Virginia Supreme Court Grants Petition for Rehearing of AES Corporation v. Steadfast Insurance Company
All eyes will return to Virginia as a result of the Virginia Supreme Court's decision to grant a petition for rehearing of the appeal in AES Corporation v. Steadfast Insurance Co., a first of its kind case involving insurance coverage for climate change liability lawsuits. In September 2011, Virginia's highest court held that insurance companies do not have to defend utility companies accused of intentional wrongdoing in connection with such suits. Specifically, the court concluded that the underlying climate change claims for which AES sought coverage did not constitute an "occurrence" under AES's commercial general liability (CGL) policies. The case, which has important implications for both insurers and companies with potential exposure to climate change-related tort claims, is likely to garner even more attention now that the Virginia Supreme Court has agreed to reconsider AES' appeal.
Appellant AES Corporation is a defendant in Native Village of Kivalina v. ExxonMobil Corp., one of the first climate change nuisance cases brought in federal court. The Kivalina plaintiffs, an Inupiat village located off the coast of Alaska, allege that greenhouse gas emissions from AES and other oil, energy, and utility companies have contributed to climate change which, in turn, has eroded the village's coastline and rendered it uninhabitable. The complaint alleges that AES intentionally emits millions of tons of carbon dioxide and thereby "intentionally or negligently" created a nuisance, global warming. Kivalina further asserts that AES "knew or should have known" that its activities would result in the environmental harm to Kivalina.
After being sued, AES asked its insurer, Steadfast Insurance Company, to defend. Steadfast refused and thereafter filed a declaratory judgment action in Virginia (where AES is headquartered). Steadfast denied coverage based on three grounds: (1) the Kivalina complaint did not allege "property damage" caused by an "occurrence" under its policies; (2) the alleged injuries arose before Steadfast's coverage incepted; and (3) the GHG emissions alleged in Kivalina were "pollutants" excluded from coverage by virtue of the policies' pollution exclusion.
For the occurrence argument, the at-issue policies defined "occurrence" as "an accident, including continuous, repeated exposure to substantially the same general harmful condition." The trial court granted summary judgment for Steadfast, holding that the insurer had no duty to defend AES because the Kivalina complaint did not allege an "occurrence" within the meaning of the CGL policies issued to AES by Steadfast.
Proceedings on Appeal
AES appealed to the Virginia Supreme Court, which heard oral argument on April 19, 2011. AES argued that because the complaint alleged that AES "[i]ntentionally or negligently" created a nuisance, the damage alleged by the plaintiffs in Kivalina constitutes an "accident" and thus an "occurrence." AES further argued that because the complaint alleges that AES "knew or should have known" that generation of electricity would result in the environmental harm suffered by Kivalina, the complaint alleges, at least in the alternative, that the consequences of AES's intentional carbon dioxide emissions were unintended. The court disagreed.
In a decision issued September 16, 2011, the Court held that an allegation of negligence does not equal an occurrence. Whether or not AES's intentional act constitutes negligence, the natural and probable consequence of that intentional act is not an accident under Virginia law. Thus, the Virginia Supreme Court held that the underlying Kivalina complaint did not allege an "occurrence," such that Steadfast has no duty to defend AES under the CGL policies.
AES subsequently petitioned for rehearing, claiming that the authorities cited by the Court do not support the Court's ruling that when the complaint alleges that the defendant should have known its conduct would cause harm, there is no "occurrence" or "accident" and thus no duty to defend under a CGL policy. AES argued that the test should be whether the defendant should have known to a substantial probability that its conduct would cause harm. On January 17, 2012, the court issued an order setting aside its prior decision and granting AES's petition. Additional briefing and oral argument will occur during the court's February session, which will conclude by the middle of March 2012.
Potential Impact of Rehearing
As noted, the Virginia Supreme Court's decision to grant AES's petition for rehearing means that this important case will once again be in the spotlight. Aside from what the court ultimately will decide, there are two interesting things to note with regard to the rehearing.
First, rehearings are infrequently granted by Virginia's highest court, making the court's decision to do so here fairly extraordinary. According to the most recent State of the Judiciary Report available on the Virginia Supreme Court's website, of 440 petitions for rehearing filed in 2009, the court granted only 12, or less than 3%. The statistics for the previous four years evidence similarly low success rates on petitions for rehearing (varying between 3-6%).
Second, two of the justices that participated in the original decision were Senior Justices sitting by designation, given that the court had two vacancies at the time of briefing and argument in the AES case. The two Senior Justices, Lawrence Koontz and Harry Carrico, authored a concurring opinion that cautioned against reading the majority's holding too broadly. The court has since filled its two vacancies, with Justice Elizabeth McClanahan being sworn in on September 1, 2011, and Justice Cleo Powell taking the bench on October 21, 2011. Thus, it is likely that these two new Justices, who were not part of the original decision, will participate in the rehearing.
The original AES decision was considered a major victory for insurers, who undoubtedly will follow the rehearing proceedings closely and hope that the Justices affirm the decision. Policyholders and their attorneys will be watching as well, hoping for a reversal or at least an affirmance that indicates the decision should be interpreted narrowly (as Justices Koontz and Carrico had suggested in their concurrence). In either event, it appears that all observers will need to wait a bit longer for the first judicial guidance regarding whether climate change-related tort claims are covered under CGL policies.