The Ninth Circuit found that a pollution endorsement did not cover the cost of retrieving oil barrels that did not discharge pollutants. Guam Industrial Services, Inc. v. Zurich Am. Ins. Co., 2015 U.S. App. LEXIS 9045 (9th Cir. June 1, 2015).
Guam Industrial's dry dock sank into the harbor. Various containers in which 113,000 gallons of oil were stored fell into the water. None of the containers were breached, however. The Coast Guard forced Guam Industrial to recover the containers, and the cost of the retrieval was $647,000.
Guam Industrial sought coverage under two policies. A Hull and Machinery Policy was underwritten by Zurich and Star Indemnity and Liability Company. The policy covered damaged to the dry dock resulting from certain specified "perils" that included lightning, earthquake, pirates, and various types of accidents and malfunctions. The policy required a Navy Certification for the dry dock.
Guam Industrial never acquired the certification, however, instead it obtained "commercial" certification from a private company. In October 2010, the commercial certification expired. The private company would not renew the certification unless significant repairs were made. The dry dock sank while it was undergoing the repairs. Coverage was denied under the Hull and Machinery Policy because of the breach of the requirement to obtain Navy Certification.
The second policy was an Ocean Marine Policy with Zurich. Through an endorsement, the policy covered "the discharge, dispersal, release, or escape" of any pollutants into the environment, provided the discharge was accidental. Zurich denied the claim because no actual discharge of pollutants occurred.
Guam Industrial filed suit. The district court granted summary judgment to the insurers on both policies.
The Ninth Circuit affirmed. Strict compliance with marine policy warranties was required, even when the breach of the warranty did not cause the loss. Even if the insurers waived their right to demand strict compliance with the Navy Certification because they had accepted commercial certification, the dry dock lacked even commercial certification when it sank.
Regarding coverage under the Ocean Marine Policy, it was undisputed that no oil leaked out of the containers and into the water in the harbor. Although barrels or containers were discharged, dispersed, and released, oil was not. The oil remained sealed inside its containers at all relevant times.
Judge Kozinski dissented with a relish that policy holder lawyers can appreciate. Judge Kozinski started his dissent as follows:
If you slap a silk suit on a monkey, you still won't want to take it to the prom. And if you pour crude oil into a barrel, you sill won't want it in your hot tub.
The dissent concluded by stating,
No rational dry dock owner would buy a policy that covers government-ordered pollution clean-up if containment vessels filled with toxic waste break apart upon sinking but not if they remain intact. It's absurd. Zurich's denial of coverage is the type of slimy conduct that gives insurance companies a bad name. This opinion should serve as fair warning to those who would throw away good money doing business with Zurich.
Special thanks to Damon Key blogging colleague Robert Thomas (www.inversecondemnation.com) for flagging this case.