Last month, the Second Circuit summarily reversed a district court's ruling that an insurer must pay for legal defense costs far in excess of the insured's liability coverage.
In American Commercial Lines LLC v. Water Quality Insurance Syndicate, Case Nos. 16-91-cv & 16-119-cv, American Commercial Lines (ACL) incurred significant legal defense costs after a barge it owned spilled 300,000 gallons of oil into the Mississippi River. ACL's insurance policy included two important coverage provisions: the first provided $5 million of liability coverage per vessel, and the second provided "costs and expenses . . . for investigation of, or defense against, any liabilities covered under [the first provision]." The policy also provided that "the amounts payable for costs and expenses incurred by [ACL] . . . for investigation of, or defense against, any liabilities covered under [the first provision] shall be in addition to the limits of liability."
A dispute arose as to whether the phrase "in addition to the limits of liability" required the insurer to reimburse ACL for its legal defense costs even after the $5 million indemnity limit had been reached. The district court answered this question in the affirmative and granted partial judgment on the pleadings for ACL. The Second Circuit reversed, holding that while the policy language is ambiguous, a "reasonably intelligent person who has considered the context of the Policy as a whole and who is cognizant of the customs and practices of the trade could conclude that [the insurer's] liability under [the second provision] ceased once the [coverage] limit was reached." That reasonable person could also conclude, the court noted, that the parties did not intend for the insurer to be responsible for paying defense costs that far exceeded the limit on liability.
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