In a win for policyholders, the Ninth Circuit recently determined that an insurer must defend manufacturer Ameron International in a paint failure lawsuit. Ameron supplied paint to Sable Offshore Energy for its onshore and offshore natural gas production facilities in Nova Scotia, Canada. After corrosion damaged the facilities in May 2001, rendering them prone to collapse and necessitating repair that could cost hundreds of millions of dollars, Sable filed suit against Ameron in Canada in 2004. Ameron sought coverage in California state court from two insurers which had issued general liability policies from May 2000 to April 2001 and from July 2002 to June 2003. While the first insurer eventually agreed to shoulder most of Ameron's defense costs, the second did not. In 2012, Ameron, joined by the settling insurer, sued the other in a California federal district court to cover mounting defense costs. The Ninth Circuit reversed the district court's order granting summary judgment to the defendant insurer.
The Ninth Circuit rejected the defendant insurer's argument that its 2002-2003 policy's known damages provision excluded coverage of the 2001 property damage. The court explained that even though Ameron knew before purchasing the policy that the paint it supplied to Sable had zinc deficiencies that might lead to corrosion, inferior paint did not constitute property damage. While the corrosion to the facilities might be property damage, and Ameron executives knew about the corrosion at the offshore facilities of the Sable project, the court found a possibility of coverage because Ameron employees testified they had not known about corrosion at the onshore facilities. The Ninth Circuit disagreed with the district court's finding that Ameron's knowledge of corrosion at the offshore facilities served to exclude coverage of corrosion at the onshore facilities. The court reasoned that even though Ameron supplied the same zinc-deficient paint to both types of facilities, the causes of the corrosion at the onshore and offshore facilities may not have been identical.
Ameron also overcame the insurer's argument that there was no occurrence to trigger its policy because Sable's lawsuit did not involve an accident. The court noted that even though Ameron intentionally supplied the paint, the insurer failed to establish that Ameron intentionally supplied zinc-deficient paint.
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