Federal Court Holds Indemnity Coverage Available for Remediation Costs

A Louisiana district court, applying New York law, held that an insurer must indemnify a power plant operator for millions in costs it incurred to remediate pollution pursuant to a consent decree relating to a Clean Air Act (CAA) suit, holding that all the expenditures fall within the scope of the policy’s coverage.

Cross motions for summary judgment were filed by Illinois Union Insurance Company (“Illinois Union”), and Louisiana Generating LLC (“LA Gen”) regarding the coverage obligations of Illinois Union as related to costs arising out of a consent decree addressing violations of the Clean Air Act (“CAA”) and Louisiana environmental regulations at LA Gen’s BCII Power Plant (“BCII”).

The issue before the court was the coverage obligation and duty to indemnify as related to three specific expenses that LA Gen incurred as a result of the consent decree. LA Gen sought indemnification for costs associated with installing “selective non-catalytic reduction” technology at one of the units at BCII, as well as surrendering its emission allowances and carrying out mitigation projects. The court previously held, and the Fifth Circuit affirmed, that Illinois Union had a duty to defend LA Gen in connection with the Clean Air Act enforcement action.

Under New York law, the first step of policy interpretation is to look to the policy’s language. The Illinois Union policy included the following language in its coverage clause:

‘Claims’, ‘remediation costs’, and associated ‘legal defense expenses’, in excess of the ‘self-insured retention’, as a result of a ‘pollution condition’ … provided the ‘claim’ is first made, or the ‘insured’ first discovers such ‘pollution condition’ during the ‘policy period.’

Also at issue is the definition of “remediation” costs, which the policy defined:

‘Remediation costs’ means reasonable expenses incurred to investigate, quantify, monitor, mitigate, abate, remove, dispose, treat, neutralize, or immobilize ‘pollution conditions’ to the extent required by ‘environmental law.’

Illinois Union argued that the terms “mitigate” and “abate” are terms of art in environmental law, but the court disagreed and held that the terms were to be given their plain meaning in accordance with the expectations of a reasonable insured.

The court then determined that the question of whether there was coverage was ambiguous and, therefore, the court relied on extrinsic evidence in making the determination that coverage for the expenditures existed under the policy. The court relied on LA Gen’s argument that Illinois Union wrote the policy and could have used narrower language, but it did not do so. The court disagreed with Illinois Union’s argument that it did not have to indemnify LA Gen for the expenditures at issue because the measures taken by LA Gen only addressed future emissions, stating that although remediation implies a past wrong, it does not require the addressing of the exact wrong. Illinois Union also unsuccessfully argued that coverage was not available with regard to mitigation projects because they had nothing to do with addressing a specific pollution condition previously created by LA Gen. The court also rejected Illinois Union’s argument that the mitigation projects were not covered by the policy because they did not address the exact wrong as the underlying claim. This argument failed because the EPA approved the mitigation projects as a part of the consent decree. Finally, the court found no merit in Illinois Union’s argument that there would be “moral hazard” in finding that coverage existed. The court reasoned that the insurer had the opportunity to narrowly draft its policies and investigate before accepting the risks associate with a potential insured and, therefore, the “moral hazard” would be avoided. LA Generating LLC v. IL Union Ins. Co., NO. 10-516-JJB (M.D.LA Aug. 5, 2015).