Aloha Petroleum Ltd v National Union Fire Insurance et al: Are Insurers off the hook for climate change litigation?

Clyde & Co’s Bermuda Form team explores the recent opinion of the Hawai’i Supreme Court in Aloha Petroleum v National Union Fire Insurance Co. regarding occurrence/accident and pollution in a duty to defend case in US climate change litigation

Introduction

The climate change litigation landscape is an ever-evolving ecosystem of claims attempting to hold fossil fuel and energy companies responsible for contributions to climate change. Climate change suits in the United States are finally progressing through state courts, after a long tug-of-war between state and federal jurisdiction, so it was only a matter of time before insurance disputes began and there was an opinion regarding an insurance company’s duty to defend the policyholder defendants in such suits, usually large energy and oil companies.

In answering two questions posed to it by the Hawai’i District Court, the recent opinion of the Hawai’i Supreme Court (“HSC”) in Aloha Petroleum Ltd v National Union Fire Insurance Company of Pittsburgh et al¹ was that Aloha Petroleum (“Aloha”) could not reasonably expect coverage from AIG as greenhouse gases fall under the policy’s definition of a pollutant. In 2012, the Virginia Supreme Court in AES Corporation v Steadfast Insurance Co² had also found that insurers did not have a duty to defend the policyholder against climate change suits, but that ruling was for different reasons and was distinguished by the justices in Aloha Petroleum. The ripple effects of this discrepancy are considered below.

Background

Two climate change lawsuits in Hawai’i were brought against Aloha, alongside other major oil and gas companies such as Exxon, Chevron and BP, in March³ and October⁴ 2020. It was alleged in both lawsuits that the defendant oil companies failed to warn consumers of the hazards of using fossil fuels and were responsible for the harmful effects of climate change caused by greenhouse gas emissions.

Aloha tendered defence of the suits to two subsidiaries of AIG – National Union Fire Insurance Company of Pittsburgh, PA and American Home Assurance Co (the “AIG Insurers”). When that defence was not forthcoming, in August 2022 Aloha sued its insurers, asserting that coverage for defence of the climate change suits was available under a series of commercial general liability (“CGL”) policies.

The AIG Insurers argued that, as the climate change suits specifically alleged that the harm caused by greenhouse gas emissions (“GHGs”) was “the foreseeable result of Aloha’s intentional emission of GHGs”, any loss could not constitute an “accident”. As such, it did not fall under the definition of an “occurrence” under the policies. Furthermore, AIG Insurers argued that GHGs were pollutants, so coverage was excluded under the policy’s pollution exclusion.

US District Judge Otake, before whom the case was brought in the United States District Court for Hawai’i, put two questions to the HSC in order to assist her in ruling on the parties’ motions for summary judgment:

1. For an insurance policy defining a covered “occurrence” in part as an “accident”, can an “accident” include recklessness?
2. 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”?

Is Reckless Behaviour an “Accident”?

The AIG policies in question defined an “occurrence” as an “accident”, so the main point of contention fell to whether precedent case law in the HSC determined if recklessness, or reckless behaviour, could constitute an “accident”. Aloha alleged that coverage was available under AIG’s CGL policies for reckless behaviour.

Quoting the drafting history of a standard CGL policy, Aloha argued that historically, a standard “occurrence” definition described an event which was not “expected or intended from the standpoint of the insured”. The HSC agreed with this point and followed the guidance of Tri-S⁵ to find 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”. Thus, recklessness did not involve any intent or expectation of injury and was thus a covered occurrence under the policy.

Countering a seeming discrepancy with Caraang,⁶ which was raised by the AIG Insurers, the HSC clarified that the use of the “expected or reasonably foreseeable” test to exclude coverage for an alleged occurrence only applied to “foreseeable results of an insured’s intentionally harmful conduct”, essentially “invoking the intentional conduct exception to coverage”, rather than an insured’s awareness of risk. Given that Tri-S defined an expected injury “as one “practically certain” to occur”, then where there is no harmful intent, whether the occurrence is an accident “hinges on the certainty of the risk”.

For the court, “the plain meaning of ‘accident’ supports the idea that an ‘accident includes reckless conduct” as “interpreting an ‘accident’ to include reckless conduct honors the principle of fortuity. The reckless insured, by definition, takes risk”. On this point, the HSC agreed with Aloha in that losses caused by recklessness would be considered an accident, and therefore could be an occurrence.

