Related Practices

After Climate Rulings, Insurers May Go On Coverage Offense

Law360
October 13, 2022

Two recently filed lawsuits, Aloha Petroleum Ltd. v. National Union Fire Insurance Co. and Everest Premier Insurance Co. v. Gulf Oil Ltd. Partnership, signal the beginning of litigation over liability insurance coverage for climate change-related lawsuits and damages. In this article, we discuss these two lawsuits and their implications for the industry.[1]

Underlying Claims

Climate Change Contribution

Since 2017, state and local governments around the U.S. have been filing lawsuits against oil and gas companies for their contribution to climate change.[2]

The government entities allege that production and use of defendants' fossil fuel products has created greenhouse gas pollution, which is causing global warming, sea level rise, and increased frequency and severity of extreme weather events, resulting in climate change-related injuries to the plaintiffs.

In addition, the government entities claim that the energy companies were aware for decades of the climate effects of the use of their fossil fuel products, but failed to disclose those dangers to consumers and regulators.

These climate change lawsuits include two suits filed in Hawaii state court, City and County of Honolulu v. Sunoco LP[3] and County of Maui v. Sunoco LP[4] against several oil and gas companies including Aloha Petroleum Ltd., a subsidiary of Sunoco.

After years of litigation over whether climate change lawsuits belong in state or federal court, several federal courts of appeal have now sent those cases back to the state courts where they were originally filed.[5] In particular, on July 7, the U.S. Court of Appeals for the Ninth Circuit affirmed the remand of the Honolulu and Maui lawsuits to Hawaii state court.[6]

The lawsuits are now proceeding in state court.

Earlier this year, the Hawaii First Circuit Court in the Honolulu lawsuit denied the defendant Sunoco and other oil and gas companies' motions to dismiss for failure to state a claim and for lack of personal jurisdiction.[7]

In the Maui lawsuit, motions to dismiss have also been filed and are pending before the Hawaii Second Circuit Court.[8]

Adaptation Lawsuits

In addition to these cases seeking redress for contributions to climate change, several climate adaptation lawsuits have been filed across the country.[9] The plaintiffs in these cases generally allege that energy companies and other defendants have failed to adapt their facilities and operations to prepare for the effects of climate change, exposing communities to harms from foreseeable weather events. The complaints seek, among other things, environmental restoration and compensatory mitigation, and injunctive relief.

These adaptation cases include a lawsuit filed by the Conservation Law Foundation[10] against Gulf Oil in the U.S. District Court for the District of Connecticut, alleging that defendant failed to adequately prepare its petroleum fuel terminal in New Haven, Connecticut, for the effects of climate change, in violation of the Clean Water Act and the Resource Conservation and Recovery Act.[11]

Adaptation lawsuits are also moving forward in the courts. On June 30, in another fuel terminal case brought by the Conservation Law Foundation, the U.S. District Court for the District of Rhode Island recommended the denial of defendant Shell's motion for judgment on the pleadings, and discovery is now proceeding.[12]

Coverage Litigation

Aloha Petroleum

On Aug. 10, Aloha Petroleum filed a lawsuit against National Union Fire Insurance Company of Pittsburgh, PA in the U.S. District Court for the District of Hawaii,[13] for breach of contract arising out of National Union's denial of its duty to defend and indemnify Aloha Petroleum in connection with the Honolulu and Maui lawsuits.

Aloha Petroleum also seeks a declaration that National Union has a duty to defend and indemnify it in connection with the suits.

It is alleged that National Union denied the insured's claim for defense and indemnity relying on a qualified pollution exclusion. Aloha Petroleum refutes the application of the exclusion by alleging that the policy provides coverage for "products hazard," which includes bodily injury or property damage arising out of the insured's products.

This case represents one of the first attempts by climate change defendants to seek an affirmation of coverage from the courts. The Honolulu and Maui lawsuits were originally filed in October 2020.

