Kozinski Raps Insurer in 9th Circuit Ruling

     (CN) – Despite a stinging dissent from Judge Alex Kozinski, a Guam company that maintains Navy vessels will not get insurance coverage for damage it suffered in a typhoon, the 9th Circuit ruled Monday.
     Zurich American Insurance Co. and Starr Indemnity & Liability Co. need not cover losses suffered by Guam Industrial Services, a three-judge panel ruled, affirming a decision by U.S. District Court of Guam Chief Judge Frances Tydingco-Gatewood.
     Judge Alex Kozinski wrote an extremely tart partial dissent, lambasting Zurich for “slimy conduct that gives insurance companies a bad name.”
     Guam Industrial owned and operated the Machinist, a dry dock in Apra Harbor, Guam, which sank on Jan. 2, 2011, during a typhoon. Containers holding 113,000 gallons of oil sank with the dry dock.
     The Coast Guard told Guam Industrial it would have to remove the sunken containers – which were not breached – or face fines and liability for any water contamination. The company spent $647,000 recovering the containers, which never leaked.
     The shipyard claimed it was entitled to insurance coverage for damages to the dry dock, and damages under a separate policy that covered pollution.
     Guam Industrial was insured with Zurich and Starr under a Hull and Machinery Policy that covered damage to the dry dock resulting from “perils” such as lightning, earthquake, pirates, assailing thieves, and other types of accidents and malfunctions.
     As a condition of coverage, the shipyard had to obtain and maintain Navy certification for the dry dock, to ensure that the dock’s structural integrity.
     Guam Industrial never obtained Navy certification, but got “commercial” certification from a Heger Dry Dock Inc., and the certification expired in October 2010.
     Heger told the shipyard it would not renew the certification unless Guam Industrial undertook significant repairs. The dock was taken out of commission and the repairs were under way when the dock sank.
     The 9th Circuit ruled that federal and state rules provide that marine insurance policy warranties are to be strictly construed. Although Guam’s courts have not spoken on the issue, it is reasonable to conclude that the Supreme Court of Guam would follow the majority rule, the panel said.
     “Ultimately, whether derived from federal admiralty law or state law, we conclude that the law requires strict compliance with marine insurance policy warranties, even when the breach of the warranty did not cause the loss. Applying that law to these facts, there is no question that Guam Industrial failed to comply with the Navy Certification warranty,” the panel concluded.
     Even if the insurers had waived their right to demand strict compliance with the Navy certification warranty because they had accepted the commercial certification, the dry dock lacked even commercial certification when it sank.
     The panel also found that Guam Industrial was not entitled to reimbursement under Zurich’s Ocean Marine Policy, for property damage caused by pollutants.
     The policy limits coverage to claims arising out of the discharge or release of pollutants into any body of water.
     “It is undisputed that no oil leaked out of the containers and into the water in the harbor. Thus, the policy’s coverage could be triggered only if the sinking of the containers constituted a ‘discharge, dispersal, release, or escape’ of oil or pollutants into the waters of the bay. It did not,” the panel said.
     The sealed barrels themselves do not qualify as a pollutant, the panel said.
     Kozinski dissented on that point, saying the policy should be construed in favor of the insured and that the barrels were indeed pollutants.
     “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,” Kozinski began.
     Had Guam Industrial not removed the sealed barrels from the water, sooner or later they would have leaked, which is why the Coast Guard ordered the shipyard to clean up the barrels, but not the other debris, Kozinski said.
     “No rational dry dock owner would buy a policy that covers government-ordered pollution clean-up if containment vessels filled with toxic waste break apart upon sinking but not if they remain intact. It’s absurd,” Kosinski wrote. “Zurich’s denial of coverage is the type of slimy conduct that gives insurance companies a bad name. This opinion should serve as fair warning to those who would throw away good money doing business with Zurich.”
     Kozinski said the majority based its ruling on a misunderstanding of the 7th Circuit Patz ruling, which involved buried barrels of paint sludge. (Patz v. St. Paul Fire & Marine Ins. Co., 15 F.3d 699 (7th Cir. 1994)).
     After years underground, the sludge leaked and the Patzes were ordered to clean it up. The insurer denied coverage, saying it was no accident because the Patzes themselves had buried the barrels.
     “The Seventh Circuit did say that ‘the barrels themselves were not contaminants’ at the time they were buried, and that ‘no discharge of contaminants into the soil occurred until the barrels leaked or broke,’ id. at 703, but it did so while construing the insurance contract – as it was required to do – in favor of the insureds,” Kozinski wrote in dissent.
     “The real lesson of Patz, which my colleagues overlook, is that when it comes to construing insurance contracts, the insured need not have the best interpretation or even one just as good as the insurer’s. The insured’s interpretation need only be plausible.”
     Attorneys on both sides did not immediately respond to requests for comment.

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