Will Insurers Dodge Climate Nuisance Liability Bullet?

Editor's Note: This is the first article in a three-part series that will examine a trio of emerging threats in 2011, each with the potential to impose seismic change upon the risk-management landscape.

By William F. Stewart

In September 2009, all three branches of the United States government were racing headlong toward efforts to mitigate the threat of man-made global warming.

The executive branch sought to impose greenhouse-gas emission limitations; the House passed landmark cap-and-trade legislation; and two appellate courts recognized a viable cause of action against carbon-dioxide emitters for "climate nuisance."

Less than two years later, with the economic downturn and the 2010 midterm elections in the rearview mirror, the executive and legislative branches have slammed the brakes on their respective climate initiatives. The focus has shifted to the judiciary.

The case at the center of the climate- change controversy is Connecticut v. American Electric Power Co., et al.

In AEP, several states and environmental groups filed suit against power companies, seeking an abatement of "the public nuisance of global warming."

The plaintiffs alleged that the utilities' combustion of fossil fuels has contributed to elevated levels of atmospheric CO₂ which, in turn, has led to beach erosion, droughts and floods.

After a New York federal district court dismissed the suit on grounds that the regulation of greenhouse-gas emissions was a political question best left for the legislature, the Second Circuit Court of Appeals reversed. The appellate court's decision to let the nuisance case against the utilities proceed sent shockwaves through the energy industry, opening the door for an untold number of climate-change claims and lawsuits.

Last fall, the U.S. Supreme Court advised that it would hear the appeal over whether the AEP plaintiffs' federal nuisance claims are viable. Argument is set for April 19, 2011.

Among the critical issues is whether the judiciary is the branch of government best suited to regulate greenhouse-gas emissions.

Interestingly, both the Obama administration and several conservative organizations have opposed climate litigation on the grounds that the elected branches of government are in a better position to provide a comprehensive, non-patchwork approach to establishing a national, sustainable-energy strategy.

If affirmed, AEP threatens to open up a Pandora's box of global-warming suits, as well as associated coverage litigation. Under the Second Circuit's ruling, any entity with "special" climate-related harm—harm that is different in kind or in scope from the general public—would have standing to pursue large GHG emitters.

The AEP decision has the potential to substantially damage the national economy and may be the most important environmental case in a decade.