Guam Industrial Services v. Zurich American Insurance Co. , 787 F.3d 1001 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
GUAM INDUSTRIAL SERVICES, INC., No. 13-17005
DBA Guam Shipyard; MATHEWS
POTHEN, D.C. Nos.
Plaintiffs-Appellants, 1:11-cv-00014
1:11-cv-00031
v.
ZURICH AMERICAN INSURANCE OPINION
COMPANY, a corporation; STARR
INDEMNITY AND LIABILITY
COMPANY, a corporation,
Defendants-Appellees,
v.
UNITED STATES OF AMERICA,
Defendant.
Appeal from the United States District Court
for the District of Guam
Frances Tydingco-Gatewood, Chief District Judge,
Presiding
Argued and Submitted
August 27, 2014—Hagatna, Guam
Filed June 1, 2015
2 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
Before: Mary M. Schroeder, Alex Kozinski,
and N. Randy Smith, Circuit Judges.
Per Curiam Opinion;
Dissent by Judge Kozinski
SUMMARY*
Insurance Law
The panel affirmed the district court’s summary judgment
in favor of defendant insurance companies concerning
coverage under two policies issued to Guam Industrial
Services, Inc., arising out of the sinking of a dry dock, loaded
with barrels of oil, during a typhoon on Guam.
The Hull and Machinery Policy covered damage to the
dry dock, and required as a condition of coverage that Guam
Industrial obtain and maintain Navy Certification for the dry
dock. The panel held that strict compliance with marine
insurance policy warranties was required, even when the
breach of warranty did not cause the loss. The panel applied
that law to the facts, and concluded that Guam Industrial
failed to comply with the Navy Certification warranty.
The Ocean Marine Policy covered liability for property
damage caused by pollutants. It was undisputed that no oil
leaked out of the containers and into the water in the harbor.
The panel held that because there was no actual discharge of
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 3
pollutants, even though the containers of oil were submerged
after the sinking of the dry dock, Guam Industrial’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.
Judge Kozinski dissented in part, and would find that
pollutants were “discharged, dispersed, and released” from
the dry dock under the Ocean Marine Policy.
COUNSEL
Helkei S. Hemminger (argued) and David P. Ledger, Cabot
Mantanona LLP, Tamuning, Guam, for Plaintiffs-Appellants.
Marilyn Raia and Andrew B. Downs (argued), Bullivant
Houser Bailey PC, San Francisco, California, for Defendants-
Appellees.
4 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
OPINION
PER CURIAM:
This insurance coverage case arises out of the sinking of
a dry dock, loaded with barrels of oil, during a typhoon on
Guam. The issues pertain to whether either of two insurance
policies covered costs of damage to the dock and the clean up
which was accomplished before any of the oil leaked out of
the containers into the Pacific Ocean.
Guam Industrial Services, Inc. (“Guam Industrial”)
owned the dry dock. At the time of the sinking, one of its
insurance policies covered damage to the dock, and one
covered liability for property damage caused by pollutants.
After the dock sank, Guam Industrial filed a claim under each
policy. The insurers denied the claims, and Guam Industrial
brought suit. The district court granted summary judgment
for the insurers, finding that the first policy was voidable
because Guam Industrial had failed to maintain the warranty
on the dock, and that the coverage under the second policy
was never triggered because no pollutants were released.
Guam Industrial and its CEO, Mathews Pothen, appeal. We
affirm.
BACKGROUND
Guam Industrial owned and operated a dry dock called
the Machinist, located in Apra Harbor, Guam. The dry dock
sank on January 2, 2011. Guam Industrial had insured the
dry dock under two policies: a Hull and Machinery Policy,
which was underwritten collectively by Zurich American
Insurance Company (“Zurich”) and Starr Indemnity and
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 5
Liability Company (“Starr”), and an Ocean Marine Policy,
which was underwritten by Zurich alone.
The Hull and Machinery Policy covered damage to the
dry dock resulting from certain specified “perils” that
included lightning, earthquake, pirates, assailing thieves, and
various types of accidents and malfunctions. As a condition
of coverage, the policy required Guam Industrial to obtain
and maintain Navy Certification for the dry dock (“the Navy
Certification warranty”). Such certification ensures that the
dock has satisfied a certain level of structural integrity. It is
the highest standard in the industry.
It appears, however, that Guam Industrial never obtained
Navy Certification. Instead, Guam Industrial obtained
“commercial” certification from a company called Heger Dry
Dock, Inc. In October 2010, that commercial certification
expired. Heger Dry Dock informed Guam Industrial that it
would not renew the certification unless Guam Industrial
undertook significant repairs. Guam Industrial then took the
dry dock out of commission to conduct these repairs. The
dock sank while it was undergoing the repairs.
When the dry dock sank, it took with it various containers
in which were stored approximately 113,000 gallons of oil.
None of the containers were breached, however. Following
the incident, the Coast Guard issued a letter informing Guam
Industrial that it had to remove the sunken containers holding
the oil or face the possibility of fines and strict liability for
any contamination to the surrounding waters. Guam
Industrial recovered the containers, expending approximately
$647,000; no oil ever leaked out of the containers and into the
water.
