Refusal to Defend Risks Accepted Is Expensive
The Fifth Circuit Court of Appeal was asked to determine whether Illinois Union Insurance Company (“ILU”) has a duty to defend Louisiana Generating LLC (“LaGen”) in an underlying suit filed against it by the Environmental Protection Agency (“EPA”) and the Louisiana Department of Environmental Quality (“LDEQ”) for alleged Clean Air Act (“CAA”) and state environmental law violations. In Louisiana Generating L.L.C.; Nrg Energy Incorporated v. Illinois Union Insurance Company, No. 12-30651 (5th Cir. 05/15/2013) the district court had held that under the insurance policy at issue, there is a duty to defend and the Fifth Circuit affirmed.
The underlying suit in this duty to defend case between LaGen and ILU revolves around Big Cajun II (“BCII”), a coal-fired electric steam generating plant owned by LaGen in Louisiana. In February 2005 and December 2006 the EPA sent LaGen Notices of Violation (“NOVs”) alleging that certain major modifications performed without a permit at BCII in 1998 and 1999 caused net emissions increases in violation of the CAA. In January 2009, NRG Energy, LaGen’s parent, purchased a Custom Premises Pollution Liability Insurance Policy (“the policy”) from ILU to cover a large number of its facilities, including BCII. The effective date of the policy is January 22, 2009.
On February 18, 2009, one month after the issuance of the policy, the EPA filed the underlying suit over the modifications made to BCII, asserting violations of the CAA and Louisiana environmental laws. LDEQ intervened in the suit, asserting essentially identical allegations and claims. The suit alleged that the previous owner of BCII did work on the plant that increased certain emissions which under applicable law would be considered “major modifications” and would have required a Prevention of Significant Deterioration of Air Quality permit (“PSD permit”) before being completed.
LaGen sought coverage from ILU under the policy for legal fees associated with the underlying EPA suit, and ILU denied that the EPA suit was covered by the policy.
The district court bifurcated the trial between the duty to defend and the duty to indemnify. The district court held that “ILU failed to prove that there was no possibility the claims in the underlying EPA suit would be covered and thus had a duty to defend.” (Emphasis added)
The only issue decided by the district court on summary judgment was the duty to defend. Thus, the only question on appeal concerns whether the district court correctly held that ILU has a duty to defend LaGen in the underlying suit filed by the EPA and LDEQ.
The policy contains a choice of law clause specifying that New York law governs the interpretation of the policy.
Coverage for Claims and Remediation Costs
In New York, whether there is a duty to defend is determined by comparing the allegations in the underlying complaint to the terms of the policy. An insurance policy must be read as a whole in order to determine its purpose and effect and the apparent intent of the parties.
The policy states that it provides coverage for “Claims, remediation costs, and associated legal defense expenses . . . as a result of a pollution condition” at a covered location. “Claim” in turn is defined as “the assertion of a legal right, including but not limited to a government action(s), suits or other actions alleging responsibility or liability on the part of the insured for. . . property damage, or remediation costs as a result of pollution conditions to which this insurance applies.” “Government action” is defined as “action taken or liability imposed by any federal [or] state . . . government agency or body acting under the authority of environmental laws.” The policy covers pollution conditions, which it defines in relevant part as “the discharge, . . . dispersal, release, escape, migration, or seepage of any . . . gaseous or thermal irritant, contaminant, or pollutant . . . on, in, into, or upon. . . the atmosphere. . . .” “Property damage” is defined to include, inter alia, “[n]atural resource damages,” which in turn is expressly defined as including “injury to . . . air.” “Remediation costs” is defined as “reasonable expenses incurred to investigate, quantify, monitor, mitigate, abate, remove, dispose, treat, neutralize, or immobilize pollution conditions to the extent required by environmental law.”
