Global warming litigation continues, but President Obama’s new environmental policies likely will change its path.  Insureds should consider their risks in light of these new policies to determine whether their present insurance programs provide adequate coverage.

We have previously discussed coverage issues arising out of global warming litigation.  Click Here; Click Here  One of the cases we addressed was California’s lawsuit against GM and Chrysler, which alleged that the cars and trucks the two companies manufactured damaged the state by contributing to global warming and its negative environmental consequences.  See California v. General Motors Corp., No. 06-cv-05755 (N.D. Cal.).  The District Court for the Northern District of California dismissed that lawsuit on the ground that it presented a non-justiciable political question.  California appealed.  See California v. General Motors Corp., No. 07-16908 (9th Cir.).  However, because both GM and Chrysler recently filed for bankruptcy protection and the federal government has taken action to address global climate change, California “decided to dismiss the appeal and to leave for another day resolution of the issues the appeal raises.”  Download 6-24-09 Dismissal of California’s case against GM  

California referred to two recent actions of President Obama’s administration that influenced its decision to dismiss the case.  First, on April 24, 2009, the EPA issued a proposed “endangerment finding,” which concludes that auto emissions “endanger the public health and welfare of current and future generations.”  Click Here  This finding, made as a result of the U.S. Supreme Court’s decision in Massachusetts v. EPA, 127 S.Ct. 1438 (2007) that greenhouse gases are “air pollutants” under the Clean Air Act, sets the stage for EPA’s regulation of auto emissions and other greenhouse gas-emitting industries.  Click Here  The public comment period on the proposed finding closed on June 23, 2009, one day before California dismissed its appeal, and the EPA’s final finding is expected to largely conform to the one it proposed.  Second, President Obama recently pledged to implement new fuel efficiency standards that are in line with the emissions standards California has attempted to implement over the past several years.  Download 6-24-09 Decl. in support of dismissal of CA’s appeal against GM

Ironically, while the administration’s actions apparently have contributed to the dismissal of California’s lawsuit against GM and Chrysler, they likely will lead to further disputes and coverage issues for numerous insureds.  Once the EPA’s new regulations are in place, companies will confront the costs of complying with those new emissions rules.  Furthermore, the EPA presumably will enforce the new rules, giving rise to liability for past and current violations.

This raises a frequently arising issue – whether a commercial general liability policy requires an insurer to defend administrative actions (i.e., an EPA enforcement action).  California courts have held there is no duty to defend an insured in a state or federal environmental clean-up proceeding because such an administrative action does not constitute a “suit” under the typical CGL policy.  Foster-Gardner, Inc. v. Nat’l Union Fire Ins. Co., 18 Cal.4th 857 (1998).  Likewise, California courts have held that CGL insurers have no duty to indemnify their insureds for costs and expenses paid to comply with administrative orders where no “suit” was filed.  Certain Underwriters at Lloyd’s of London v. Superior Court, 24 Cal.4th 945 (2001).

However, it may be able to obtain coverage under recent CGL forms, many of which define “suit” to include a “civil proceeding.”  The issue of whether an administrative action constitutes a “civil proceeding” is currently on appeal to the California Supreme Court.  See Ameron Int’l Corp. v. Ins. Co. of State of Penn., Case No. S153852 (rev. granted 8/15/07).  Further, insureds may be able to find coverage under umbrella policies, which typically cover “claims” in addition to “suits” and contain broader indemnity coverage that may extend to costs and expenses paid to comply with administrative orders even where no “suit” was filed.

As we discussed previously, an additional hurdle to coverage for global warming related claims – including any administrative proceedings under current or future rules regulating greenhouse gas emissions – is the pollution exclusion.  Click Here; Click Here  It should be possible to get around the pollution exclusion to obtain coverage in many cases, either because greenhouse gases will not qualify as “pollutants” under a CGL policy or the absolute pollution exclusion applies only to “pollutants” discharged at or from the insured’s premises (and the cars and trucks produced by an auto manufacturer discharge greenhouse gases from the road, not the manufacturer’s premises).

However, one insurer has sued for a declaration that the pollution exclusion in its policy precludes coverage for claims against a greenhouse gas emitter for environmental damages allegedly caused by global warming on the Alaska coastline.  See Steadfast Ins. Co. v. The AES Corp., No. 2008-858 (Vir., Circuit Ct. of Arlington County).  The pollution exclusion at issue in that case is broader in several ways than standard pollution exclusions in recent CGL policies.

Insurers are already reacting to the likelihood that insureds will face new exposures as a result of anticipated federal regulation of greenhouse gas emissions.  For example, Zurich Financial Services Ltd. is offering “climate products,” including “Carbon Capture and Sequestration Liability Insurance,” “Geological Sequestration Financial Assurance” and political risk coverage for carbon credit projects.  Click Here   It remains to be seen what coverage these policies will actually provide, but the “Carbon Capture and Sequestration Liability Insurance” purportedly will cover “liabilities from pollution events, business interruption, control of the well, liabilities relating to the transmission of carbon, and geomechanical liabilities, predominantly during the operational life of the storage facilities.”  Click Here

Insureds should review their policies with an eye toward how future federal regulation of greenhouse gas emissions will impact their businesses.  To the extent their current risk management program may not adequately cover anticipated exposures, insureds may benefit from considering alternative coverages now being offered to protect against liability related to global warming claims.