Power companies won't receive reimbursement of defense costs

John O'Brien May 1, 2007, 3:00pm


INDIANAPOLIS - The Indiana Supreme Court unanimously decided Tuesday that several power companies currently fighting a federal lawsuit are not entitled to reimbursement for their attorneys fees from their insurance companies.

Associated Electric & Gas Insurance Services Limited (AEGIS) and 22 other insurance entities filed a complaint for declaratory judgment against power companies insured under policy contracts issued by the plaintiffs for the purpose of determining the extent of their insurance obligations.

Those power companies are Cinergy Corp., Duke Energy Indiana, Inc. and Duke Energy Ohio. They are fighting a lawsuit filed by the United States, three states and several environmental organizations that alleges violations of the Clean Air Act.

They filed a motion for partial summary judgment concerning Plaintiff AEGIS, seeking $4 million in reimbursement for defense costs. The trial court and Court of Appeals denied it, as did the Supreme Court.

"Incurring enormous defense costs in the course of a federal environmental lawsuit, several power companies desire payment of these defense costs, as they are incurred, under the terms of certain liability insurance policies," wrote Justice Brent Dickson.

"The insurance companies, denying liability for such defense costs, initiated this action for declaratory judgment. The power companies sought partial summary judgment to compel payment of all past and future defense costs incurred in responding to the federal lawsuit. We affirm the trial court's denial of the motion because it seeks relief more extensive than that to which the power companies are entitled."

According to Dickson, the power companies claim their insurers are obligated to pay the costs of the lawsuit, while the insurers contend their "policies require payment of defense costs only if the insured is
'legally obligated to pay a judgment or settlement in the underlying action,' and that it need not pay defense costs 'unless and until the loss occurs and is determined to be covered (and the self-insured retention is exhausted).'

"AEGIS argues that it has 'no contractual requirement to pay defense costs for disputed claims.' In the alternative, AEGIS also asserts that the companies have failed to establish that the underlying claims in the federal lawsuit fall within their claim of 'potentially covered.'"

The power companies, however, say the allegations made by the U.S., three states and environmental groups constitute covered damages.

"But what 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," Dickson wrote. "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."

The ongoing federal lawsuit focuses on the application of EPA's New Source Review program for maintenance, repair and replacement projects in the electric utility industry.

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