Reading all of these provisions together and giving them their plain meaning, the underlying EPA suit includes allegations and prayers for relief that could potentially result in covered remediation costs. Government agencies acting under the authority of environmental laws allege that LaGen violated those laws, resulting in increased emissions of pollutants into the atmosphere, and seek to require LaGen to mitigate and remediate those emissions. The EPA complaint clearly alleges a covered “pollution condition” at BCII when it asserts that “significant amounts of NOx and SO2 pollution each year have been, and still are being, released [from BCII] into the atmosphere.” The language providing coverage for remediation costs potentially covers the multiple prayers for relief in the EPA complaint which seek to require LaGen to mitigate, offset and remediate the alleged past pollution. The requests for mitigation, offsetting and remediation suggest a reasonable possibility of coverage under the policy. Because part of the suit is “potentially within the protection purchased, the insurer is obligated to defend.”
In addition to and distinct from installation of equipment and application for permits, part of what the EPA complaint seeks is remediation of past pollution, and under the clear definitions in the policy, costs associated with that remediation could be covered by the policy. At oral argument, counsel for ILU conceded that if LaGen engaged in voluntary action to remediate past pollution, those costs would be covered by the terms of the policy.
COVERAGE FOR INJUNCTIVE RELIEF
The Fines and Penalties provision excludes coverage for “Payment of criminal fines, criminal penalties, punitive, exemplary or injunctive relief.” ILU cannot show that its interpretation of the exclusion is the only possible reasonable construction, as it must do to negate coverage. Reading the policy as a whole, including construing the exclusion narrowly, LaGen’s interpretation of the Fines and Penalties exclusion as applying only to criminal and punitive fines and penalties is a reasonable reading of the exclusion. Conversely, under ILU’s interpretation, the policy would illogically provide coverage for “remediation costs” but would exclude coverage if that remediation is required by a court order.
The policy expressly provides that it covers remediation costs to mitigate pollution conditions to the extent required by judicial and administrative orders.
THE TIMING OF THE SUIT
Lastly, ILU argues that it has no duty to defend because the claims were “first made” when the EPA first issued the NOVs with regard to BCII, which was before the effective date of the policy, rather than when the EPA filed suit.
Always, when the terms of the policy are clear and unambiguous, they should be given their plain meaning. The policy language with regard to this issue is clear. The policy provides coverage for claims or remediation costs as a result of pollution conditions “provided the claim is first made, or the insured first discovers such pollution condition during the policy period . . . .” The policy further states that, “Any pollution conditions specifically referenced, or identified in documents listed, on the Schedule of Known Conditions Endorsement are deemed to be first discovered during the policy period.”
It is not disputed that the NOVs concerning the pollution condition at BCII were identified on the Schedule of Known Conditions Endorsement. It is difficult to determine what the purpose of listing the NOVs relating to BCII on the endorsement would be if not to include claims and remediation costs relating to that known pollution condition within the policy’s coverage. The “pollution condition” at BCII identified in the NOVs was “deemed (by the policy wording) to be first discovered during the policy period” and potential remediation costs associated with that pollution condition are covered by the policy.
The Fifth Circuit held that there is a duty to defend because the EPA’s and LDEQ’s claims may potentially result in covered remediation costs. New York law provides that if any claim in an action is potentially covered, the insurer must defend the entire suit.
Dumb and dumber. The insurer accepted coverage for a known pollution event and although it had been going on for several years agreed – by accepting the Schedule of Known Conditions – accepted responsibility for the loss. This is simply incompetent underwriting unless the insurer obtained sufficient premium to honor the risk. That it probably did not is honored by the attempt to refuse coverage for defense.
An insurer told that there is an ongoing loss and that the ongoing loss is potentially covered would invariably exclude coverage for that problem. The insured obtained coverage for a suit it knew was coming and for claims that had already been made. The insurer took the risk with full knowledge that it existed. They added to their error by then refusing to defend the insured.
Had the fact been concealed the insurer would have rescinded under New York law without difficulty. It could not rescind because the insured disclosed the fact and the insurer accepted the risk.
© 2013 – Barry Zalma
Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2013″; “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “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 programing, http://wrin.tv.