Warranty and Pollution Provisions of Marine Policies Upheld

Case: Guam Indus. Servs. v. Zurich Am. Ins. Co.
United States Court of Appeals for Ninth Circuit
No. 13-17005, 787 F.3d 1001 (9 Cir. 06/01/15)

In January 2011, a dry dock in Apra Harbor, Guam, owned and operated by Guam Industrial Services Inc., sank during a typhoon, along with 113,000 gallons of oil stored in containers on the dock. After Guam was instructed by the U.S. Coast Guard to retrieve the oil containers or face fines and strict liability for any resulting contamination, Guam spent approximately $647,000 recovering the oil containers. Fortunately for Guam, no oil had leaked out prior to the containers being retrieved.

Guam then made claims under its Hull and Machinery insurance policy underwritten by Zurich American Insurance Company and Starr Indemnity and Liability Company, which provided coverage for damage to the dry dock itself, and its Ocean Marine policy, also underwritten by Zurich, which provided coverage for liability for property damage caused by pollutants. The insurers denied coverage under both policies and Guam instituted the instant coverage suit in the United States District Court of Guam. The insurers prevailed on summary judgment at the District Court, which found no coverage available under the Hull and Machinery Policy due to Guam’s breach of a warranty provision and likewise found that the Ocean Marine Policy coverage for property damage caused by pollution was never triggered because the oil never left the containers. Guam appealed the District Court’s decision but the Ninth Circuit affirmed the grant of summary judgment in favor of the insurers.

Important to the court’s holding, the Hull and Machinery Policy issued to Guam contained a Navy Certification Warranty, which required Guam to obtain and maintain Navy Certification for the dry dock, the purpose of which was to ensure that the dry dock satisfied a certain level of structural integrity. However, Guam never obtained the Navy Certification as required. Instead, Guam obtained a lower standard “commercial” certification; however, even that certification had expired approximately three months prior to the loss. Although the state courts of Guam had not yet spoken on the issue, the Ninth Circuit found it reasonable to conclude that the Supreme Court of Guam would follow the “majority rule” and hold that the law requires strict compliance with marine insurance policy warranties – even when the breach of the warranty did not cause the loss. The court found there was “no question” that Guam failed to comply with the Navy Certification warranty. Thus, it was not entitled to coverage under the policy.

The Ocean Marine Policy covered Guam’s liability for property damage caused by pollutants and limited 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.” As it was undisputed that no oil actually leaked out the containers and into the water of the harbor, the court reasoned that the policy’s coverage could only be triggered if the sinking of the containers themselves constituted a “discharge, dispersal, release, or escape” of oil or pollutants into the waters – which it did not. Thus, since there was no actual discharge of pollutants, even though the containers of oil were submerged after the sinking, Guam’s costs of retrieving the containers from the sea were not covered by the policy’s allowance of coverage for cleanup after the “discharge, dispersal, release, or escape” of pollutants.

While express warranties in marine insurance contracts may be strictly construed in the Ninth Circuit; i.e., enforced without the requisite showing of any relationship between the breach of the warranty and loss, the Federal Fifth Circuit and jurisdictions included within the Gulf Coast region do not necessarily follow suit and do generally require the showing of a casual connection between the breach of an express warranty and a loss in order for insurers to avoid coverage.