In the first judgment of its kind to consider policy coverage in the context of climate change litigation, Hawaii's Supreme Court has ruled that greenhouse gas (GHG) emissions are a 'pollutant' within the scope of the pollution exclusion in a commercial general liability policy.

The court also found that reckless conduct falls within the meaning of the word 'accident' for the purposes of policy coverage. Following this highly significant ruling, we explore the rationale of the court's decision and the potential implications for insurers in relation to the growing exposures arising out of climate change litigation.

Insurance cover for climate actions against the big GHG emitters

In the United States, an increasing number of climate-related actions are being brought by cities, counties, municipalities and states against fossil fuel companies. These actions allege that the public were deceived and misled about the risks associated with fossil fuels and GHG emissions.

Should those claims succeed, who is going to pay? Fossil fuel companies are looking to their insurance portfolios to help manage their exposure, but there are significant obstacles to the availability of coverage for these types of climate-related claims.

One such action is being pursued in Hawaii by the counties of Honolulu and Maui. The claim was issued in 2020 and has been subject to a number of notable procedural challenges and disputes. As an adjunct to this claim, one of the fossil fuel companies being pursued, Aloha Petroleum, has issued a claim against its liability insurer, AIG, seeking a declaration that its commercial general liability policies should respond to the counties' claims as may be necessary.

The underlying action, City & County of Honolulu v Sunoco LP, is one of the twenty high-profile and ground-breaking legal actions included in the current version of our interactive climate change litigation map. 

The litigation alleges that, since the 1960s, fossil fuel companies were aware of the risk posed by climate change, choosing to conceal this knowledge, then promoting climate science denial and increased fossil fuel production. The litigation raises a number of cause of actions, namely:

• Trespass, via entry of ocean water onto county property,
• Public and private nuisance, from the unreasonable sale of fossil fuels interfering with counties’ and community property rights, and
• Negligent and strict liability failure to warn, the fossil fuel companies having a duty to warn the public about the dangers of their products, which was breached by positively promoting fossil fuels and misrepresenting climate change.

Damage allegedly caused by this deception includes erosion, decreased fresh water, damage to water infrastructure, increased risk of extreme heat and storms, and damage to Native Hawaiian cultural resources. The plaintiffs seek unspecified amounts of compensation, punitive damages and other relief.

In the coverage dispute which relates to policies between 1978 to 1981, 1984 to 1989 and 2004 to 2010, two key questions have now been determined by the Hawaii Supreme Court (the Court), as set out below.

1. Does an 'accident' include an insured’s reckless conduct?

These are occurrence-based policies, and for the periods in question, there are two relevant definitions of the word 'occurrence':

• “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.”
• "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

The Supreme Court found that the undefined term 'accident' was held to include reckless conduct in this instance. There was a clear difference between the "awareness of the risk of harm and awareness of certain harm". In this instance, the alleged actions of Aloha in knowing the risk of GHG emissions but misleading the public were reckless, and not intentional.

The Court referred to judicial precedents that recklessness could be an occurrence, clarifying apparent inconsistencies with other decisions. It was held that "when an insured perceives a risk of harm, its conduct is an 'accident' unless it intended to cause harm or expected harm with practical certainty". The Court held that the plain meaning of accident should include reckless conduct, which would honour the principle of fortuity where insurance responds to risks as opposed to intentional or planned losses.

Fossil fuel companies will welcome this part of the ruling. It is particularly relevant here as one of the policies (covering 1986 to 1987) did not include the pollution exclusion, and the question of whether AIG is now required to provide an indemnity to Aloha in that instance will be a question for the District Court. We await the outcome of any decision with great interest, although the referral to the Supreme Court expressly stated that the claims do not allege any damage occurring before 2000 in any meaningful sense.

The Hawaii Supreme Court did note that its opinion on 'occurrence' departed from the only other state supreme court case when it ruled on whether a climate damage action represented an 'occurrence'. The Virginia Supreme Court decision in AES Corp had concluded that an energy company's emissions were not an 'accident', as accidents in Virginia are defined as "unexpected from the viewpoint of the insured". Companies will need to be mindful of the standards applicable in various states as to what constitutes intentional harm, as it is arguable that the fossil fuel companies may have been unsuccessful on both points elsewhere.

2. Does the pollution exclusion include GHG emissions?

The pollution exclusions varied across the AIG policies, but it was agreed that the differences were immaterial for the analysis of this question. The 'total pollution' exclusion from the 2004-2010 AIG Policy excluded cover for:

"'Bodily injury' or 'property damage' which would not have occurred in whole or part but for the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of 'pollutants' at any time."

The Court noted that the interpretation of pollution exclusions at a national level is disputed. In this instance, it was held that a 'traditional environmental pollution' reading was the superior approach, meaning that a 'contaminant', and thus a 'pollutant', is defined by "whether it causes damage due to its presence in the environment". This approach means greenhouse gases are considered to be pollutants, and is supported by the regulation of GHG emissions in Hawaii.

The Court disagreed with Aloha's interpretation that only hazardous waste could be considered a pollutant, finding that "because greenhouse gases contaminate the atmosphere, they are clearly one of those hazards. And, the alleged deceptive marketing about GHG that forms the basis of the lawsuits falls within the scope of that exclusion."

Aloha argued that the exclusion wording was unclear as other courts held it to be ambiguous and that, in other instances, carbon dioxide or gasoline, have not been found to be pollutants. The Court disagreed, emphasising it was a fact-specific exercise, noting that "we don’t construe the exclusion on a molecule-by-molecule basis. Carbon dioxide may not be a pollutant in a single office building, but it is when billions of tonnes are added to the atmosphere every year."

Ultimately, the Court was satisfied that Aloha's gasoline produces GHG emissions, which in turn cause environmental damage due to their presence in the atmosphere. Therefore, GHG emissions would be covered by the exclusion.

Comment: the hydrocarbon hydra

Climate litigation can be seen as a many-headed hydra: for each argument that is cut down, we expect another two to grow. 

Of most significance is the Court's view that a pollution exclusion in a liability policy includes GHG emissions, meaning that cover for losses flowing from the claims by the counties' actions against Aloha Petroleum could be excluded. In other policies, 'pollutant' may have a different definition, and the court in Aloha was clear that its interpretation of the exclusion required a fact-specific analysis.

As one of a number of arguments, the Court disagreed with Aloha's submissions that the counties' actions should be covered as part of its product liability, and that applying the exclusion would undercut Aloha's expectation of coverage. The finding that GHG emissions are pollutants is potentially a significant setback for fossil fuel companies that are facing climate change disputes on multiple fronts.

Courts in other US states and in other jurisdictions around the world may come to differing conclusions on the application of pollution exclusions, and other conditions and exclusions, in relation to climate actions. For example, the case gives rise to questions over the interpretation of the exclusion for "deliberate or conscious disregard" often found in liability policies, as well adding to the debate of the meaning of "sudden, accidental and unintended" or similar wording.

We expect the Aloha case to be the first of many in the context of the coverage implications of climate change litigation. It highlights the need for insurers to review their potential exposure and stress-test how liability wordings may respond to claims for climate harms.