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Justice warns insurance case may paint courts ‘into a corner’

Insurance companies scored a win at the Supreme Court of Virginia with a coverage decision last month that could limit available insurance in some tort cases.

Revisiting an earlier opinion hailed by insurers, the court stuck to its position denying coverage to electric utilities blamed for greenhouse gases. But its opinion after rehearing used language calculated to limit the scope of the ruling.

Still, a concurring justice warned of a “day of reckoning” that may leave policy holders wondering what their coverage is worth.

Justice William C. Mims agreed with the outcome in the greenhouse case, but said the court’s precedents “may have painted us into a jurisprudential corner.”

Despite its unusual facts, the high court’s decision in AES Corp. v. Steadfast Ins. Co. (VLW 012-6-064) may raise questions for any lawyer alleging that a wrongful act was intentionally done.
The loss involved in AES is both distant and distinctive.

An Eskimo village on the Northwest coast of Alaska had to relocate because of devastating erosion blamed on global warming. The village of Kivalina sued a collection of utilities including electric companies controlled by Virginia-based AES Corporation. The lawsuit said the utilities’ emissions contributed to the greenhouse effect.

AES sought coverage under commercial general liability policies issued by Steadfast Insurance Company. Steadfast asked an Arlington judge to declare that it owed neither a defense nor liability coverage for the greenhouse gas claims. The Arlington judge ruled for Steadfast, finding the village’s complaint did not allege an “occurrence” as defined in the policies.

The Supreme Court used the familiar “eight corners” rule limiting coverage analysis to only the lawsuit and insurance policies at issue.

The Steadfast policies provided property damage coverage only for damage caused by an “occurrence” or “accident.”

The village’s complaint alleged AES intentionally released carbon dioxide into the atmosphere as a regular part of making electricity. The lawsuit also asserted there was a clear scientific consensus that global warming and arctic erosion were “natural and probable” consequences of such emissions.

Whether or not AES’s intentional act constituted negligence, as the village also alleged, the natural and probable consequence of that intentional act “is not an accident under Virginia law,” wrote Justice S. Bernard Goodwyn for the court.

“If 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 a CGL policy,” Goodwyn wrote.

After the Supreme Court’s initial September opinion, it reheard the case and made a few changes when it issued its April 20 opinion. The revised opinion included language seen by some as an attempt to limit the sweep of the decision:

“The dissimilarity between the allegations in the Kivalina complaint and those in most other tort actions for bodily injury of property damage is the relevant intentional or negligent act alleged in the complaint. Kivalina does not allege that AES’s intentional acts were done negligently,” Goodwyn wrote.

In a footnote, Goodwyn said, “In many instances the breach is the manner in which the act was done rather the doing of the act.”

The court reached the right result in this case, Mims said, but he warned the majority opinion’s restricted reasoning could spell trouble. Mims’ concurrence took issue with the “eight corners” approach.

“Our jurisprudence … is leading inexorably to a day of reckoning that may surprise many policy holders,” Mims wrote.

The court’s oft-used definitions of accident, Mims said, clash with the language used to test for a connection between the accident and damages in negligence cases.

In the insurance context, the court has defined accident as an event creating an effect that is “not the natural or probable consequence” of the action. But, Mims said, if an injury is not the “natural and probable consequence” of a breach of duty, the causation element of negligence is missing.

Under past decisions, Mims said, “allegations of negligence and allegations of accident must be mutually exclusive.” Since “accident” is synonymous with “occurrence” and the insurance policies are indistinguishable from other CGL policies, Mims suggests some policy holders may find unexpected holes in their coverage.

As if to reassure litigators, Mims said the clash is not likely to arise in garden variety negligence cases. In a footnote, he said the case involves a CGL policy and “the question of whether the words ‘occurrence’ and ‘accident’ exclude liability for negligent acts in other contexts, such as automobile or homeowners’ insurance policies, is not before the Court today.”

“Insurance companies have a tough call now,” said Charlottesville lawyer John E. Davidson who filed an amicus brief for the Virginia Trial Lawyers Association asking the court to rehear the case.

Davidson said some insurance companies may not want to play the claim denial card with big corporate policy holders, even when the court has dealt them that card with the AES decision. “Companies might not buy CGL coverage anymore,” Davidson said. “Insurance companies want good relations with their insureds,” he said.

If the high court was trying to reassure trial lawyers, the revised opinion may have helped.

Laura A. Foggan of Washington, who authored an amici brief on behalf of insurance industry associations, said she didn’t think the decision would jeopardize coverage on run-of-the-mill accidents. As for the environmental law aspects the of the case, the impact is minor, she said.

Richmond p.i. lawyer Roger T. Creager, said the AES ruling on intentional acts is “very unlikely to bleed over into our regular negligence practice.”

Creager said he used a word processing program to compare the September opinion with the April version. The revised opinion deleted some “problematic” sentences, and added language should “greatly limit” adverse effects, he said.

Nevertheless, Creager said plaintiffs’ lawyers need to be aware of the opinion and make sure their pleadings do not allege wrongful conduct was “intentionally done.”

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