate change can seek redress from the judicial system and whether any such damages are, in turn, covered by insurance. Insurance carriers should remain vigilant in surveying the legal landscape as it relates to these topics and in adjusting their market strategies to attempt to mitigate risk. Allegations in cases like the ones discussed above will likely remain in dispute, and it may be years before courts render substantive decisions on these issues. In the meantime, one thing is likely to remain certain: as the alleged effects of climate change continue to manifest, so will their impact on the insurance industry.