Eight Corners Rule Strikes Again

Natural or Probable Consequences of an Intentional Act Not an Occurrence

Zalma on Insurance Makes Top 50

On September 27, 2011 I wrote about a holding of the Virginia Court of Appeal at http://zalma.com/blog/?p=1792 where the court concluded that an intentional act cannot be an occurrence. The parties appealed to the Supreme Court of Virginia who, in The AES Corporation v. Steadfast Insurance Company, No. 100764 (Va. 04/20/2012), was called upon to decide whether the trial court and Court of Appeal erred because the pleadings included reference to the word “negligence.”

The Supreme Court of Virginia considered whether the suit against The AES Corporation (AES) did not allege an “occurrence” as that term is defined in AES’s contracts of insurance with Steadfast Insurance Company (Steadfast), and that Steadfast, therefore, did not owe AES a defense or liability coverage.

Background

AES is a Virginia-based energy company that holds controlling interests in companies specializing in the generation and distribution of electricity in numerous states, including California. Steadfast is an Illinois-based company and indirect subsidiary of Zurich Financial Services, a global insurance provider. AES paid premiums to Steadfast for commercial general liability (CGL) policies from 1996 to 2000 and 2003 to 2008.

In February 2008, the Native Village of Kivalina and City of Kivalina (Kivalina), a native community located on an Alaskan barrier island, filed a lawsuit (the Complaint) in the United States District Court for the Northern District of California against AES and numerous other defendants for allegedly damaging the village by causing global warming through emission of greenhouse gases. AES requested Steadfast provide a defense and insurance coverage, pursuant to the terms of the CGL policies, for the claims alleged in the Complaint. Steadfast provided AES a defense under a reservation of rights and filed a declaratory judgment action, which is the subject of this appeal, in the Circuit Court of Arlington County.

In the declaratory judgment action, Steadfast claimed that it did not owe AES a defense or indemnity coverage for damage allegedly caused by AES’s contribution to global warming based on three grounds:

  1. the Complaint did not allege “property damage” caused by an “occurrence,” which was necessary for there to be coverage under the policies;
  2. any alleged injury arose prior to the inception of Steadfast’s coverage; and
  3. the claims alleged in the Complaint fell within the scope of the pollution exclusion stated in AES’s policies.

The parties subsequently filed cross-motions for summary judgment, both claiming that whether Steadfast had a duty to defend AES against the Complaint could be decided by examining the “eight corners” of the Complaint and the CGL policies. The circuit court denied AES’s motion for summary judgment and granted Steadfast’s motion for summary judgment, holding that the Complaint does not allege an “occurrence” as that term is defined in the CGL policies, and thus, the allegations in the Complaint are not covered under those policies.

The Insurance Policies

In each of the CGL policies AES purchased from Steadfast, Steadfast agreed to defend AES against suits claiming damages for bodily injury or property damage, if such damage “is caused by an ‘occurrence.’ ” The policies define “occurrence” as follows: ” ‘Occurrence’ means an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The policies specify that Steadfast has no duty to defend or indemnify AES against damage suits to which the policies do not apply.

The Complaint

The complaint alleged that Kivalina is located on the tip of a small barrier reef on the northwest coast of Alaska, approximately seventy miles north of the Arctic Circle. As pertinent to this appeal, in the Complaint, Kivalina alleges that AES engaged in energy-generating activities using fossil fuels that emit carbon dioxide and other greenhouse gases, and that the emissions contributed to global warming, causing land-fast sea ice protecting the village’s shoreline to form later or melt earlier in the annual cycle. This allegedly exposed the shoreline to storm surges, resulting in erosion of the shoreline and rendering the village uninhabitable.

The Complaint alleged that AES “intentionally emits millions of tons of carbon dioxide and other greenhouse gases into the atmosphere annually.”  The Complaint further alleges that AES “knew or should have known of the impacts of [its] emissions” of carbon dioxide, but that “[d]espite this knowledge” of the “impacts of [its] emissions on global warming and on particularly vulnerable communities such as coastal Alaskan villages,” AES “continued [its] substantial contributions to global warming.” Kivalina then dedicates sixteen pages and sixty-six paragraphs of its sixty-nine page Complaint to explaining global warming.

The Complaint alleges a civil conspiracy by power, coal and oil companies to mislead the public about the science of global warming.  The Complaint then states three claims for relief against AES. Two causes of action are for nuisance and the other is for concert of action. The first claim for relief is entitled “Federal Common Law: Public Nuisance.”  The second claim for relief asserted against AES is entitled “State Law: Private and Public Nuisance.” The last claim for relief against AES is entitled “Concert of Action.” Kivalina alleges that the “[d]efendants have engaged in and/or are engaging in tortious acts in concert with each other or pursuant to a common design” in creating, contributing to and/or maintaining a public nuisance, specifically, global warming.

Analysis

Both AES and Steadfast agree that it is a well-established principle, consistently applied in this Commonwealth, that only the allegations in the complaint and the provisions of the insurance policy are to be considered in deciding whether there is a duty on the part of the insurer to defend and indemnify the insured. This principle is commonly known as the “eight corners rule” because the determination is made by comparing the “four corners” of the underlying complaint with the “four corners” of the policy, to determine whether the allegations in the underlying complaint come within the coverage provided by the policy.

