The Pollution Exclusion: Are Insurers off the Hook for Climate Change Litigation?

Article by Niki Saberi Oskoui

The landscape of climate change litigation is continuously evolving. Specifically, in the United States and Europe, we have seen numerous claims attempting to hold fossil fuel and energy companies responsible for their contributions to climate change. Such companies are looking to their insurance portfolios to help manage their exposure and financial risks and cover defence costs.

In the first judgment of its kind to consider policy coverage in the context of climate change litigation, this article will explore the recent case of Aloha Petroleum Ltd v National Union Fire Insurance et al. Here, the Hawaiian court addressed two pivotal elements regarding Aloha Petroleum’s insurance policy:

1. Whether reckless conduct can be classified as an “accident” under Aloha’s insurance policies, which is necessary to trigger coverage;
2. Whether greenhouse gases are considered “pollutants” under the policies’ pollution exclusion clause, potentially allowing insurers to deny coverage.

Does Reckless Conduct Qualify as an Accident?

Firstly, the court ruled that if an insured party perceives a risk of harm, their actions qualify as an “accident” unless the harm was intended or practically certain to occur. Here, the court used the ‘expected or reasonably foreseeable’ test. The court interpreted a plain meaning and held that recklessness alone does not imply intent to cause harm. Thus, Aloha’s conduct was deemed an “accident,” satisfying the policy requirement for coverage.

In stark contrast to the findings in AES v Steadfast, the Hawaiian Supreme Court 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 “accident.”

The Pollution Exclusion

On the second point, the court sided with the insurers, determining that greenhouse gases fall within the definition of “traditional environmental pollutants.” This activates the pollution exclusion clause, releasing insurers from the obligation to defend Aloha in climate-related lawsuits.

The justices dismissed Aloha’s argument that such pollution only pertains to hazardous waste, noting that the potential for harm matters more than the legality or intent behind a product’s use. They held that “what makes a product a pollutant is that it causes damage due to its presence in the environment”, recognising greenhouse gases as a form of environmental pollution that the exclusion was designed to address.

Implications of the Judgment

While insurers will doubtless continue to cite AES v Steadfast in arguments to deny coverage in climate change litigation, arguing that the policyholder energy majors were aware of the environmental harm caused by the burning of fossil fuels, insurers will also cite Aloha’s interpretation of the pollution exclusion in their attempts to exclude coverage for climate change claims.

However, the court in Aloha was clear that its interpretation of the exclusion required a fact-specific analysis. To adequately respond, insurers and their legal teams must review their potential exposure and stress-test how liability wordings may respond to claims for climate harm.

This area of litigation is likely to remain dynamic, particularly as cases involving nature and biodiversity gain traction. Stay tuned to The Student Lawyer to see how this exciting area progresses.