Civil Penalties under Clean Air Act Do Not Constitute Punitive Damages

Applying New York law, the United States District Court for the Middle District of Louisiana has held that an insured is entitled to indemnity coverage for civil penalties under the Clean Air Act because those amounts do not constitute “punitive” damages.  Louisiana Generating LLC v. Illinois Union Ins. Co., No. 10-516 (M.D. La. Sept. 30, 2014).

The insured, the owner of several power plants, was sued by the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality for increasing emissions without necessary permits in violation of the Clean Air Act.  The owner tendered the suit to its insurer, and the insurer denied coverage for the suit.  Previously, the court held that the insurer had a duty to defend the owner in the suit.  Subsequently, the insured settled the suit and, under a consent decree, paid civil penalties.  The insurer argued that no indemnity coverage was available for payment of the civil penalties based on an exclusion, which barred coverage for “criminal fines, criminal penalties, punitive, exemplary or injunctive relief . . . .”

The court held that indemnity coverage was available for the civil penalties.  The civil penalties paid under the Clean Air Act did not constitute criminal fines or penalties because the underlying suit was a civil proceeding.  In addition, the court held that the civil penalties were not “punitive” in nature because the legislative history of the Clean Air Act did not demonstrate that the civil penalties were meant to be punitive and because civil penalties can be assessed without consideration of the intent or knowledge of a Clean Air Act violation.