Law and Insurance

Court's Refusal To Analyze Plain Meaning of "Hostile-Fire" Exception In Pollution Exclusion Burns Insured

Noble Energy, Inc. v. Bituminous Casualty Co., #07-20354 (5th Cir. June 2, 2008) see Noble Energy Decision.

In interpreting insurance policies, courts are supposed to give effect to the plain meaning of the contract language without inquiring into broader considerations of the design or purpose of the provision.  In this case, the court whip-sawed the insured by first refusing to consider the insured's "reasonable expectations" of the scope of an absolute pollution exclusion (because courts just give effect to the language as written), but then artificially limiting  the "hostile-fire" exception by what it was designed to cover, not what it actually said.

Noble Energy was an additional insured under the policy of a contractor hired to dispose of "Basic Sediment & Water" (let's call it gunk) from Noble's storage tanks.  The contractor trucked the gunk to waste facilities, where one day a truck caught fire and exploded when fumes from the gunk seeped into the idling engine.  Death and destruction resulted, and ensuing litigation eventually narrowed to the insurer's refusal to cover Noble's damages due to the absolute pollution exclusion in the policy. 

Pollution exclusions currently enjoy very broad application under Texas law eliminating coverage for all sorts of non-pollution accidents such as tipsy falls from scaffolding due to paint fumes and carbon monoxide deaths caused by careless roofers that covered the chimney with their tool box.  Noble argued that the pollution exclusion was not intended to exclude this type of mishap, but the court, following the Texas Supreme Court's lead, stuck to the plain meaning of the policy.  The fumes from the gunk were a "pollutant," out of which arose the event.

But the pollution exclusion had a hostile-fire exception which states:

[The pollution exclusion clause] does not apply to bodily injury or property damage caused by heat, smoke or fumes from a hostile fire.  As used in the exclusion, a hostile fire means one which becomes uncontrollable, or breaks out from where it was intended to be.

Noble argued that the deaths and injuries were caused by the heat of a hostile fire.  Rather than consider this argument (I can certainly see a counter argument that "heat" and "fire" are not the same thing, and the deaths were cause by explosion, not heat -- but that wasn't raised).  Instead, the court looked to a California federal court decision to infer that the hostile-fire exception applies only if a pre-existing fire causes the pollution.  [Emphasis in original]

But that is not what the policy says.  The court's interpretation is a reasonable inference from the language, but so is Noble's.  I admit, I find the insurer's interpretation more reasonable than Noble's.  But the rules of policy interpretation require a court to give effect to the insured's reasonable interpretation of an exclusion, even if the insurer's interpretation is more reasonable. 

The court should have analyzed Noble's interpretation to determine if it could fit the plain meaning of the exception.  If so, the exception should have applied. Instead, the court jumped to a conclusion, relying on a non-controlling case, that hostile-fire exceptions only apply when the fire causes the pollution.  That is probably what the drafters (insurers) had in mind, but they didn't necessarily draft it that narrowly. 

Pollution Exclusion in D&O Insurance Policy Should Not Completely Bar Shareholder Securities Claim, Says Canadian Court

Boliden Ltd. vs Liberty Mutual Ins. Co., 85 O.R. (3d) 492 (Ontario Superior Court of Justice, April 1, 2008) see Boliden Decision

Several years ago, a federal appeals court sent shivers through many American boardrooms by ruling that a securities lawsuit, brought derivatively by shareholders over alleged misrepresentations in SEC filings, was not covered due to a pollution exclusion in a Directors & Officers (D&O) insurance policy.  It seems that the alleged misrepresentations concerned management's failure to report certain fines and costs for a subsidiary's mishandling of waste (the company was in the waste-hauling business), and the exclusion applied to any claims "arising out of pollution [including waste])."  See National Union Fire Ins.Co. v. U.S. Liquids, Inc., 88 Fed. Appx. 725 (5th Cir. 2004).

U.S. Liquids never expected its D&O insurer to cover pollution lawsuits or clean up costs, but it was shocked to learn that it had no coverage for shareholder securities actions simply because the remote subject of alleged SEC misstatements related to operations that related to pollutants.  Foul!

