Indiana Supreme Court Finds Installation Of Government Mandated Equipment To Reduce Future Emissions Is Not An Occurrence
August, 2007
Facts
Cinergy, a power company being sued by the United States, three states, and several environmental organizations pursuant to the federal Clean Air Act and similar state statutes, sought to determine the extent of insurers’ obligations with respect to defense costs being incurred in the federal suit. Affirming the denial of Cinergy’s motion for partial summary judgment, the court held that the insureds’ costs to install government mandated equipment to reduce future emissions of pollutants and to prevent future environmental harm were not caused by an “occurrence” and thus not within policy coverage. Cinergy Corp. v. Associated Elec. & Gas Ins. Services, Ltd., 865 N.E.2d 571 (Ind. 2007).
Analysis
On appeal to the Indiana Supreme Court, Cinergy sought relief from the trial court’s denial of its summary judgment motion against one of its excess insurers, AEGIS, seeking to require it to pay defense costs in the underlying action as they were being incurred. Specifically, Cinergy argued that AEGIS had a duty to reimburse Cinergy’s defense costs for “potentially covered claims” because the AEGIS policies explicitly included defense costs as part of “ultimate net loss” and because AEGIS agreed to reimburse “the defense of any claim or suit seeking such damages.” Focusing on the complaint in the underlying action, Cinergy then argued that the claims against it were potentially covered and, thus, that AEGIS owed it defense costs.
The Supreme Court agreed with Cinergy that “after the self-insured retention amounts specified in the policies are satisfied” AEGIS had a ‘direct pay’ responsibility” for Cinergy’s defense costs “as incurred.” However, the Supreme Court went on to find that AEGIS did not have to pay for Cinergy’s defense costs in the underlying litigation. While Cinergy characterized its costs as compliance costs, the Court did not agree. Specifically, the Court analyzed the complaint against Cinergy in great detail and noted that the alleged damages were “the costs of installing emission control equipment.” Discussing the allegations against Cinergy further the Court noted, “[t]he federal lawsuit [against Cinergy] is directed at preventing future public harm, not at obtaining control, mitigation, or compensation for past or existing environmentally hazardous emissions.” The Supreme Court further explained the significance of these observations when it held that the claims against Cinergy failed to even potentially present a claim for “damages” caused by an “occurrence.”
[W]hat the power companies here claim to be covered, the installation costs for equipment to prevent future emissions, is not caused by the happening of an accident, event, or exposure to conditions but rather result from the prevention of such an occurrence. We cannot read the policy requirement that covered damages result from the happening of an occurrence to mean that coverage extends to damages that result from the prevention of an occurrence. Notwithstanding our preference to construe ambiguous insurance policy language strictly and against the insurer, we discern no ambiguity here that would permit the occurrence requirement reasonably to be understood to allow coverage for damages in the form of installation costs for government-mandated equipment intended to reduce future emissions of pollutants and to prevent future environmental harm.
Rejecting the contention that these claims against Cinergy are “ordinary environmental claims” that satisfy the potential for coverage standard, the Court determined that the claims were not potentially covered and, therefore, AEGIS did not owe Cinergy defense costs. In finding a distinction between remedial and prophylactic remedies as a basis for determining coverage, the Court rejected Cinergy’s argument that the pollution control equipment would somehow remediate “the damage caused by air pollution” because air is “self-cleansing through time.” As the Court found, pollution control equipment installed today is designed to improve the quality of post-installation emissions. In fact, an element of damages may include installation of new pollution control equipment. The Supreme Court unequivocally determined that the insurers did not commit to pay for Cinergy’s capital improvements. Therefore, the Court found that there was no occurrence that warranted a finding of coverage owed.
Learning Point:
Although Indiana precedent holds that the undefined term “damages” in a CGL policy includes environmental cleanup and response costs, these expenses must result from a prior “occurrence” to be covered. Where, as here, the expenses incurred are for prophylactic measures intended to prevent emissions or discharges of environmental hazards that may be produced in the future, there has been no “occurrence” and thus there is no CGL coverage afforded.
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