(Article from Insurance Law Alert, October 2024)
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Holding
The Hawaii Supreme Court ruled for the insurer in a coverage dispute involving underlying alleged harms for climate change. The court ruled that the reckless conduct alleged in the underlying suits constituted an “accident” and thus an “occurrence” within the meaning of the policies. However, the court also ruled greenhouse gases are “pollutants” and therefore that the pollution exclusion bars coverage for damages arising out of greenhouse gas emissions. Aloha Petroleum, Ltd. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2024 Haw. LEXIS 179 (Oct. 7, 2024).
Background
Suits by Hawaiian municipalities against Aloha and other fossil fuel companies alleged that Aloha’s former and current parent companies were on notice that their products would cause catastrophic climate change but concealed and/or denied that knowledge while increasing production of fossil fuels.
Aloha sought a declaration that AIG was obligated to defend the suits. AIG refused, arguing that Aloha’s conduct was intentional and was not a covered occurrence and, in any event, that coverage was barred by the policies’ pollution exclusions.
The federal district court ruled that the suits alleged reckless conduct—namely, that the defendants acted with “conscious disregard for the probable dangerous consequences of their conduct’s and products’ foreseeable impact on the rights of others.” The district court did not rule on coverage, however, and instead certified the following questions to the Hawaii Supreme Court:
- For an insurance policy defining a covered “occurrence” in part as an “accident,” can an “accident” include recklessness?
- For an “occurrence” insurance policy excluding coverage of “pollution” damages, are greenhouse gases “pollutants,” i.e., “gaseous” “irritant[s] or contaminant[s], including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”?
The Hawaii Supreme Court answered both questions in the affirmative.
Decision
The court held that “accidents” are both “unexpected and “not intended or practically certain from the insured’s standpoint.” In finding that an accident may involve reckless conduct, the court emphasized that recklessness requires an awareness of the risk of injury, but not a certainty. The court concluded that “[r]eckless conduct—an awareness of risk of harm—falls short of practical certainty.” The court stated: “When the risk crosses the line into ‘practical certainty,’ it is no longer an ‘accident.’”
In so holding, the court harmonized prior Hawaii precedent, which the district court had found to be in conflict. The Hawaii Supreme Court found no tension between its intended or “practical certainty” standard, previously articulated in Tri-S Corp. v. Western World Ins. Co., 135 P.2d 103 (Haw. 2006) and earlier precedent holding that an occurrence-based policy does not cover the “expected or reasonably foreseeable result of the insured’s own intentional acts or omissions.” See AIG Haw. Ins. Co., Inc. v. Est. of Caraang, 851 P.2d 321 (Haw. 1993).
The court explained: “We clarify what Caraang meant by ‘reasonably foreseeable.’ In that case’s context, Caraang referred to the reasonably foreseeable results of an insured’s intentionally harmful conduct. Carrang used ‘reasonably foreseeable” as another way of invoking the intentional conduct exception to coverage.” Having cabined Caraang’s reasonable foreseeability standard to apply to the insured’s intent alone, and not to the insured’s expectations, the court held that “when an insured perceives a risk of harm, its conduct is an ‘accident’ unless it intended to cause harm or expected harm with practical certainty.” Finding no such practical certainty here given the recklessness allegations in the underlying suits, the court concluded that the allegations against Aloha could constitute a covered occurrence.
With respect to the pollution exclusion, the court first addressed whether a pollution exclusion is limited to “traditional environmental pollution” or extends to non-traditional contexts, such as small-scale harm to an individual in a limited or enclosed capacity. Noting that jurisdictions are split on this issue, the court endorsed the former position, finding that what makes a substance a “pollutant” subject to a pollution exclusion is whether it causes damage to the environment.
Having reached that conclusion, the court held that greenhouse gases are clearly traditional environmental pollution. The court emphasized that “reducing [greenhouse gas] emissions is the most consequential environmental pollution issue our species has faced.” The court cited numerous government studies and state regulations identifying greenhouse gases as “pollutants” to buttress the “common sense” understanding that the term encompasses harmful gases emitted into the environment.
The court rejected Aloha’s argument that its products were used legally and in the ordinary course of business and that “contamination” should be limited to accidental scenarios, such as an oil spill. The court also stated that “[t]he legality, ordinariness, and intent of a product’s use is irrelevant” because “the operative question is whether a substance causes pollution to the environment.” As such, the court held that the exclusion was unambiguous and that any expectation of coverage on the part of Aloha for harm arising from greenhouse gas emissions was not reasonable.
Comments
The other state supreme court to address the “occurrence” issue in the context of climate change coverage litigation reached a different conclusion. In AES Corp. v. Steadfast Ins. Co., 725 S.E.2d 532 (Va. 2012), the Virginia Supreme Court held that the insured’s conduct could not be deemed “accidental” because climate change was the “natural or probable consequence” of that conduct. AES ruled that under Virginia law, an accident requires conduct that is “unexpected from the viewpoint of the insured”—precluding coverage for reasonably foreseeable harms, as AIG urged the court to find in Aloha Petroleum. However, the Hawaii Supreme Court distinguished AES based Hawaii law differing from Virginia law. In Hawaii, “practical certainty”—not mere reasonable foreseeability—is required for unintended consequences to fall outside the meaning of “accident.”
Aloha Petroleum leaves unresolved the consequences of the absence of a pollution exclusion from certain long-ago policies issued to Aloha Petroleum. The Hawaii Supreme Court noted that two policies from the 1980s lacked pollution exclusions, but left it for the district court to determine whether AIG must defend the underlying suits. Resolution of this question may turn, according to the court, on the extent of the damages allegations in the underlying suit that relate to the time period in which the policies lacking pollution exclusions were issued.