As reported in The Climate Report, Fall 2011, the Virginia Supreme Court unanimously held in September 2011 that an insurer did not have a duty to defend a commercial general liability policyholder accused of contributing to the effects of climate change. The AES Corporation v. Steadfast Insurance Co., 715 S.E.2d 28 (Va. 2011). The dispute at issue stemmed from AES Corporation being named as a defendant in Native Village of Kivalina v. Exxon Mobil Corp., in which Kivalina, a coastal Alaskan village, sued AES and 23 other oil, gas, and utility companies for allegedly damaging the village by causing global warming through emission of greenhouse gases.

AES requested that Steadfast Insurance Company provide a defense and insurance coverage for the Kivalina claim under AES's commercial general liability ("CGL") policies. Steadfast provided AES a defense under a reservation of rights and later filed a separate action seeking a declaratory judgment that AES was not entitled to coverage or defense.

The Virginia Supreme Court's September 16, 2011 decision agreed with Steadfast that the allegations in the Kivalina complaint were insufficient to trigger coverage under the relevant CGL policies. The court noted that, under the policies, the duty to defend applied only to suits claiming "property damages" caused by an "occurrence." Under Virginia law, "occurrence" is synonymous with "accident." Because the Kivalina complaint alleged that the "damages it sustained were the natural and probable consequences of AES's intentional emissions," the court held that there was no allegation of an "accident." Therefore, Steadfast had no duty to defend or indemnify AES.

Following that ruling, AES filed a petition for rehearing. The petition was granted, and the court set aside and withdrew its September 16 opinion.

On April 20, 2012, the Virginia Supreme Court again decided that Steadfast owed AES no coverage with respect to the Kivalina complaint. In an opinion that substantially mirrored its prior opinion, the court held that "[i]f an insured knew or should have known that certain results were the natural or probable consequences of intentional acts or omissions, there is no 'occurrence' within the meaning of [the] policy." The court again found that the Kivalina complaint did not allege an "accident," even if AES were actually ignorant of the effect of its actions and/or did not intend for damages to occur.

In a concurring opinion, Justice Mims cautioned that the opinion's reasoning could not be limited to the four corners of the policies at issue or the specific allegations of the complaint. He noted that under Virginia case law, a dichotomy exists between allegations of an "accident" and of "negligence"; to prevail on an action for negligence, a plaintiff must prove that the injury that occurred was reasonably foreseeable, or the "natural and probable consequence" of the tortious breach. But, under the court's reasoning, if the alleged damage was the "natural and probable consequence" of an injurious action, there can be no insurance coverage. Justice Mims found no rationale to distinguish the policies at issue from other CGL policies. Thus, he noted that the decision was correct under Virginia precedents but warned that the Supreme Court's jurisprudence is "leading inexorably to a day of reckoning that may surprise many policy holders."

The consequences of this decision may be far-reaching. Although the court made some effort to confine its discussion to the particular nature of the claims in the Kivalina complaint, Justice Mims may be correct in finding little basis for limiting the underlying reasoning to this case. Thus, the availability of insurance coverage under CGL policies for negligence-based claims is now an open question in Virginia. In the climate change arena, the decision will undoubtedly be cited as precedent in insurance cases, although other jurisdictions could adopt different interpretations based on their own state laws.

Further, another of Steadfast's arguments may have recently received additional support. As an alternative to its contention regarding the interpretation of "occurrence," Steadfast had also argued that the claims in the Kivalina complaint fell within the scope of the pollution exclusion in AES's CGL policies. The Virginia Supreme Court did not reach the pollution exclusion argument. However, as discussed elsewhere in this edition of The Climate Report, the U.S. Court of Appeals for the District of Columbia Circuit upheld a set of greenhouse gas regulations promulgated by the U.S. Environmental Protection Agency under authority of the Clean Air Act on June 26, 2012. Some practitioners anticipate that the insurance industry will now point to that decision to bolster arguments that greenhouse gases that contribute to global warming are "pollutants" for purposes of applying pollution exclusions in CGL policies.