Indiana Supreme Court Denies Coverage In Decision That Leaves More Questions Than Answers

In Cinergy. v. Associated Elec. & Gas Ins. Services, Ltd, an insurer, AEGIS, sought a declaratory judgment that it was not liable for the defense costs of its insureds until it was determined that its insureds were entitled to coverage for the underlying claims.  The underlying action in Cinergy concerned whether the insureds were entitled to coverage for an action brought under the federal Clean Air Act by the United States, several states and various environmental agencies for wide-spread harm to public health and the environment for failure to obtain permits and the discharge of excessive emissions.     

The Indiana Supreme Court confirmed the appellate division’s decision that the insureds were not entitled to a defense in the underlying action even though the insureds’ policies stated that the policies imposed a duty on the insurer to directly pay for all amounts associated with its insureds’ defense of a lawsuit.

Even though prior Indiana appellate decisions have found coverage for insureds in claims made by the federal government concerning environmental actions to prevent future environmental damages, the Court here based its decision on the specific policy language involved.  The policy language states that the insured is entitled to coverage when the damages are “caused by an occurrence” and the policy defines occurrence as “an accident, event, or continuous or repeated exposure to conditions.”  The Court determined that “caused by” was required to precede the damages, which it said was not the case here.  As a result, the insurer was also not obligated to pay for the installation of government mandated equipment that would reduce future emissions and environmental harm. 

The Court avoids deciding whether insurers as a general rule should defend their insureds in environmental actions brought by the government even though concern for public health and environmentalism are in the forefront.  The Court also declines to examine whether the public good is served by obligating the insurers to pay for costs to defend litigation, rather than the power companies, who are less able to absorb the costs of litigation than their insurers. 

One important question that this decision leaves us with is whether these power companies will survive and be able to pay for a defense for these actions and upgrades to their facilities to meet environmental standards when insurers can avoid coverage by adding a phrase in the insurance contract which redefines the scope of coverage.  If independent power companies are not able to survive and bought out by larger companies, what will happen to competition?  Will our power companies follow the path of the oil companies and will the public eventually be the ones to pay for the defense and upgrade through our power bills?

Melissa Birnbaum