The relevant policies provide coverage for damage resulting from an “occurrence,” and define an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” The terms “occurrence” and “accident” are synonymous and refer to an incident that was unexpected from the viewpoint of the insured. The Supreme Court has held in the past that an “accident” is commonly understood to mean an event which creates an effect which is not the natural or probable consequence of the means employed and is not intended, designed, or reasonably anticipated.  An accidental injury is one that happens by chance, unexpectedly, taking place not according to the usual course of things, casual or fortuitous.

Kivalina alleges that AES intentionally released tons of carbon dioxide and greenhouse gases into the atmosphere as part of its electricity-generating operations. The Virginia Supreme Court has held in numerous cases that an intentional act is neither an “occurrence” nor an “accident” and therefore is not covered by the standard policy. If a result is the natural or probable consequence of an insured’s intentional act, it is not an accident.

However, even though the insured’s action starting the chain of events was intentionally performed, when the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision. In such a context, the dispositive issue in determining whether an accidental injury occurred is not whether the action undertaken by the insured was intended, but rather whether the resulting harm is alleged to have been reasonably anticipated or the natural or probable consequence of the insured’s intentional act. For coverage to be precluded under a CGL policy because there was no occurrence, it must be alleged that the result of an insured’s intentional act was more than a possibility; it must be alleged that the insured subjectively intended or anticipated the result of its intentional act or that objectively, the result was a natural or probable consequence of the intentional act.

Resolution of the issue of whether Kivalina’s Complaint alleges an occurrence covered by the policies turns on whether the Complaint can be construed as alleging that Kivalina’s injuries, at least in the alternative, resulted from unforeseen consequences that were not natural or probable consequences of AES’s deliberate act of emitting carbon dioxide and greenhouse gases.

AES notes that the Complaint alleges that AES intentionally or negligently created the nuisance, global warming, and that the defendants’ concerted action in causing the nuisance constitutes a breach of duty.

Applying the “eight corners” rule, the Supreme Courts precedent required it to consider the terms of the relevant insurance policies and the allegations in the Complaint. The policies issued to AES do not provide coverage or a defense for all suits against the insured alleging damages not caused intentionally. Likewise, the policies in this case do not provide coverage for all damage resulting from AES’s negligent acts. The relevant policies only require Steadfast to defend AES against claims for damages for bodily injury or property damage caused by an occurrence or accident.

In the Complaint, Kivalina plainly alleges that AES intentionally released carbon dioxide into the atmosphere as a regular part of its energy-producing activities. Kivalina also alleges that there is a clear scientific consensus that the natural and probable consequence of such emissions is global warming and damages such as Kivalina suffered. Whether or not AES’s intentional act constitutes negligence, the natural or probable consequence of that intentional act is not an accident under Virginia law.

Allegations of negligence are not synonymous with allegations of an accident. In this instance, the allegations of negligence do not support a claim of an accident. Even if AES were negligent and did not intend to cause the damage that occurred, the gravamen of Kivalina’s nuisance claim is that the damages it sustained were the natural and probable consequences of AES’s intentional emissions.

The dissimilarity between the allegations in the Kivalina complaint and those in most other tort actions for bodily injury or property damage is the relevant intentional or negligent act alleged in the complaint. The complaint alleges that AES was “negligent” only in the sense that it “knew or should have known” that its actions would cause injury no matter how they were performed.

Under the CGL policies, Steadfast would not be liable because AES’s acts as alleged in the complaint were intentional and the consequences of those acts are alleged by Kivalina to be not merely foreseeable, but natural or probable. Where the harmful consequences of an act are alleged to have been not just possible, but the natural or probable consequences of an intentional act, choosing to perform the act deliberately, even if in ignorance of that fact, does not make the resulting injury an “accident” even when the complaint alleges that such action was negligent.

Kivalina asserts that the deleterious results of emitting carbon dioxide and greenhouse gases are something that AES knew or should have known about. 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. Even if AES were actually ignorant of the effect of its actions and/or did not intend for such damages to occur, Kivalina alleges its damages were the natural and probable consequence of AES’s intentional actions. Therefore, Kivalina does not allege that its property damage was the result of a fortuitous event or accident, and such loss is not covered under the relevant CGL policies.

ZALMA OPINION

Although global warming is the gravamen of the complaint filed by the village of Kivalina this is not a pollution or global warming case. This is a case that explains the meaning of the term “occurrence” as used in a CGL policy of insurance and that there is no possibility that an intentional act can be an “occurrence.”

Fortuity is an essential element of every insurance policy. If the event is not fortuitous there can never be coverage.

Barry Zalma

(c) 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant.

Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.com.

About Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Insurance Fraud - 2013;" "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” which are all available at http://www.zalma.com/zalmabooks.htm. Contact the author or access his free "Zalma's Insurance Fraud Letter" at http://www.zalma.com/ZIFL-CURRENT.htm or write to him at zalma@zalma.com.
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