In a coverage dispute based on underlying environmental litigation, the 5th U.S. Circuit Court of Appeals held that Illinois Union Insurance Co. must defend Louisiana Generating LLC in an action brought by the Environmental Protection Agency and the Louisiana Department of Environmental Quality.

“Big Cajun II,” a coal-fired electric steam-generating plant owned by LaGen, was targeted by the EPA and Louisiana’s state equivalent for allegedly toxic emissions. The agencies filed suit seeking a variety of relief, including an order for LaGen to “remedy, mitigate, and offset the harm to public health and the environment” caused by the alleged violations of the Clean Air Act, the assessment of a civil penalty for each day in violation of the CAA, an order to mitigate emissions and an injunction to repair emission control equipment to comply with regulatory standards.

LaGen turned to Illinois Union to defend and pay liability, if any. The applicable state law was again an important consideration, and here the court applied New York law.

Analysis of the policy language at issue covered “Claims, remediation costs, and associated legal defense expenses... a result of a pollution condition.” The Fifth Circuit took great pains to match up the specific policy language at issue with its reading of New York law. The court determined that the policy covered remediation costs and nothing under New York law limited such coverage whether these costs were incurred voluntarily or as a result of a government demand. The insurance company further sought to apply an exclusion for fines and penalties, which the company argued was the context in which these costs were incurred. The court rejected that outcome, holding that the exclusion could not swallow up and nullify the clear grant of coverage for remediation costs.

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

Why it matters: What does a policy actually pay for? That is the question at the heart of the dispute in the 5th Circuit case, which again serves to remind policyholders to read the policy to understand the terms of coverage. The court’s opinion also emphasizes that under New York law, an insurer has a broad duty to defend and policyholders will be entitled to a full defense as long as some of the underlying allegations are covered by the terms of the policy. The policyholder must be armed with this understanding before it presses its demands for coverage.