Aloha Petroleum alleges that it has incurred over $880,000 in defense costs in the two years since the lawsuits were filed.

Importantly, these lawsuits are still in early stages having been remanded to state court only in the past year. There are dozens of defendants in multiple actions across the country defending similar claims. A simple extrapolation from Aloha Petroleum's disclosure highlights the potential multimillion-dollar exposure the energy and insurance industries face in defense costs alone.

Gulf Oil

As insurers ramp up efforts to limit their exposure to climate-related lawsuits across the U.S., on June 9, two insurers, Everest Premier Insurance Co. and Everest National Insurance Co., asked the Suffolk County Superior Court of Massachusetts for a declaration that they have no duty to defend and indemnify Gulf Oil in connection with the climate change adaptation suit brought by the Conservation Law Foundation.[14]

The insurers seek a declaration of no coverage as to Gulf Oil's claim, stating that the underlying lawsuit does not allege bodily injury or existing property damage caused by an occurrence first manifested during the policy period of the primary policies.

The insurers also allege that even if the complaint alleged property damage, coverage would be precluded by the policies' pollution exclusion and other exclusions. This is discussed further below.

Implications for the Insurance Industry

As most current climate change lawsuits in the U.S. have been greenlighted to proceed in state courts and have survived early motions to dismiss, the energy company defendants are increasingly likely to turn to their liability insurance carriers to obtain coverage.

We can also expect insurers to be more proactive in seeking to limit their exposure to defense costs and potential indemnity payments.

The significant potential price tag on the defense of these lawsuits, in particular as they enter discovery, is likely to further encourage insurers to seek declarations of no coverage while in early stages, particularly in jurisdictions where insurers can terminate their defense obligations only upon a finding of no coverage.

For example, as noted above, Aloha Petroleum alleges that it has incurred more than $880,000 in defense costs to date in connection with the Honolulu and Maui lawsuits. And this is a local company named in only two cases — the legal costs for international energy companies sued in courts around the nation are likely in the tens of millions of dollars.

Liability insurers will respond to these coverage claims based on their specific policy terms, conditions, limitations and exclusions. We expect that, as more claims are presented to insurance carriers, disputes will arise, and more coverage litigation will ensue.

In this regard, the Aloha Petroleum and Gulf Oil cases may provide useful guidance to other courts considering similar issues and should be closely watched by liability insurers and their reinsurers.

For example, the pollution exclusion at issue in Aloha Petroleum is a standard pollution exclusion from the mid-1980s with a "sudden and accidental" exception.[15] The federal court in Hawaii will decide whether this exclusion precludes coverage for damage arising out of the release of greenhouse gases into the atmosphere as a result of the use of fossil fuel products.[16]

The court's decision will be important as the same exclusion likely will be at issue in other coverage disputes. On the other hand, there have been multiple variations of the pollution exclusion over the years, and the wording of the exclusion — and its exceptions — in the liability policies issued to other energy companies may be significantly different.

As another example, Everest, the insurer in the Gulf Oil case is alleging that the underlying lawsuit against the insured "alleges a risk of potential property damage" from weather events related to climate change, but does not allege damage caused by an occurrence during the policy period.[17]

The Gulf Oil policies' definitions of terms like "property damage" and "occurrence" frequently appear in commercial general liability policies.

In AES v. Steadfast,[18] the Virginia Supreme Court, interpreting the same definition of "occurrence," held, in 2012, that an insurer did not have a duty to defend or indemnify an electric company in a climate change lawsuit, because the underlying complaint's allegations that the insured damaged a village by causing global warming did not allege property damage caused by an occurrence.

Further, courts, such as the Indiana Supreme Court in its 2007 decision in Cinergy v. AEGIS, have recognized that where the relief requested in the underlying lawsuit is directed at preventing future public harm, for example by installing equipment to contain future emissions, there is no coverage as the claim is not seeking damages because of property damage caused by an occurrence.[19]

Therefore, the Massachusetts court's ruling in Gulf Oil may be significant for coverage litigation arising out of other climate adaptation cases.

