Why it matters: A Louisiana federal court held that a general liability insurer must indemnify its policyholder for costs incurred to address violations of the Clean Air Act when the costs at issue are aimed at reducing future air emissions, rather than remediating emissions that have already occurred. The EPA filed suit alleging the insured company's coal-fired electric generation units emitted excessive amounts of regulated pollutants into the air. The action was resolved by a consent decree with the company agreeing to install certain emission controls and implement environmental projects at a cost in excess of $30 million. The company's insurer denied coverage on the basis that the terms "mitigate" and "abate" have special meaning in the environmental context, and are understood by industry as limited to CERCLA cleanups, rather than addressing violations of permitting and compliance statutes like the Clean Air Act. The court disagreed and sided with the insured, applying the plain meaning of the words "mitigate," "abate," and "remediation costs," rather than an industry-specific meaning that the insurer had argued. Under the plain dictionary meaning of these words, the measures the company was required to take under the consent decree were all covered remediation costs under the policy.

Detailed discussion: At the heart of the coverage dispute between Louisiana Generating and Illinois Union Insurance was the application of an insurance policy to a consent decree between LA Gen and environmental authorities.

The Environmental Protection Agency (EPA) and the Louisiana Department of Environmental Quality (LDEQ) sued LA Gen over violations of the Clean Air Act (CAA) and state regulations at an LA Gen power plant. While the action was pending, LA Gen sought a defense from Illinois Union. The insurer denied coverage. In a prior decision, the federal court found that Illinois Union had a duty to defend LA Gen, a ruling that was affirmed by the Fifth Circuit Court of Appeals.

LA Gen reached an agreement with the EPA and LDEQ in 2012. The company agreed to pay $3.5 million as well as perform three specific actions: install Selective Non-Catalytic Reduction (SNCR) technology at three units; permanently surrender its emissions allowances for nitrogen oxide and sulfur dioxide; and undertake various "Mitigation Projects."

Arguing that the actions were not covered by the policy, Illinois Union pointed to the definition of "remediation costs," 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 asserted that those expenditures were not covered because they are not "remediation costs" addressing a "pollution condition." The installation of pollution control technology and forfeiture of emissions credits only address future emissions, and the mitigation projects have nothing to do with addressing a specific pollution condition previously created by LA Gen, the insurer argued.

The court began its analysis with an interpretation of the terms "mitigate" and "abate." The court rejected Illinois Union's contention that the words should be understood as terms of art relating to violations of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

Instead, the court embraced the policyholder's position that the terms should be read with their "common meaning," and that ambiguous terms should be interpreted against insurers. "Consequently, 'mitigate' and 'abate' are to be given a construction congruent with their plain meaning and the expectations of a reasonable insured," the court ruled.

"Based on a plain reading of 'mitigate,' 'abate,' and 'remediation costs,' coupled with the extrinsic evidence available, the installation on unit 3 qualifies under the policy," the court ruled. "As LA Gen points out, Illinois Union wrote the policy; narrower language exists, of which Illinois Union was presumably aware, yet they chose to write the policy without using that language."

LA Gen's trade-off with the EPA—agreeing to undertake additional remediation efforts by reducing emissions from unit 3 in lieu of getting units 1 and 2 into full compliance—did not transform the trade-offs into compliance measures, the court added, as "the EPA found this satisfactory and accepted."

Of the several mitigation projects agreed to by LA Gen, Illinois Union asserted that they lacked a sufficient connection to the excessive emissions that triggered the underlying enforcement action to deserve coverage. The court disagreed.

"Illinois Union lacks support for their assertion that such a strong nexus is required," the court stated. "The plain language, again, 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." Again, the court noted that the "EPA accepted this project, supporting LA Gen's position that these chemicals are related."

Finally, the court considered the surrender of emission allowances. The permanent agreement indicated that the emission allowances were not about mitigation, the insurer argued, and suggested ongoing compliance. But the court said Illinois Union's reading of "remediation" was too narrow.

Having concluded that LA Gen was entitled to coverage, the court was not persuaded by Illinois Union's concerns that a moral hazard existed because insureds could simply "pollute at will" and then have insurers cover their expenses.

"Illinois Union's arguments ignore that it has the power to write its policy more narrowly or to determine that a potential insured is too big of a risk before insuring them," the court stated. "As LA Gen points out, Illinois Union had the opportunity to evaluate LA Gen as a client, presumably did so (or should have), and decided to provide coverage. They accepted the premiums and, as a result, accepted the risk."

To read the decision in Louisiana Generating LLC v. Illinois Union Insurance Co., click here.