United States: 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.

Aimed mostly at the denial of coverage under the Ocean Marine policy, the dissenting judge called the denial of coverage "absurd" and "the type of slimy conduct that gives insurance companies a bad name." The position of the dissent was simply that if the barrels were discharged, dispersed, or released, then so were their contents. Overall, the dissenting judge strongly believed that the cost of fishing out submerged oil barrels at the command of the Coast Guard is the kind of risk for which dry dock owners would seek coverage when buying insurance and that it did not matter whether oil mixes with water immediately or sometime later - the risk is the same. In sum, the dissenting judge commented, "If you slap a silk suit on a monkey, you still won't want to take it to prom. And if you pour crude oil into a barrel, you still won't want it in your hot tub."

To the majority, the plain language of the policy's pollution coverage provision was not ambiguous and the court was required to and did appropriately construe the provision as written.

As it concerns the strict construction and enforcement of the warranty provision, the court held the breach of warranty need not be material to the cause of the loss. This is interesting, particularly since in this case there actually appeared to be a legitimate connection between the insured's breach of the Navy Certification Warranty and the sinking of the dry dock.

In any event, 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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