raa reclaims: taking it to the next level...raa reclaims: taking it to the next level september 15,...
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Climate ChangeClimate ChangeLiability Issues & TheirImpact on the Industry
Jennifer R. Devery
Crowell & Moring LLP
RAA ReClaims: Taking it to the Next LevelSeptember 15, 2010New York City
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“Conversation about the weather is thelast refuge of the unimaginative.”
– Oscar Wilde
“Climate is what we expect. . .weather is what we get.”
– Mark Twain
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TOPICS
What is Climate Change?
Projected Impact of Climate Change
Climate Change Tort Litigation
Other Potential Liabilities
Insurance Coverage Issues
Reinsurance Considerations
Challenges for Insurers/Reinsurers
From Risk to Opportunity: New ProductOpportunities for Insurers/Reinsurers
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What is “Climate Change?”
Any significant change in measures of climate(e.g. temperature, precipitation, or wind) lastingfor an extended period (decades or longer)
Caused by:
» Natural factors, such as changes in the sun’sintensity or slow changes in the Earth's orbitaround the sun;
» Natural processes within the climate system (e.g.changes in ocean circulation);
» Human activities that change the atmospherescomposition (e.g. through burning fossil fuels) andthe land surface (e.g. deforestation, reforestation,urbanization, desertification, etc.)
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What is “Climate Change?”
Global warming: Average increase in thetemperature of the atmosphere near the Earth’ssurface and in the troposphere, which cancontribute to changes in global climate patterns
Greenhouse gases:
» carbon dioxide (CO2)
» methane (CH4)
» nitrous oxide (N2O)
» hydrofluorocarbons
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Projected Impact
Varies by region and may include:
» Powerful hurricanes, fueled by warmer ocean temperatures(along with increased frequency and landfall)
» Other types of intense wind storms
» Environmental destruction and degradation caused by risingocean levels and coastal erosion
» Heat waves, drought, water shortages
» Wildfire
» Increased flooding and resulting crop loss
» Outbreaks of dengue fever, malaria, hantavirus and otherdiseases caused by disease-carrying mosquitoes androdents which proliferate in warmer weather
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Overview of Litigation
4 lawsuits filed in federal court asserting tortclaims for alleged global warming-relatedinjuries
» Defendants (so far): electric utilities; oil & naturalgas; coal; chemical; and automobile
All district courts ruled early in defendants’favor, finding:
» no constitutional standing; and/or
» non-justiciable political questions
All 4 cases appealed.
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Underlying Cases
Connecticut v. AEP & Open Space Institute, Inc. v.AEP (2d Cir.) – filed 2004 in New York
Comer v. Murphy Oil USA (5th Cir.) – filed 2005in Mississippi
Native Village of Kivalina v. ExxonMobil Corp.(9th Cir.) – filed 2008 in California
California v. GMC (9th Cir.) – filed 2004 inCalifornia
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Asserts public nuisance under federal commonlaw.
Claims defendants jointly & severally liable foralleged global warming-related damages suchas:
» reduced mountain snow pack
» coastal erosion
» increased flooding
Seeks an injunction forcing defendants to capand reduce their emissions by some % each year.
Connecticut v. AEP
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District court dismisses: Not justiciable.
Second Circuit reverses:
» Rejects defense view that the claim touches onmany significant economic, environmental,national security, and foreign policy issues, thusrequiring an initial policy determination by thepolitical branches.
» Tort law is sufficient to adjudicate plaintiffs’claims, and courts capable of resolving causationand remedy.
» It is an ordinary tort suit.» Plaintiffs need only, and did, allege defendants
“contributed to” injuries to satisfy standing.
» Federal common law not displaced by statute.
Connecticut v. AEP
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Supreme Court
» Petition for Writ of Certiorari filed by AEP onAugust 2.
» On August 24, U.S. Solicitor General filed brief onbehalf of TVA.
» Amici filed briefs in September:• Union for Jobs and the Environment• Pacific Legal Foundation• Association of Int’l Automobile Manufacturers• American Chemistry Council• National Federal of Independent Business Small Business Legal Center• Center for Constitutional Jurisprudence• U.S. Chamber of Commerce• Edison Electric Institute• American Farm Bureau Federation• Law Professors• Indiana, et al.• Cato Institute• Mountain States Legal Foundation
Connecticut v. AEP
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Class complaint filed on heels of HurricaneKatrina by Mississippi property owners againstinsurance companies.