6 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
Guam Industrial then filed a claim under the Hull and
Machinery Policy with Zurich and Starr. The insurers denied
the claim on the basis of the breach of the requirement to
obtain Navy Certification.
Guam Industrial also filed a claim with Zurich under the
Ocean Marine Policy. That policy generally covered “all
sums which the insured shall become legally obligated to pay
and shall have damages because of . . . [p]roperty damage.”
The policy also contained a “Pollution Exclusion Clause,”
which generally excluded coverage for any damages caused
by the “actual or potential discharge” of pollutants. The
scope of this exclusion was narrowed by an endorsement that
was attached to the policy (“Endorsement No. 10”).
Together, the exclusion and the endorsement specified that
the policy would cover the costs of any damage caused by
“the discharge, dispersal, release, or escape” of any pollutants
into the environment, provided the discharge was accidental
rather than intentional. Zurich denied the claim because no
actual discharge of pollutants had occurred.
After the denial of both claims, Guam Industrial brought
this suit in the District of Guam, invoking diversity
jurisdiction, against Zurich and Starr, seeking to recover on
both policies. The district court granted summary judgment
in favor of Zurich and Starr. It concluded that the Hull and
Machinery Policy did not provide coverage because Guam
Industrial had breached the Navy Certification warranty. The
court rejected Guam Industrial’s position that Zurich and
Starr had to demonstrate that the breach caused the sinking of
the dry dock, because applicable law required strict
compliance with certification requirements.
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 7
The district court further concluded that the Ocean Marine
Policy coverage for property damage caused by pollution was
never triggered because the oil never left the containers.
There was no “discharge, dispersal, release, or escape” of any
pollutant into the waters of Apra Harbor, and hence no
property damage within the terms of the policy.
Guam Industrial now appeals.
HULL AND MACHINERY POLICY AND THE LACK
OF CERTIFICATION
The Hull and Machinery Policy covering damage to the
dry dock was underwritten by both Zurich and Starr, and
required, as a condition of coverage, that Guam Industrial
obtain and maintain Navy Certification for the dry dock.
Guam Industrial breached the warranty because the dry dock
was never Navy Certified. Deciding whether the insurance
policy mandates strict compliance with its requirement of
Navy Certification requires interpretation of the policy.
To interpret a marine insurance policy, we usually must
first determine whether to apply state or federal law. See
Wilburn Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310,
313–14 (1955). Generally, courts are to “apply state law
unless an established federal rule addresse[s] the issues
raised, or there [is] a need for uniformity in admiralty
practice.” Yu v. Albany Ins. Co., 281 F.3d 803, 808 (9th Cir.
2002). That being said, we do not need to determine whether
to apply federal or state law in this instance because both
sources of law lead to the same rule: that marine insurance
policy warranties are to be strictly construed. The federal
8 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
rule, if one in fact exists,1 is that “admiralty law requires the
strict construction of express warranties in marine insurance
contracts; breach of the express warranty by the insured
releases the insurance company from liability even if
compliance with the warranty would not have avoided the
loss.” See Lexington Ins. Co. v. Cooke’s Seafood, 835 F.2d
1364, 1366 (11th Cir. 1988). The state majority rule also
provides that express warranties in marine insurance policies
should be strictly construed. See Yu, 281 F.3d at 808–09.
Guam’s courts have not yet spoken on this specific issue,
and where state courts are silent, “federal court[s] must make
a reasonable determination of the result the highest state court
would reach if it were deciding the case.” Med. Lab. Mgmt.
Consultants v. Am. Broad. Cos., 306 F.3d 806, 812 (9th Cir.
2002) (internal quotation marks omitted). We think that it is
reasonable to conclude that the Supreme Court of Guam
would likely follow the majority rule. Guam’s insurance
statutes are derived from California law, which requires strict
compliance with warranties when they are material. Cal. Ins.
Code § 447. 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
1
In Wilburn Boat Co. v. Fireman’s Fund Ins. Co., the Supreme Court
declared that no established federal rule addressed marine insurance policy
warranty clauses, and that the clauses should be interpreted using state
law. 348 U.S. at 314-16. Since Wilburn Boat, however, a few circuits
have announced the “federal rule” identified above. See Lexington Ins.
Co. v. Cooke’s Seafood, 835 F.2d 1364, 1366 (11th Cir. 1988); see also
Lloyd’s of London v. Pagan-Sanchez, 539 F.3d 19, 24 (1st Cir. 2008).
This circuit has neither announced a federal rule nor disclaimed such a
rule.
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 9
Guam Industrial failed to comply with the Navy Certification
warranty.
Guam Industrial contends that the insurers waived their
right to demand strict compliance with the Navy Certification
warranty because they had accepted commercial certification.
