An
insurer is not obligated to provide coverage under a pollution policy
if barrels containing oil are submerged in water but no oil leaks out,
says an appeals court in a divided opinion with a strongly worded
dissent.
Santa
Rita, Guam-based Guam Industries Services Inc. owned and operated a dry
dock in Apra Harbor, Guam, that sank during a typhoon on Jan. 2, 2011,
according to Monday’s ruling by the 9th U.S. Circuit Court of Appeals in
San Francisco in Guam Industries Services Inc. et al. v. Zurich American Insurance Co. et. al.
Guam
Industries had insured the dry dock under two policies: an ocean marine
policy underwritten by Schaumburg, Illinois-based Zurich American
Insurance Co. that covered liability for property damage caused by
pollutants, and a hull and machinery policy written collectively by
Zurich and New York-based Starr Indemnity & Liability Co.
When
the dry dock sank, it took with it various containers that stored about
113,000 gallons of oil, although none of the containers were breached,
according to the ruling. Guam Industries spent about $647,000 recovering
the containers.
It
filed a claim under the Zurich ocean marine policy, which provided
coverage for claims “arising out of the discharge, dispersal, release or
escape of … oil … or pollutants into or upon … any watercourse or body
of water,” according to the ruling. Zurich denied the claim because no
actual discharge of pollutants had occurred.
Guam
Industries also filed a claim with Zurich and Starr under the hull and
machinery policy, which covered damage to the dry dock, which the
insurers denied on the basis that the company had failed to obtain the
required navy certification for the dry dock.
Guam
Industries sued the insurers in U.S. District Court in Guam, which
granted the insurers summary judgment dismissing the case.
That ruling was upheld by the 9th Circuit’s majority.
“It
is clear that barrels or containers were discharged, dispersed, and
released but that oil was not,” said the appeals court in its 2-1
ruling. “Sealed barrels, regardless of their contents, do not qualify as
‘pollutants’ under the plain meaning” of the policy.
In a dissenting opinion, Judge Alex Kozinski said the pollution policy should still apply.
“If
you slap a silk suit on a monkey, you still won’t want to take it to
the prom. And if you pour crude oil into a barrel, you still won’t want
it in your hot tub,” he said.
“Zurich’s denial of coverage is the type of slimy conduct that gives insurance companies a bad name,” he said.
The panel agreed with the lower court that the hull and machinery policy did not provide coverage.