2006: plaintiffs add oil, coal, chemicaldefendants.
Complaint alleges greenhouse gas emissionsintensified Hurricane Katrina, caused propertydamage.
Comer
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Plaintiffs assert:
» public and private nuisance
» trespass
» negligence
» unjust enrichment
» fraudulent misrepresentation
» civil conspiracy
Seek compensation for property damage,increased insurance premiums, and other losses.
Comer
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District court dismisses: no standing, notjusticiable.
Fifth Circuit:
» Reverses as to nuisance, negligence, trespass:
• An ordinary tort suit for damages
• Only 1st part of 6-part political question analysisreally matters.
• Standing satisfied because plaintiffs pleadeddefendants “contributed to” their harms.
» Affirms dismissal of unjust enrichment, fraud, andconspiracy because they raise “generalizedgrievances” shared by “the entire Americancitizenry.”
Comer
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Subsequent Developments:
Rehearing en banc granted and 5th Circuit Paneldecision vacated.
» 7 justices recuse themselves leaving bare quorum
Decision to hear the case en banc reversed when8th justice recuses herself.
District court decision dismissing the casereinstated.
On August 27, Plaintiffs Seek Writ of Mandamusfrom Supreme Court
Comer
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Complaint filed in 2008 by the Native Village andCity of Kivalina against 24 oil, energy, coal, andutility entities
Federal and state law claims
» nuisance
» civil conspiracy
» concert of action
Kivalina
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Alleges defendants jointly & severally liable forKivalina on verge of eroding, falling into theocean.
Seeks damages for the relocation of Kivalina’spopulace, estimated to cost $95-$400 million.
District court dismissed plaintiffs’ federal claimsunder political question doctrine, lack ofstanding.
» Then dismissed state claims without prejudice.
Kivalina
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No judicially discoverable, manageable standardsare available.
Would require policy-making:
» an “acceptable” limit on emissions
» who should bear the cost of climate change, eventhough “virtually everyone” is responsible forgreenhouse gas emissions
Plaintiffs did not show “substantial likelihood”that defendants’ conduct caused their harm.
Causal chain too “attenuated” to confer standing.
Kivalina
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State of California filed suit in 2004 against 6major automakers.
Asserted federal and state public nuisance.
Alleged injuries:
» reduction in snow pack
» increased risk of flooding
» increased erosion from rising sea levels
» increased frequency and duration of extreme heatevents
» increased risk and intensity of wildfires
California v. GMC
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Court dismissed federal claim under politicalquestion doctrine.
» Then dismissed the state claim without prejudice.
Draws on AEP district court’s decision:
» “[R]ecognizing such a new and unprecedented . . .claim for damages would likely have commerceimplications in other States by potentially exposingautomakers, utility companies, and otherindustries to damages flowing from a newjudicially-created tort for doing nothing more thanlawfully engaging in their respective spheres ofcommerce . . . .”
California v. GMC
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9th Circuit appeal
» Voluntarily dismissed
• Nationwide political agreement regarding revisionsto NHTSA’s fuel economy standards and EPA’sendangerment finding.
California v. GMC
Subsequent Developments:
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Massachusetts v. EPA
Environmental group filed petition in 1999seeking to force EPA to regulate greenhouse gasemissions from new motor vehicles under theClean Air Act.
Plaintiff argued that EPA is required to regulatebecause greenhouse gases are a pollutant.
EPA denied petition:
» No legal authority to regulate greenhouse gases.
» Declines to regulate on policy grounds.
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EPA shall regulate:
» “The emission of any air pollutant from . . . newmotor vehicles or . . . engines, which in hisjudgment cause, or contribute to, air pollutionwhich may reasonably be anticipated to endangerpublic health or welfare”
Air pollutant:
» Any “air pollution agent . . . including any physical,chemical, biological . . . matter which is emittedinto or otherwise enters the ambient air”
Welfare effects:
» Include “ effects on soils, water, crops, . . . animals,wildlife, . . . and climate”
Clean Air Act
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Mass. v. EPA
To date, Mass. v. EPA is the only Supreme Courtcase on the topic of global warming.
Supreme Court ruled against EPA in 2007.