This decision appears to be in stark contrast to the findings of the Virginia Supreme Court in AES v Steadfast, but the HSC justified the difference by stating that Tri-S required the loss to be “practically certain” to be an expected injury, or an intentionally harmful act, to fall outside the bounds of an “occurrence”. Under Virginian law, per AES, climate change was a “natural or probable consequence” of the insured’s voluntary act, so it was not “unexpected from the viewpoint of the insured” and could not constitute an “accident”, even if it was reckless.

The Pollution Exclusion: Are Greenhouse Gases “Pollutants”?

Setting aside state-specific legal standards of “accidents”, the court provided the AIG Insurers with a solution to resolving the ‘duty to defend’ dilemma: reliance on the pollution exclusion.

Aloha argued that, as the CGL policies had defined ‘pollutants’ as “any […] irritant or contaminant”, GHGs were neither irritants (which Aloha claimed to apply only in personal injury claims) nor contaminants (i.e. liquids damaging counties’ properties). Ultimately, Aloha alleged that the policy “should be read in the appropriate context” of “traditional environmental pollution by hazardous wastes”, once again turning for support to the drafting history of the typical CGL policy and arguing the exclusion was meant to cover environmental clean-up costs, not liability from finished products.

The HSC was not convinced by Aloha’s arguments. The justices supported the district court’s definition of “traditional environmental pollution” to include GHGs. Rejecting Aloha’s argument that pollution referred to hazardous waste, the court made the point that “many products – pesticides, aerosols, non-reef-safe sunscreen, and fossil fuels – are inherently polluting when used in their intended way”.

Painting a parallel between, on the one hand, carbon dioxide and, on the other, the sulphur dioxide produced from the burning of coal, the HSC made the point that federal law regulates sulphur emissions and “no one questions that sulfur dioxide from coal is a pollutant”. Ultimately, a product’s status as a pollutant was rooted in the damage it caused to the environment due to its presence. As “gasoline may […] cause environmental contamination, because it spills and needs to be cleaned up or because it is burned and contaminates the atmosphere […] a reasonable insured would understand the spilled or burned gasoline as pollution”.

Conclusion

The decision of the HSC has not marked the end of Aloha, as the case is now back before the Hawai’i District Court, which has given directions as to the progress of the case. Nonetheless, this is likely to be the first of many coverage litigation suits arising from the multitude of climate suits populating the US litigation scene. The real battleground will be on whether the allegations in climate change suits could constitute reckless behaviour – which is a covered occurrence – even if policyholders had knowledge of a given risk. The outcome, as demonstrated in Aloha, may depend on which state’s law applies and the specific terms of the policies in issue (including the existence and terms of any pollution exclusion) and it seems that we are likely to see varying results across state lines on an insurers’ duty to defend policyholders from underlying climate change suits.

Where reckless behaviour constitutes an “accident” under state law, the wording of a CGL policy’s pollution exclusion becomes imperative, especially as some older CGL policies do not contain pollution exclusions. The “traditional environmental pollution” wording is broad, but the US Supreme Court had also found GHGs to be ‘pollutants’ under the Clean Air Act in 2007,⁷ and it may be surmised that this interpretation will be upheld in state courts.

While AES v Steadfast will doubtless continue to be cited by insurers in arguments to deny coverage in climate change litigation, on the basis that the policyholder energy majors were aware of the environmental harm caused by the burning of fossil fuels, it is Aloha’s interpretation of the pollution exclusion that will be cited by insurers looking to exclude coverage for climate change claims, it now being clear – if it was ever in doubt – that GHGs are pollutants. It is clear, however, that much will turn on the exact wording of any pollution exclusion.

1. Aloha Petroleum Ltd v National Union Fire Insurance Company of Pittsburgh et al SCCQ-23-0000515
2, The AES Corporation v Steadfast Insurance Co Record No. 100764.
3. City & County of Honolulu v Sunoco LP et al 23-947
4. County of Maui v Sunoco LP et al 2CCV-20-0000283
5. Tri-S Corporation v Western World Insurance Co 135 P.3d 82
6. AIG Hawai’i Insurance Company Inc v Estate of Caraang 74 Haw. 620, 851 P.2d 321 (Haw 1993)
7. Massachusetts v. EPA 549 U.S. 497, 504, 127 S. Ct. 1438, 1446 (2007)