Conclusion

Coverage litigation arising out of climate change lawsuits is no longer theoretical. More cases are likely to follow. As the Aloha Petroleum and Gulf Oil lawsuits make their way through the courts, and new cases are filed, the insurance industry should pay close attention to these developments and assess their effects on their exposure to climate change liabilities.

In addition, insurers and reinsurers should continue to proactively develop a strategy for responding to climate change risks and manage their exposure. Some options to address these issues include: drafting endorsements that expressly exclude climate change claims, such as the LMA5570 model climate change exclusion published by the Lloyd's Market Association;[20] inserting sublimits to reduce exposure to climate-related litigation; and offering bespoke climate change liability products for policyholders outside of generic commercial general liability policies.

Jose Umbert is a partner and Hernan Cipriotti is a senior associate at Zelle LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] For our prior discussion on climate change litigation in the context of insurance and reinsurance, please see the following articles: Opioid Case May Guide Climate Change Insurance Suits, Law360 Insurance Authority, May 11, 2022; Insurer Implications As 3 Climate Suits Return to State Courts, Law360 Insurance Authority, Apr. 26, 2022; Why Climate Plaintiffs Are Filing Securities, Consumer Suits, Law360, 15, 2022; Minn. Big Oil Climate Suit Follows Big Tobacco Blueprint, Insurance Law360, Jan. 4, 2022.

[2] See http://climatecasechart.com/case-category/common-law-claims/.

[3] City and County of Honolulu v. Sunoco LP, Civil No. 1CCV-20-0000380 (LWC), First Circuit Court, State of Hawai'i.

[4] County of Maui v. Sunoco LP, Civil 2CCV-20-0000283, Second Circuit Court, State of Hawai'i.

[5] See Insurer Implications As 3 Climate Suits Return to State Courts, Law360 Insurance Authority, Apr. 26, 2022.

[6] City and County of Honolulu Sunoco LP, 39 F.4th 1101 (9th Cir. 2022).

[7] See http://climatecasechart.com/case/city-county-of-honolulu-v-sunoco-lp/ (last visited Oct. 13, 2022).

[8] See http://climatecasechart.com/case/county-of-maui-v-sunoco-lp/ (last visited 13, 2022).

[9] See http://climatecasechart.com/case-category/actions-seeking-adaptation-measures/.

[10] CLF is a nonprofit organization dedicated to the conservation and protection of New England's public health, environment and natural resources.

[11] Conservation Law , Inc. v. Gulf Oil Ltd. P'ship, Civ. No. 3:21-cv-00932 (D. Conn.).

[12] Conservation Law , Inc. v. Shell Oil Prods. US, C.A. No. 17-00396-WES (D.R.I.).

[13] Aloha Petroleum v. National Union Fire Ins. Co. of Pittsburgh, Pa., case number 1:22-cv-00372 (D. Haw.).

[14] Everest Premier Co. v. Gulf Oil Ltd. P'ship, Case No. 22-1291 (Suffolk Superior Court).

[15] The exclusion reads: "This insurance does not apply … (f) to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental."

[16] See, g., Technicon Electronics Corp. v. American Home Assur. Co., 542 N.E.2d 1048, 1050-1051 (N.Y. 1989) (pollution exclusion applied to claims for personal injuries allegedly suffered from exposure to toxic chemicals discharged by insured into nearby creek).

[17] Complaint for Declaratory Relief, ¶¶35-36.

[18] AES Corp. Steadfast Ins. Co., 725 S.E. 2d 532 (Va. 2012).

[19] See, g., Cinergy Corp. v. Associated Elec. & Gas Ins. Servs., Ltd., 865 N.E.2d 571, 582 (Ind. 2007).

[20] See https://www.lmalloyds.com/LMA/News/LMA_bulletins/LMA_Bulletins/LMA21-041- aspx.