» Petitioners have standing.
» Greenhouse gases are “pollutants” under theClean Air Act.
» EPA’s actions were arbitrary and capricious,inconsistent with Act.
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Looking Ahead
The Torts’ bar waits and watches.
Circuit split could emerge.
» Note Fourth Circuit’s decision in North Carolina exrel. Cooper v. TVA reversing a district court’s orderthat relied upon the common law of nuisance torequire specific emission caps and controls at 4TVA power plants.
Supreme Court may want to be heard.
Legislation could alter the torts’ landscape.
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SEC Climate Change Disclosure Standards
» January 2010 Guidelines require companies toconsider the effects of global warming and effortsto curb climate change when disclosing businessrisks to investors in corporate filings.
EPA Initiatives: mandatory greenhouse gasreporting rule
» Nation’s first greenhouse gas reporting system
» Monitoring begins in 2010; annual reports
» An estimated 85% of the total U.S. greenhouse gasemissions, from approximately 10,000 facilities,are covered.
Other Potential Liabilities
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Implications for D&O insurance when properdisclosures are not made:
» EPA Reporting: Data must be certified as true andaccurate, subject to civil and criminal penalties forfalse statements.
» Civil liability for individual directors and officers formaterial misstatements or omissions in disclosures
» Direct shareholder actions or derivative actions forbreach of fiduciary duty and mismanagement ofclimate risks resulting in declining stock value orharm to the corporate insured.
Other Potential Liabilities
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Climate Change and Insurance
A study by Ernst & Young in 2008 found thatpotential climate change is the greatest strategicrisk currently facing the property casualtyinsurance industry.
2008 was the 5th most expensive year on recordfor weather catastrophes.
» $113B in losses and $41B to the insurance industry– Int’l Assoc. of Ins. Supervisors, Global Reinsurance Market
Report 2009
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Insurance Implications
Types of coverage that may be impacted,directly or indirectly, by climate change:
» CGL
» Property & Casualty
» Life & Health
» D&O and E&O
» Business Interruption
» Flood
» Crop
But, is there insurance coverage for climatechange-based litigation?
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Climate ChangeCoverage Litigation
Steadfast Ins. Co. v. AES Corp., No. 2008-858 (Cir.Ct. Arlington Cty., VA)
» First climate change coverage case
» Native Village of Kivalina v. ExxonMobil Corp. No.CV 08-1138 SBA (N.D. Cal)
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Steadfast v. AES
Steadfast’s 3 Theories for Summary Judgment:
» Pollution exclusion:
• “Any injury or damage which would not haveoccurred in whole or in part but for the actual,alleged or threatened discharge, dispersal, seepage,migration, release or escape of pollutants at anytime.”
• Carbon dioxide is a pollutant, per Mass v. EPA,hence exclusion applies. Pollutant is defined in thepolicy as an “irritant or contaminant.”
» Kivalina complaint does not allege “propertydamage” caused by an “occurrence.”
» Loss in progress endorsement precludes coverage.
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Court initially denies Steadfast’s SJ motion:
» Issues of fact exist regarding Steadfast’s duty todefend.
» Judge Kendrick rules from the bench, remarkingthat if carbon dioxide is a pollutant, then “we’re allpolluting this courtroom as we breathe.”
AES files for SJ: Steadfast has an affirmativeduty to defend.
Steadfast renews its SJ motion.
Steadfast v. AES
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Court reverses original denial and grants SJ inSteadfast’s favor:
» No duty to defend
» Complaint does not allege an “occurrence” asdefined in the policies.
» Under Virginia law, an accident “is an event whichcreates an effect which is not the natural orprobable consequence of the means employedand is not intended, designed or reasonablyanticipated.”
Steadfast v. AES
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General Coverage Issues Implicated byClimate Change Claims:
Definition of Occurrence
Loss In Progress Exclusion
Pollution Exclusion
Other
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Standard CGL policies generally providecoverage for “all sums which the insured shallbecome legally obligated to pay as damages . . .caused by an occurrence.”
» “Occurrence” is often defined as “an accident,including continuous or repeated exposure toconditions, which results in bodily injury orproperty damage neither expected nor intendedfrom the standpoint of the insured.”
Occurrence
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As an alternative, “occurrence” may also bedefined as “an accident, including continuous orrepeated exposure to substantially the sameharmful conditions.”
