Guam Industrial Services, Inc. v. Zurich American Insurance Company

In Guam Industrial Services, Inc. v. Zurich American Insurance Company, __ F.3d __ (June 1, 2015), the Ninth Circuit Court of Appeal affirmed the district court’s grant of summary judgment to two insurers for losses arising out of the sinking of a dry dock during a typhoon.

Guam Industrial Services, Inc. (“Guam Industrial”) was insured under two policies: a Hull and Machinery Policy underwritten by Zurich American Insurance Company (“Zurich”) and Star Indemnity and Liability Company (“Star”); and an Ocean Marine Policy, underwritten by Zurich.

Guam Industrial owned and operated a dry dock, which sank on January 2, 2011 while undergoing repairs. When the dock sank, sealed barrels containing approximately 113,000 gallons of oil also sank. None of the containers were breached, but the Coast Guard informed Guam Industrial it had to remove the barrels or face the possibility of fines and strict liability for any resulting damage. Guam Industrial successfully recovered all the containers without any oil leaking into the water, at a cost of approximately $647,000.

Guam Industrial then filed claims under both policies for these costs. Both claims were denied.

The Hull and Machinery Policy insured Guam Industrial against specified perils, e.g. lightning, pirates, and certain types of accidents and malfunctions. The Policy included a condition to coverage: Guam Industrial must obtain and maintain a Navy Certification, the highest standard of warranty for ensuring structural integrity, for the dry dock. Guam Industrial did not obtain a Navy Certification, but obtained a “commercial” certification, which expired in October 2011. To renew the certification, Guam Industrial was required to undertake significant repairs to the dry dock, which it was performing at the time the dry dock sank. Zurich and Star denied the claim based on Guam Industrial’s failure to obtain the requisite Navy Certification.

The Ocean Marine Policy contained a pollution exclusion clause, which was then limited by endorsement. “Together, the exclusion and the endorsement specified that the policy would cover the costs of any damage caused by ‘the discharge, dispersal, release, or escape’ of any pollutants into the environment, provided the discharge was accidental rather than intentional.” Zurich denied Guam Industrial’s claim as “no actual discharge of pollutants had occurred.”

Guam Industrial then brought suit against Zurich and Star in the District of Guam, seeking coverage under these policies. The district court granted summary judgment to Zurich and Star, concluding that (1) Guam Industrial had breached the Hull and Machinery Policy by failing to obtain the Navy Certification, and (2) coverage was not triggered under the Ocean Marine Policy as no oil ever left the containers. Guam Industrial appealed.

The Ninth Circuit first addressed the issue of whether strict compliance was required for the Hull and Machinery Policy. The Court determined that, whether applying state or federal law, the analysis is the same: both state and federal law require strictly construing a marine insurance policy. As Guam’s courts had not addressed this issue, the Ninth Circuit would then make a “reasonable determination” of how the highest court would rule. The Court reasoned Guam’s highest court would follow the majority rule, because Guam’s insurance statutes are derived from those of California, which require strict compliance for a material warranty. Based on this analysis, Guam Industrial was required to strictly comply with the terms of its policy, by obtaining a Navy Certification, which it failed to do. In response, Guam Industrial asserted Zurich and Star had waived this condition by accepting the commercial certification. However, the Court rejected this claim: as Guam Industrial did not even have commercial certification at the time of the loss, the insurers did not waive their right to insist on commercial certification at the least.

The Ninth Circuit then addressed the issue of coverage under the Ocean Marine Policy based on the escape of pollutants:

The Ocean Marine Policy, in material part, limits coverage to claims “arising out of the discharge, dispersal, release, or escape of . . . oil . . . or pollutants into or upon . . . any watercourse or body of water.” It is undisputed that no oil leaked out of the containers and into the water in the harbor. Thus, the policy's coverage could be triggered only if the sinking of the containers constituted a “discharge, dispersal, release, or escape” of oil or pollutants into the waters of the Bay. It did not.

. . .

Contract law requires that we give unambiguous insurance policy terms “their ordinary meaning.” Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206, 1210 (9th Cir. 1999) (“Whenever possible, the plain language of the contract should be considered first.”). Under the ordinary meaning of Endorsement No. 10, Zurich would provide coverage of Guam Industrial's damages only if either (1) oil or (2) pollutants escaped or were discharged, dispersed, or released into the water. . . .

It is clear that barrels or containers were discharged, dispersed, and released, but that oil was not. In fact, all parties agree that the oil remained sealed inside its containers at all relevant times. Thus, under the ordinary meaning of Endorsement No. 10, Zurich's coverage cannot be said to have been triggered by a “discharge, dispersal, release, or escape” of oil.

Further, sealed barrels, regardless of their contents, do not qualify as “pollutants” under the plain meaning of Endorsement No. 10. Endorsement No. 10 provides a list of specific substances whose “discharge, dispersal, release or escape” triggers the clause. The substances listed are “smoke, vapors, soot, fumes, alkalis, toxic chemicals, liquids or gases, waste materials, oil or other petroleum substance or derivative (including any oil refuse or oil mixed wastes).” These specific substances are then followed by the catchall terms “or other irritants, contaminants or pollutants.” The sealed barrels discharged in this case clearly do not qualify as any of the specified substances. Thus, the only question is whether sealed barrels fall within the catchall terms. “It is . . . a familiar canon of statutory construction that or pollutant.” Neither oil nor pollutants were discharged, dispersed, or released, nor did they escape, into the waters of Apra Harbor in this case.

The Court noted that, despite the dissent’s arguments, there is no ambiguity to be interpreted in favor of the insured. The Court then pointed to Patz v. St. Paul Fire & Marine Ins. Co., 15 F.3d 699 (7th Cir. 1994), wherein the Seventh Circuit determined that barrels filled with sludge were not contaminants at the time they were buried, finding there was no “discharge of contaminants” until the sludge began to leak out, in support of its holding.

The dissent questioned the purpose of the Ocean Marine Policy if it did not provide coverage for the loss: “Guam Industrial did what the law required of it and, thanks to its careful efforts, none of the oil mixed with the water. Why should Zurich's obligation to pay for the clean-up turn on the largely fortuitous circumstance that none of the barrels leaked right away?” The dissent turned to the dictionary definition of the terms of the policy, determining that the contents of the barrels (the oil) were discharged, dispersed, or released from the dry dock. The dissent questioned the majority’s analysis that the barrels were not pollutants, based on the fact that the barrels contained pollutants which would leak out in a matter of time – barrels which “[t]he Coast Guard certainly considered . . . sufficiently polluting to order that Guam Industrial remove them.” Further, the dissent argued, the majority misconstrued Patz by claiming the barrels were not pollutants. The “real lesson of Patz” is that insurance contracts should be construed consistent with the insured’s interpretation, which need only be plausible. The dissent then concluded: “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.”