I'd chose to highlight the danger or error condition instead of when things are working correctly.
- Label for normal condition: OK
- Label for error condition : !!FAILURE!!
In monospace fonts and with different text alignment:
Both labels here are short, one word in each.
Capital letters are easier to read.
Two labels are visually distinct. Regardless of text alignment and font size. Even from a distance they look different. This helps with recognizing the label without reading letter by letter.
The label for error condition is wrapped with "!!" to add an extra layer of distinction. In case a robot or machine needs to "see" this, the image classifier will have a higher accuracy rate because of this.
"FAILURE" is somewhat vague and does not convey much information except that things are not working correctly. The operator might want to see something like "leak", "burst", "overflow", "jam" etc., something that gives more information. In that case, a different word can replace "failure", but the "!!" should remain.
Answer before constraints were known. Keept for the records only.
So my labelling would be "RELEASE VALVE FAILURE" and this would lit up when the valve is not working correctly.
In most places of the world, green means OK and red means Danger. But let's not assume that is the case everywhere. Depending on the culture of the operator (or whoever needs to see this) an appropriate colour should be chosen. Let's say our operator reads red as danger. So a red indicator should be lit up when the valve is not working correctly.
If we are not constrained to have indicator for only one situation, I would suggest indicators for both OK and danger situations. Again, say the operator reads green as OK. Then a green indicator light can be used to signal that the valve is working correctly. This has the added benefit of being readable at all times even in darkness. Also, if the indicator is placed close to the valve or the interface to control it, we readily know where to go and start examine or pull a lever.
As pointed out by PhillipW, only changing colours for signalling OK/Danger does not help users with colour blindness. Distinct symbols or lettering can help in this case. But it's not clear from the question whether we are constrained to using a single indicator light. If LED letter display or lit up sings (e.g. emergency exit signs) are available, the solution can be improved.
Changed answer in response to clarification. Only label text can be changed and has to be within 35 characters, 4 words.