» In this case, an exclusion akin to the following isalso typically included in the policy provisions:“This insurance does not apply to: (a) ‘bodilyinjury’ or ‘property damage’ expected or intendedfrom the standpoint of the insured.”
Occurrence
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Depending on the jurisdiction, an insurer couldprevail in arguing that a policyholder expectedor intended to emit greenhouse gases andtherefore the acts of the policyholder do notqualify as an “occurrence.”
Intent to commit act v. intent to commit theresulting harm
Occurrence
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General Rule: insurers whose policy termscommence after initial manifestation of the lossare not responsible for any potential claimrelating to the previously discovered andmanifested loss.
The doctrine applies whenever the insured is orshould be aware of an ongoing progressive lossat the time a policy is purchased.
The doctrine precludes coverage for losses thatwere known before the policy period, even if thedamages progress into the policy period.
Loss in Progress
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Most modern, post-1986 CGL policies contain anabsolute pollution exclusion.
» “Any injury or damage which would not haveoccurred in whole or part but for the actual,alleged or threatened discharge, dispersal,seepage, migration, release or escape of pollutantsat any time.”
• Pollutant means “any solid, liquid, gaseous, orthermal irritant or contaminant including smoke,vapor, soot, fumes, acid, alkalis, chemicals andwaste.”
– Waste includes material to be recycled, reconditioned orreclaimed.
Pollution Exclusion
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Pollution Exclusion
» Can carbon dioxide and other greenhouse gases becategorized as a pollutant?
» Massachusetts v. EPA
• Greenhouse gases are “air pollutants” under theClean Air Act.
• “Refusing to call greenhouse-gas emissions apollutant is like refusing to say that smoking causeslung cancer…[t]he Earth is round. Elvis is dead.Climate change is happening.”
– Melissa Carey, Climate Policy Specialist, EnvironmentalDefense
• However, this Supreme Court decision construes aspecific statute and is fact intensive.
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Trigger of Coverage
» When do accumulated emissions result in allegedinjury or damage?
Covered Damage
» General Rule: CGL policies do not cover pureeconomic loss.
Known Loss Doctrine
» General Rule: coverage is precluded for a losswhich has already occurred and which the insuredknew about or had reason to know about prior tothe inception of the insurance policy.
OTHER COVERAGE DEFENSES
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Reinsurance Considerations
Severity, duration and impact of climate changehas potential for damage amounts that couldimpact reinsurance coverage.
Costs of defending climate change litigation andresponding to regulatory initiatives will besignificant irrespective of the outcome ofdebates on causation, liability and allocation ofresponsibility.
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Reinsurance Considerations
Many of the same direct coverage issues areimplicated (e.g., definition of occurrence)
Also, certain exclusions, including:
» Loss/damage/costs/expenses arising fromseepage, pollution, contamination from smoke
» Hail insurance or reinsurance covering growing orstanding crops
» Policies covering flood only
» Mortality and health insurance on all animals andbirds
» Policies written to cover only the specific perils ofwindstorm, earthquake, and/or flood
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Property per risk contracts (definition of “risk”):
» Does a climate change claim implicate more thanone risk?
Property catastrophe contracts (definition of“occurrence”)
» For loss occurrence property/cat contracts, does aclimate change case implicate more than oneoccurrence?
Reinsurance Considerations
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Traditional reinsurance considerations alsoapply:
» Allocation/Aggregation – duration of climatechange may implicate multiple contract years
» Coverage for ex gratia and ECO/XPL liability
» Follow the Fortunes/Follow the Settlements
Reinsurance Considerations
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Challenges for the Industry
NAIC Climate Risk Disclosure Survey
Unknowns of climate change make modelingand risk assessment complex as science andresearch are evolving.
Must keep up with domestic and internationalclimate change policy.
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New Climate Change-Related Insurance Products
» Wind farms and other alternative fuel facilities,green buildings and upgrades, financial risksinvolved in carbon trading
» Special insurance programs for climate consciencepractices
» Weather energy products
» Increase in issuance of CAT bonds
From Risk to Opportunity
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Questions?
Jennifer R. Devery
Crowell & Moring
1001 Pennsylvania Avenue NW
Washington, DC 20004
202.624.2534