By: Gina Foran and Bill Baron
The Hawai‘i Supreme Court ruled on October 7 that AIG has no duty to defend Aloha Petroleum against climate change lawsuits, because the pollution exclusions in AIG’s policies barred coverage for the suits.
Certain cities and counties in Hawaiʻi sued major oil companies, including Aloha, for their role in emitting greenhouse gases (“GHGs”) that contribute to global warming. Plaintiffs alleged that Aloha was on notice that its products caused catastrophic climate change because the industry had been advised in the 1960s through various channels, including the American Petroleum Institute (“API”), an oil industry group, of the effect that burning fossil fuels would have on the climate. API commissioned studies that predicted the earth’s temperatures would significantly increase around 2000 and cause catastrophic effects by the mid-21st century. Aloha was aware, or should have been aware, of these studies. Plaintiffs alleged that Aloha “had actual knowledge that their products were defective and dangerous,” and “acted with conscious disregard for the probable dangerous consequences of their conduct’s and products’ foreseeable impact upon the rights of others.” The District Court in the coverage action thus concluded that the counties alleged reckless conduct.
The District Court certified two questions to the Hawaiʻi Supreme Court: (1) whether an “accident” includes an insured’s reckless conduct; and (2) whether GHGs are “pollutants” within the meaning of pollution exclusions. The Court held that an “accident” did include reckless conduct, but ultimately concluded that AIG had no duty to defend the insured because the pollution exclusions in the policies unambiguously barred coverage for “pollutants” which include GHGs.
First, the policies covered “occurrences,” defined to include “accidents.” The court held that recklessness could be an “occurrence” because recklessness does not involve intent or expectation of injury, e.g., uncovered conduct. “Expected” injury is one practically certain to occur. The court also surveyed dictionary definitions of the word “accident,” including one defining the word to mean “an unfortunate event resulting especially from carelessness or ignorance” and concluded that the plain meaning of the word “accident” includes reckless conduct. Last, the court stated that interpreting an “accident” to include reckless conduct “honors the principle of fortuity” because “[a] reckless insured perceives the possibility of harm.” (Opinion at 36.)
In addressing that issue, the Court noted that its decision, and Hawaiʻi law, differs from the only prior State Supreme Court opinion addressing whether harm due to climate change comprises an “occurrence.” In AES Corp. v. Steadfast Ins. Co., 283 Va. 609, 618-619, 725 S.E.2d 532 (Va. 2012), the Virginia Supreme Court held that harm due to climate change was not an “accident” within the definition of “occurrence,” because under Virginia law intentional conduct is not an “accident,” regardless of whether the insured intended or expected to cause harm, unless an unforeseen intervening cause results in injury. California courts have reached the same conclusion. (Delgado v. Interinsurance Exchange (2009) 47 Cal.4th 302, 311; Collin v. American Empire Ins. Co. (1994) 21 Cal.App.4th 787, 810.)
By contrast, Aloha Petroleum held that under Hawaiʻi law, the insured’s intentional conduct may comprise an accident, if the insured acted recklessly and the resulting harm was neither expected nor reasonably foreseeable. Addressing AES, the Hawaiʻi court explained that “[o]ur decision differs because Virginia law and Hawaiʻi law differ.” (Opinion at 37.)
Though Aloha Petroleum held that reckless conduct can be an “occurrence,” the court ultimately concluded that the insurer had no duty to defend under its policies containing pollution exclusions. On that issue, the Court held that GHGs are “pollutants,” within the meaning of the pollution exclusion.
Before this case, the Hawaiʻi court had yet to determine which of two approaches should be utilized in interpreting pollution exclusions: (1) reading the exclusion’s language literally; or (2) confining the exclusion to only traditional environmental pollution. The court held that application of pollution exclusions should be limited to traditional environment pollution.
In applying that conclusion, the Court held that it is “common sense approach” that GHGs are “traditional environmental pollution[s],” because they cause damage due to their presence in the environment. As such, coverage was barred and Aloha was not entitled to a defense for the underlying actions under policies containing pollution exclusions. The court also rejected Aloha’s arguments that the exclusion was ambiguous and that a reasonable policyholder would have an expectation of pollution coverage. The Court returned the case to the federal District Court, for a determination of other issues under two policies that did not contain pollution exclusions. In short, Aloha Petroleum concluded that fossil fuels are inherently pollutants when used in their intended manner, and held that the pollution exclusion bars coverage for resulting climate change damage whether or not an insured intended that use of its products would harm the environment.