In Louisiana Generating L.L.C. v. Illinois Union Ins. Co., 2013 WL 2096382 (5th Cir. May 15, 2013), the United States Court of Appeals for the Fifth Circuit tackled the question of whether the insurer, Illinois Union Insurance Company, had a duty to defend its insured, Louisiana Generating LLC, in an underlying suit filed by the Environmental Protection Agency (“EPA”) and the Louisiana Department of Environmental Quality (“LDEQ”) for alleged Clean Air Act and state environmental law violations. The Court affirmed the trial court’s holding that under the insurance policy at issue, there is a duty to defend. The Court reached this conclusion by comparing the allegations in the underlying complaint to the terms of the policy, as required by New York Law. The policy contained a choice of law clause specifying that all questions related to the interpretation of the policy would be decided in accordance with the laws of New York. This comparison revealed that the allegations and prayers for relief in the complaint made the underlying suit “potentially within the protection purchased,” and therefore the insurer was obligated to defend—a duty that the Court described as “exceedingly broad.”
The underlying suit between Louisiana Generating and Illinois Union revolved around Big Cajun II, a coal-fired electric steam generating plant in Louisiana owned by Louisiana Generating. The EPA had sent multiple Notices of Violation (“NOVs”) to the utility alerting it to the fact that certain major modifications to Big Cajun II that were performed without a permit had caused net emissions increases in violation of the Clean Air Act. Years after receiving the NOVs, NRG Energy, Louisiana Generating’s parent company, purchased a Custom Premises Pollution Liability Insurance Policy from Illinois Union to cover a large number of its facilities, including Big Cajun II.
Subsequently, the EPA filed the underlying suit over the modifications made to Big Cajun II, alleging that the proper permits had not been obtained, that the plant modifications failed to employ the best available control technology to limit emissions, and that excess amounts of regulated pollutants were being emitted into the air. The LDEQ intervened in the suit, asserting essentially identical claims.
On appeal, the insurer argued that it had no duty to defend because the underlying EPA suit did not seek any form of relief that potentially falls within the policy’s coverage. Illinois Union also argued that the policy excludes coverage for any injunctive relief. The Court disagreed.
The Fifth Circuit’s opinion highlights the well settled law in New York that an insurer’s duty to defend its insured is exceedingly broad and that an insurer must provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage. If a complaint “contains any facts or allegations which bring the claim even potentially within the protection purchased, the insurer is obligated to defend.” Further, if any of the claims arguably arise from covered events, the insurer is required to defend the entire action.
Reading all of the policy provisions together and giving them their plain meaning, the Court found that the underlying EPA suit included allegations and prayers for relief that could potentially result in covered remediation costs. Specifically, the allegation that Louisiana Generating violated the Clean Air Act by emitting an increased number of pollutants into the atmosphere was clearly a covered “pollution condition.” According to the policy, a covered “claim” included government action alleging responsibility or liability on the part of Louisiana Generating for remediation costs as a result of a pollution condition. Remediation costs were unquestionably covered, as they were broadly defined in the policy to include expenses incurred to redress pollution in compliance with environmental law.
The Court also rejected Illinois Union’s argument that injunctive relief was excluded from coverage by the Fines and Penalties provision, which excluded coverage for “[p]ayment of criminal fines, criminal penalties, punitive, exemplary or injunctive relief.” Louisiana Generating argued that when read in context, it was clear that the exclusion covered only those types of relief that are akin to punitive fines and penalties and could not be interpreted to exclude coverage for all injunctive relief.
The Court explained that under New York law policy exclusions are given strict and narrow construction. Thus, to negate coverage by virtue of an exclusion, “an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.” Any ambiguity is resolved against the insurer. Applying these standards, the Court found that the insurer could not meet its heavy burden of showing that its interpretation of the exclusion was the only possible reasonable construction. In fact, Illinois Union’s interpretation of the injunctive relief language was illogical and conflicted with other terms of the policy. Additionally, the carrier’s reading of the “Fines and Penalties” exclusion would result in very little coverage for some of the major types of environmental law liability that a reasonable policyholder would expect. Louisiana Generating’s interpretation, on the other hand, was a reasonable reading of the exclusion. For these reasons, the Court found that injunctive relief was covered by the policy.
The Court also rejected the insurer’s argument that it had no duty to defend because the EPA’s claims were first made before the effective date of the policy, when the NOVs were issued. Under the plain language of the policy, the pollution conditions at Big Cajun II that had been identified by the EPA in the NOVs were specifically deemed to have been first discovered during the policy period.
As this case makes clear, the duty to defend is not one that the courts take lightly. If the allegations of the complaint suggest a mere “reasonably possibility” of coverage, that is all that is required to trigger an insurer’s obligation to defend. Exclusions to negate coverage must be clear and unmistakable, and ambiguity in the policy will be construed against the insurer. These standards combined create a steep uphill battle for an insurer seeking to avoid its duty to defend.
Jaime Wisegarver is an associate in the Litigation Section, where she handles a variety of civil and commercial matters, including insurance recovery litigation and counseling. For more information, please contact Jaime at (804) 771-5634 or firstname.lastname@example.org.
Kristen M. Chatterton