Climate Change and Insurance: Learn From MTBE, Asbestos

Zelle LLP

Zelle  LLP

Insurance Law360
April 2, 2019

This is the fourth of five articles addressing climate change lawsuits in the context of (re)insurance.

This article explores the ways in which (re)insurers, in dealing with an emerging body of climate change lawsuits, may draw on lessons learned from the industry’s experience with other categories of liability claims that historically have had a significant impact on the industry, including methyl tertiary butyl ether and asbestos claims.

Over the years, liability insurers have consistently faced new, emerging risks and novel litigation. At one time or another, claims arising out of environmental pollution, asbestos, silica, tobacco and MTBE were the new kids on the block. As these types of claims proliferated — and plaintiffs’ lawyers became more creative — insurers were forced to navigate the changing legal landscape.

While climate change litigation is a relatively nascent development, these suits are likely to present many of the same issues and challenges presented by prior coverage litigation. As with asbestos claims, climate change claims present the possibility of a huge pool of potential plaintiffs — and defendants/policyholders. These suits will be litigated in numerous U.S. jurisdictions, and across the world.

Like MTBE claims, climate change claims are likely to be directed at oil and gas companies (among others). Like both asbestos and MTBE claims, climate change litigation is likely to involve the allocation of liability for seemingly indivisible damage. As was the case in underlying MTBE litigation, plaintiffs are likely to advocate for the application of novel causation theories, including the “market share” theory, which gained traction in some jurisdictions in the MTBE context.

Fortunately, insurers are not starting from scratch when it comes to responding to climate change claims. For starters, a significant body of case law has been developed in the context of other claims that will no doubt instruct how climate change claims are handled. For instance, in most U.S. jurisdictions, there is guiding authority regarding what constitutes “property damage” and “bodily injury” under a commercial general liability policy, and relatedly, at what point (if any) property damage or bodily injury triggers the coverage provided by a CGL policy. There is also substantial case law addressing the scope of pollution exclusions and fortuity-related coverage defenses, including the “known loss” or “loss-in-progress” doctrine and/or “expected or intended” exclusions.

MTBE Claims Paved the Way for Nontraditional Causation Theories

It seems like just yesterday when MTBE lawsuits were a significant emerging risk facing CGL carriers. Methyl tertiary butyl ether, more commonly known as MTBE, is an oxygenate that was used as a gasoline additive beginning in the late 1970s. MTBE was widely used in the early-to-mid 1990s in connection with the implementation of oxygenated gasoline programs following the passage of the Clean Air Act Amendments in 1990. While gasoline oxygenates were aimed at reducing air pollution, MTBE’s high level of solubility in water and its persistence when released into the environment — typically through leaking underground storage tanks — posed a threat to public and private water supplies.

Given the staggering costs of removing MTBE from water supplies, many states and municipalities throughout the United States sought redress through the court system. Hundreds of MTBE suits were brought against oil and gas companies and other entities, and in many instances, corporate defendants sought insurance coverage from their liability carriers. In coverage disputes arising out of MTBE suits, key issues have included: (1) whether there was an “occurrence” triggering coverage, and if so what policies responded to the alleged damage and (2) the application of pollution exclusions.

One challenge that plaintiffs faced in the context of underlying MTBE litigation was establishing a causal link between the MTBE-containing gasoline of a specific defendant oil or gas company and the MTBE contamination at issue. That is largely because MTBE was widely used in the industry, and once the gasoline produced by various companies became commingled (as if often did), it was difficult to determine whose MTBE-containing gasoline caused the alleged environmental damage. In order to establish causation, plaintiffs advanced a number of nontraditional causation theories, including the so-called “market share” theory, and variations thereof.

Given that climate change litigation, like MTBE litigation (and in some cases, asbestos litigation), could involve the apportionment of liability for indivisible harm, it is likely that plaintiffs will advance novel causation theories in the context of climate change litigation. To the extent these theories gain traction, it could have significant implications for (re)insurers in terms of increasing (re)insurers’ potential exposure to such suits. If more suits survive early dispositive motions as a result of more lenient causation burdens for plaintiffs, this will prolong litigation and may prolong an insurer’s duty to defend, if triggered, making cases more costly to defend. Moreover, defending against novel causation theories can be a labor-intensive proposition, particularly where a court shifts the causation burden to defendants.