In a case of first impression in Canada, the Boliden court reached the opposite conclusion, at least in part.  The facts are substantially similar to those in U.S. Liquids.  A Spanish subsidiary owned a mine which flooded large tracts of land with contaminated tailings after a dam failed.  Boliden's shares plummeted, and shareholders sued the company alleging misrepresentations in a Prospectus issued a year before the disaster in an initial public offering.  The D&O insurer refused to cover the claims relying on the pollution exclusion ("[Insurer] shall not be liable under this policy to make any payment for loss respecting a claim . . . for or in respect of pollution loss.")

Boliden argued that the loss in question was the drop in value of its shares, not the damage to land and rivers in Spain.  Insurer said the loss in value of shares was caused by the discharge of pollutants and so fell within the exclusion.  Liberty also pointed to U.S. Liquids and other American cases.  However, the Canadian court noted that the American cases applied very broad "but for" causation, which Canadian courts do not accept.

Finding little helpful guidance from Canadian cases discussing causal language (such as "arising out of," "attributable to," and resulting from"), the Court made its own analysis and determined that some of the allegations did not sufficiently involve pollution, though some did.  For reasons not fully explained, the court held that allegations regarding construction defects and poor maintenance of the dam were not excluded, but other allegations were excluded.  The policy contained an allocation clause requiring Liberty to pay 80% of the defense costs where claims involved both covered and uncovered claims.  Accordingly, the court required Liberty to cover 80% of the loss.

Although the result is a victory for the policyholder, the holding may offer little useful guidance if the issue arises again in Canadian jurisprudence.  The court's analysis is very fact-specific.  The best advice to policyholders is to get enhancements to the pollution exclusion before experiencing a loss.  Most D&O insurers are willing to carve out from the exclusion shareholder derivative actions or claims against individual insureds.  The D&O market is still soft, and underwriters are generally in an accommodating frame of mind.  The best way to fix questionable policy language is before a claim is asserted.

Another Global-Warming Lawsuit Brought Against Private Companies

The New York Times reports today that an Alaskan village has filed a nuisance suit against 5 oil companies, 14 electric utilities, and the country's largest coal company, seeking to hold these defendants liable for the impact of global warming forcing the village to relocate because of flooding.  See Flooded Village Files Suit, Citing Corporate Link to Climate Change. 

This is the latest in the ever-growing number of lawsuits brought against private industries under the rubric of "global warming litigation" (perhaps better known to some lawyers as the Klondike).  So far, courts have been shy about entertaining legal theories allowing recovery in these types of actions (e.g., in Connecticut v. American Electric Power, California v. General Motors Corp., and Comer v. Murphy Oil U.S.A., the plaintiffs' cases are being dismissed either as political questions or based on tenuous causation evidence  see Global Warming Litigation Heating Up for discussion of these cases).

I believe, however, that it is too early to tell whether the courts will eventually recognize a workable (or even unworkable) legal basis for allocating liability for damage that can be tied to climate change.  For example, asbestos plaintiffs watched throughout the 1960's while their cases were dismissed before the Fifth Circuit held in Borel v. Fi breboard Paper Prods. Corp., 493 F.2d 1076 (5th Cir. 1973) that asbestos manufacturers could be held more or less strictly liable despite intermediate sellers or product warnings. 

Although Kivalina, the plaintiff Inupiat village may find it difficult to obtain judgment against Exxon Mobil, Corporation, American Electric Power, Conoco Phillips Company and others, it may be a matter of time before a court salutes at one or another aspect of the claims asserted.

What appears new in this case is the allegation of conspiracy, that the defendants sought to mislead the public about the science of global warming "by convincing the public at large and the victims of global warming that the process is not man-made when in fact it is." 

Whatever happens in this suit, we can expect to see more litigation of this kind.

California Court Says Settlements Are not "Damages" Without An Adjudication

Aerojet-General Corp. v. Commercial Union Ins. Co., #CO51124 (Cal. App., Sept. 13, 2007)

This case should serve as a warning to policyholders to read their policies closely (and with their legal hats on).  "Damages" was held to mean "legally obligated to pay or by final judgment be adjudged to pay," and would not include settlements reached out of court, even if the court approved the settlements.  Thus, the policyholder lost its right to recover $175 million, otherwise covered, because it settled rather than submit to actual trial.

Aerojet sought indemnification from several of its excess liability insurers for the cost of remediating groundwater contamination as a result of a number of lawsuits filed in 2000 and 2001.  If the insurers asserted coverage defenses over the merits of the claims, the case doesn't mention them.  It appears that the excess policies were in effect before 1970 and thus, before pollution exclusions.  Aerojet kept the excess carriers informed of the settlement talks but apparently did not obtain their consent to settlements reached with the claimants.

