A decision which could reverberate across the US has determined the responsibility of an insurer to fund a policyholder’s defence of a climate-change lawsuit.
Earlier this week the Hawaii Supreme Court issued a pivotal decision in Aloha Petroleum v National Union Fire Insurance concerning the interpretation of insurance coverage in climate-related lawsuits. The case arose from a dispute over whether two subsidiaries of AIG, the insurers of Aloha Petroleum, were bound to defend the company against lawsuits filed by the counties of Honolulu and Maui, which alleged that Aloha Petroleum contributed to climate change, which in turn resulted in substantial environmental damage across the Hawaiian islands.
TWO CENTRAL QUESTIONS
The central issue revolved around two certified questions posed by the US District Court for the District of Hawaii. First, the court needed to determine whether ‘recklessness’ could be considered an ‘accident’ under insurance policies that define a covered event as an ‘accident’. Second, the court was asked to clarify whether greenhouse gases fall within the pollution exclusions common in occurrence-based insurance policies, which typically exclude coverage for damage caused by pollutants.
Aloha Petroleum argued that the lawsuits did not allege intentional harm but rather recklessness or negligence, which should be covered under its insurance policy. The company pointed to Hawaii case law, specifically the decision in Tri-S Corp v Western World Insurance [2006], which had broadened the definition of ‘accident’ to include reckless actions. Aloha contended that Tri-S should apply here, making AIG responsible for providing legal defence in the climate change lawsuits. Aloha also argued that greenhouse gases, unlike traditional pollutants such as industrial chemicals, should not be classified as pollutants under the insurance policy’s pollution exclusion clause.
AIG countered that the pollution exclusions in its policies, which bar coverage for damages resulting from the release of pollutants, applied to greenhouse gases. The insurance giant also claimed that Aloha’s actions were not accidental, as the company was well aware of the environmental risks associated with its operations and products, making damage to the climate entirely foreseeable. This, AIG contended, disqualified the claims from being considered as covered ‘occurrences’ under the policy.
GREENHOUSE GASES ARE POLLUTANTS
The bench, comprising Hawaii Chief Justice Mark Recktenwald, and Justices Sabrina McKenna, Todd Eddins, Vladimir Devens and Lisa Ginoza, rejected Aloha’s argument on both counts. The court ruled that recklessness could be classified as an ‘accident’ for the purposes of insurance coverage, aligning with AIG’s interpretation. Moreover, the court found that greenhouse gases do indeed fall under the pollution exclusions in the insurance policies, categorising them as gaseous contaminants similar to pollutants like smoke and soot. The ruling effectively exempted AIG from covering the legal defence costs associated with the climate lawsuits filed by the counties. Justice Eddins wrote: “Greenhouse gases, including carbon dioxide, produce ‘traditional’ environmental pollution. Aloha’s gasoline produces GHGs. These gases accumulate in the atmosphere and trap heat. Because they are released into the atmosphere and cause harm due to their presence in the atmosphere, GHGs are pollutants.”
“This court respects climate science,” added the judge, pithily.
A SIGNIFICANT DECISION
This is a hugely important ruling not only for Aloha Petroleum but also for the broader energy and insurance industries. It reinforces the challenges companies face when seeking insurance coverage for liabilities arising from climate-related damages and, with insurers increasingly excluding coverage for climate risks, companies involved in the production or distribution of fossil fuels may find themselves without financial protection in the face of mounting climate lawsuits.
The ruling adds to a growing body of case law dealing with the intersection of insurance and climate change, particularly regarding how traditional liability policies are interpreted in an era of increasing environmental accountability. This decision is highly likely to influence similar cases across the US as climate litigation against energy companies continues to rise.
THE PARTIES
In Aloha Petroleum v National Union Fire Insurance and Another [both part of AIG], Aloha was represented by John Sylvester of K&L Gates, with the AIG companies represented by Christopher St Jeanos of Willkie Farr & Gallagher.