No Need to Reinvent the Wheel

In facing climate change claims, there is no reason for (re)insurers to reinvent the wheel. The claims of yesteryear — and the body of case law that has arisen out of those claims — provide valuable guidance.

Trigger of Coverage

As in both MTBE and asbestos coverage litigation, the issue of whether and when CGL policies have been triggered is likely to be front-and-center in climate change claim disputes. In the case of alleged harm that is latent, determining when “property damage” or “bodily injury” takes place can be a complicated undertaking. Historically, trigger of coverage has been a significant issue in the context of both asbestos and environmental contamination coverage disputes. Jurisdictions have approached this dilemma in a number of ways, adopting a variety of trigger theories, including “injury in fact,” “exposure,” and “manifestation,” among others.

While it remains to be seen whether climate change lawsuits will allege latent harm, if they do, there is a significant body of case law that has developed in the asbestos and environmental contamination contexts. Depending upon the jurisdiction, it is possible that climate change lawsuits could trigger historical occurrence-based CGL policies, increasing potential exposure for (re)insurance companies.

Expected/Intended Defense

Liability policies cover fortuitous accidents only and typically exclude coverage when the bodily injury and/or property damage is “expected or intended” or is known to the insured at the time the loss is reported. This has been a key issue in both MTBE coverage litigation and asbestos litigation and will likely arise in climate change coverage litigation. In MTBE litigation, for example, insurers argued that policies did not afford coverage because insured gasoline producers knew that MTBE was likely to contaminate ground water but added it to their gasoline anyway. Climate change plaintiffs are likely to allege that defendant oil and gas companies have known for years that gases from fossil fuel products cause climate warming and rising sea levels.

(Re)insurers should familiarize themselves with the applicable case law relating to the construction of “occurrence” definitions and/or “expected or intended” exclusions. Notably, in most jurisdictions, courts focus on whether the insured expected or intended the harmful result, not whether the act leading to the result was intentional. There is also an issue concerning whether the insured’s intent is to be viewed from a subjective versus objective standpoint.

Application of Pollution Exclusions and the Product Liability Exception

As the vast majority of CGL policies contain pollution exclusions that preclude or limit coverage for bodily injury or property damage arising out the release or dispersal of “pollutants,” the application of a pollution exclusion is likely to play an important role in evaluating coverage for climate change claims, as it does in MTBE-related claims. Among the issues to be addressed are whether greenhouse gases, including carbon dioxide, constitute “pollutants” within the meaning of a CGL policy.

In the context of long-tail environmental claims, U.S. jurisdictions have developed a significant body of case law addressing the application of various pollution exclusions. It is likely that this jurisprudence will provide significant guidance for American courts addressing coverage for climate change litigation. While historical iterations of the pollution exclusion, including the so-called “sudden and accidental” pollution exclusion, are no longer in use today, that does not necessarily mean that cases addressing the scope of such exclusions will not be relevant in determining coverage for long-tail climate change claims. As noted above, historical occurrence-based coverage may be triggered.

It should be noted that some pollution exclusions contain an exception that provides limited coverage for property damage or bodily injury that arises from the use of the insured’s products by a third party after the products have left the insured’s possession. In the context of certain MTBE claims, insured oil and gasoline companies have argued that the products liability exception provides coverage where the release or dispersal of MTBE-containing gasoline took place when the gasoline was already in the hands of third parties (e.g., where an insured sold gasoline with MTBE to retail sellers or other third parties who then stored the gasoline in tanks which later leaked into the environment).

It is likely that similar arguments will be employed by fossil fuel producers sued for climate change damage where greenhouse gases are emitted in the combustion process by end users (automobile drivers, for example) and other third parties, and not the producers themselves. A key issue will likely be what constitutes “use” within the meaning of these exclusions/exceptions.

Liability insurers’ past experience will be instructive as insurers face a new wave of litigation: climate change litigation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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