The California Supreme Court has already held in Certain Underwriters at Lloyd's of London v. Superior Court, 16 P.3d 94 (Cal. 2001) [Powerine I] that the term "damages" operated to limit the insurer's obligation to indemnify only to money ordered by a court and would not include environmental cleanup costs required by an administrative agency.  The California Supreme Court in a later opinion in the Powerine case [Powerine II], found that policy language requiring the insurer to indemnify "expenses" as part of the definition of "ultimate net loss" was enough to require an excess insurer to pay.

Unfortunately for Aerojet, its polices did not include the "ultimate net loss" definition or define "damages" in any way that would expand Powerine I's narrow interpretation.  Therefore, the excess insurers were not required to indemnify the (otherwise covered) settlement payments.

While Aerojet's policies were written more than 50 years ago and so contained standard language no longer in use, the lesson to be learned is still valid.  Policyholders should read their policies and have coverage counsel review the language in light of current legal trends.

GAO Report Faults Government Insurance Programs for Ignoring Increased Exposure From Global Warming

A report by the Government Accountability Office to the Senate Homeland Security and Governmental Affairs Committee said last week that federal insurance programs aimed at flood and crop risks are not adequately preparing for anticipated increases in losses from global warming.  For example, in 2005 the National Flood Insurance Program faced losses of approximately $875 billion, compared with $207 billion in 1980, the report said.  The Federal Crop Insurance Corporation's exposure increased to $44 billion, from $1.7 billion.  Insurance payments in these two programs could reach $919 billion this year, compared with $209 billion in 1980.  The report noted that private insurers now consider models and studies aimed at predicting increased losses from droughts, hurricanes, flooding and other factors of climate change.  The GAO recommended more research to help Congress keep a lid on "an emerging high-risk area with significant implications" for the budget.  See AP story by John Heilprin at  Senate Report for more details.

Estimates of Total US Insurance Exposure for Asbestos and Environmental Losses Remains Over $120 Billion

According to a recently released special report from A.M. Best Co., the U.S. property/casualty industry cut in half its unfunded asbestos liabilities during 2005 while continuing to whittle down the overall environmental exposures.  This estimate is on track with A.M. Best's original estimate of ultimate industry losses of $65 billion and $56 billion for asbestos and environmental, respectively.

A.M. Best's year-end 2005 estimate of unfunded asbestos and environmental liabilities for the industry is about $4 billion for asbestos and $22 billion for environmental, for a total funding deficit of $26 billion. Estimated incurred-to-date losses have reached nearly $95 billion, of which $61 billion relates to asbestos exposures. This report and the associated spreadsheet file are available at www.bestweek.com. They are free to BestWeek subscribers.

Copyright 2007 A.M. Best Company, Inc.

Supreme Court Ruling on Greenhouse Gas Regulation Could Have Direct Impact on D&O and Environmental Insurance

The U.S. Supreme Court's remarkable decision in Massachusetts v. EPA (see text of opinion) requiring the EPA to reconsider its decision not to regulate greenhouse gases has ramifications beyond environmental regulation.  By holding that carbon dioxide may be a "pollutant" and so may be regulated under the Clean Air Act, insurers are armed with a powerful argument that corporate losses and liabilities that arise from the effects of global warming are excluded under insurance policies that contain a pollution exclusion.  These might include general liability policies, property policies, directors and officers ("D&O")liability policies, and other types of liability insurance.  Each of these is likely to contain an exclusion for loss or damage arising from an actual or alleged discharge, dispersal, release, or escape of "pollutants."

The area of greatest concern to corporate policyholders is probably D&O insurance. Many companies are just now beginning to try to access risks to their businesses from the effects of global warming.  The Supreme Court discussed the scientific data predicting imminent rises of sea levels.  It is easy to foresee a slurry of shareholder class action lawsuits against companies adversely impacted by global warming alleging management's failure to adequately anticipate and prepare for these changes.  Because greenhouse gases are "pollutants" according to the Supreme Court, arguably, these shareholder actions could be excluded because the alleged losses arise, even if indirectly, from the release of greenhouse gases. 

For a thoughtful discussion of this Supreme Court decision, see law and environment.