Type: Law Bulletins
Date: 09/21/2015

Insurance Provides Coverage for Electric Utility’s Settlement Costs

On Aug. 5, 2015, a federal district court in Louisiana ruled that costs incurred by an electric utility under a settlement with the EPA for measures in lieu of work to bring the utility into compliance with the Clean Air Act were recoverable from the utility’s liability insurer. The case, Louisiana Generating LLC v. Illinois Union Insurance Co., 2015 WL 4656634 (M.D. La. Aug. 5, 2015), arose after resolution of an EPA enforcement action against Louisiana Generating to redress excessive air emissions from the utility’s Big Cajun II power plant. Although the alleged excessive emissions were from Units 1 and 2 of the plant, Louisiana Generating agreed in settlement of the EPA’s claims that it would take various actions other than bringing Units 1 and 2 into compliance with the law. In particular, the utility agreed to install emission-reducing technology at Unit 3 of the Big Cajun II plant, to surrender its emission allowances for the entire plant, and to undertake certain “mitigation projects” unrelated to the plant, such as funding efforts by the National Park Service to address air pollution.

After its settlement with the EPA was finalized, Louisiana Generating requested reimbursement from its liability insurer, Illinois Union Insurance Company. The policy issued by Illinois Union provided coverage for “claims, remediation costs, and associated legal defense expenses. . . as a result of a pollution condition” at a covered location. “Remediation costs” were defined by the policy 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.” Illinois Union denied coverage and Louisiana Generating sued.

Louisiana Generating conceded that any costs incurred under the settlement to achieve compliance with the Clean Air Act — i.e., costs to reduce excessive emissions from Units 1 and 2 of the plant — would not be covered by the policy. But, it said, the costs for which it sought reimbursement were all agreed to by EPA in lieu of costs to bring Units 1 and 2 into compliance; they were not compliance costs themselves. Illinois Union responded that even if the costs at issue were not compliance costs, they were not “remediation costs” either since they did not address past emissions but instead affected only future emissions.

The court granted summary judgment for Louisiana Generating on its claim that Illinois Union must indemnify it. The court agreed that the term “remediation costs” as used in the policy implied costs related to a past wrong. However, to say that it required addressing the exact wrong alleged by EPA — the excessive emissions at Units 1 and 2 — by removing those emissions, was incorrect. “[B]y reducing future emissions,” the court said, “the past emissions can be ‘remediated’ as the environment naturally eliminates the chemicals and, due to the lower emissions, there are fewer new chemicals to take their place.” 2015 WL 4656634 at *6.

The court also said Illinois Union’s contention that each project for which indemnification was sought must “directly ‘mitigate, abate, neutralize, [or] treat’ the excessive emissions that triggered the underlying enforcement action” found no support in the policy. “The plain language,” it said, “does not support holding LA Gen to such a stringent standard; the policy does not indicate that its use of ‘remediation’ or ‘mitigate’ or ‘abate’ is intended to reflect a stricter standard than the ordinary meaning of each word.” Id. at *7.

It remains to be seen how influential this decision will be in other cases, particularly those outside Louisiana, in which utilities or other manufacturers seek reimbursement from their insurers for costs they incur to reduce discharges to the environment. On one hand, even under the holding of this case, costs to bring a facility into compliance with requirements imposed by law will likely not be recoverable. But this court’s holding that costs to reduce future discharges that are not necessary to achieve compliance may be covered by liability insurance could have far-reaching implications. At the least, it should make insurers hesitant to refuse coverage for such costs out of hand.

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