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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Next spring, the Supreme Court could decide how greenhouse gases should be regulated in the United States, and who should be liable for them.

The case made headlines last fall when the U.S. Circuit Court of Appeals, Second Circuit, agreed with the plaintiffs that the case had merit. Now the Supreme Court will have its say on whether the nuisance claims can go forward.

Environmental insurance underwriters, beware.

"I believe the Supreme Court's agreement to take up the AEP case will send additional waves of concern into the environmental insurance industry. There is a significant possibility of untold defense costs as well as potentially limitless (at least from an insurance perspective) judgments," Gene Devine told Risk & Insurance® in an e-mail. Devine is a broker at JCH Environmental Insurance Brokers.

THE BIG ISSUES

"Among the critical issues is whether the judiciary, through the adjudication of nuisance litigation, is the branch of government best suited to regulate greenhouse gas emissions," wrote William F. Stewart, a partner in the National Insurance Coverage Group of Nelson Levine de Luca & Horst, in an article he wrote for the law firm.

For energy companies and their insurance companies, another critical issue could be whether they're liable for greenhouse emissions and climate-change-related losses.

The Second Circuit in its decision agreed with the plaintiffs that a link could be made between greenhouse emissions and climate change.

"Plaintiffs have sufficiently alleged that their current and future injuries are 'fairly traceable' to defendants' conduct," the two-judge panel wrote in its decision. The plaintiffs cited the Intergovernmental Panel on Climate Change and the U.S. National Academy of Sciences.

In previous decisions, the plaintiffs were said to not have standing in court because the issue was deemed untouchable politically (versus based on sound science).

Rejoice the lawyers should the Supreme Court agree with the Second Circuit.

"If affirmed, it may open up a Pandora's box of climate litigation," Stewart wrote about Connecticut v. AEP, though he didn't foresee this happening.

INSURANCE IMPACT

Still, underwriters of environmental insurance are wary.

"The carriers continue to be wary of writing significant policy limits on energy-producing companies burning fossil fuel," Devine said.

"They are taking a hard look at the long-tail nature of the insured's operations in relation to the size and types of plants which they operate, as well as the types and quantities of fossil fuel used," Devine wrote, adding that energy firms can still find coverage with the right market and with the right combination of policy terms, limits and deductibles.

If greenhouse gases like carbon dioxide are considered a pollutant by the courts and regulators, coverage for them would be excluded from most general liability policies. Pollution legal liability environmental coverage, however, is designed to fill the need.

Instead, Stewart suggested that the case could even have a broader impact for environmental insurers. This climate-change case was brought under federal nuisance law, which has evolved to become a "vehicle for bringing all sorts of pollution and toxic tort claims," according to Stewart. The result has been that environmental regulation of all kinds isn't the same from one jurisdiction to another.

Steward said that the Supremes could deliver guidance to end this "highly undesirable balkanization" of regulation, something that insurers would surely appreciate.

December 21, 2010

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