Under Guam law, conduct that is inconsistent with an intent
to demand strict compliance may constitute waiver. See
Guam Hous. & Urban Renewal Auth. v. Dongbu Ins. Co.,
Ltd., 2001 Guam 24, ¶ 18. The district court nevertheless
correctly granted summary judgment in favor of the insurers,
because even if they had waived the insistence on Navy
Certification, the dry dock lacked even commercial
certification when it sank. Though the insurers may have
waived their right to insist on the Navy Certification
warranty, they did not waive their right to insist on at least
commercial certification. See id. at ¶ 16 (waiver must be
intentional).
OCEAN MARINE POLICY
Zurich was also the insurer on an Ocean Marine Policy,
covering liability for property damage caused by pollutants.
The Ocean Marine Policy, in material part, limits 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.” 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.
10 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
Cases in this Circuit that deal with similar property
damage insurance clauses involving pollution have arisen in
situations where pollutants had unquestionably leaked into
the environment. See, e.g., Aeroquip Corp. v. Aetna Cas. &
Sur. Co., 26 F.3d 893, 893 (9th Cir. 1994) (dealing with the
leakage of 7,500 gallons of diesel fuel into the soil, but
coverage denied because leakage not “sudden and accidental”
as required under the policy); Intel Corp. v. Hartford Acc. &
Indem. Co., 952 F.2d 1551, 1559 (9th Cir. 1991) (insurer’s
reliance on pollution exclusion not waived in connection with
hazardous waste solvents that had slowly leaked out of
storage tanks and into the groundwater and soil). Thus, we
have had no occasion to consider whether the disposal into
the environment of containers holding contaminants can
constitute a discharge of pollutants, even if no contaminants
leaked into the environment.
Contract law requires that we give unambiguous2
insurance policy terms “their ordinary meaning.” Klamath
Water Users Protective Ass’n v. Patterson, 204 F.3d 1206,
1210 (9th Cir. 1999) (“Whenever possible, the plain language
of the contract should be considered first.”). Under the
ordinary meaning of Endorsement No. 10, Zurich would
provide coverage of Guam Industrial’s damages only if either
(1) oil or (2) pollutants escaped or were discharged,
dispersed, or released into the water. We agree with Guam
Industrial’s Opening Brief, where it outlined the “ordinary
meaning” for the insurance policy terms:
The plain ordinary meaning of discharge is
the release of something from “confinement,
2
No party argues (unlike the dissent) that the language of Endorsement
No. 10 is ambiguous.
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 11
custody, or care”. [sic] Webster’s Ninth New
Collegiate Dictionary (1989). A dispersal is
the “act or result of dispersing”, [sic] and
disperse includes the meaning “to spread or
distribute from a fixed or constant source”.
[sic] Id. An escape is the “act of escaping or
the fact of having escaped: as . . . leakage or
outflow esp. of steam or a liquid” and release
includes “to set free from restraint”. [sic] Id.
Bl. Br. 39. Applying these definitions to the facts of this
case, it is clear that barrels or containers were discharged,
dispersed, and released, but that oil was not. In fact, all
parties agree that the oil remained sealed inside its containers
at all relevant times. Thus, under the ordinary meaning of
Endorsement No. 10, Zurich’s coverage cannot be said to
have been triggered by a “discharge, dispersal, release, or
escape” of oil.
Further, sealed barrels, regardless of their contents, do not
qualify as “pollutants” under the plain meaning of
Endorsement No. 10. Endorsement No. 10 provides a list of
specific substances whose “discharge, dispersal, release or
escape” triggers the clause. The substances listed are
“smoke, vapors, soot, fumes, alkalis, toxic chemicals, liquids
or gases, waste materials, oil or other petroleum substance or
derivative (including any oil refuse or oil mixed wastes).”
These specific substances are then followed by the catchall
terms “or other irritants, contaminants or pollutants.” The
sealed barrels discharged in this case clearly do not qualify as
any of the specified substances. Thus, the only question is
whether sealed barrels fall within the catchall terms. “It is . . .
a familiar canon of statutory construction that [catchall]
clauses are to be read as bringing within a statute categories
12 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
similar in type to those specifically enumerated.” Paroline v.
United States, 134 S. Ct. 1710, 1721 (2014) (alteration in
original) (quoting Federal Maritime Comm’n v. Seatrain
Lines, Inc., 411 U.S. 726, 734 (1973)). When applying this
canon of construction to the Endorsement, it is clear that
barrels and other containers are not similar to the listed
substances. Instead, the Endorsement limits the term
“pollutants” to chemicals and other hazardous substances.
Solid, non-hazardous items, such as barrels, are not similar in
type to the specifically enumerated hazardous substances.
Thus, under the ordinary meaning of the policy terms, a
sealed barrel cannot be an “irritant[], contaminant[] or
pollutant.” Neither oil nor pollutants were discharged,
dispersed, or released, nor did they escape, into the waters of
Apra Harbor in this case.
The dissent argues that we err by not construing the
Ocean Marine Policy in favor of the insured (Guam
Industrial). As the authority cited by the dissent recognizes,
“should ambiguities exist in the language of the policy
provisions, they are to be liberally construed in favor of the
insured” to “protect[] . . . the objectively reasonable
expectations of the insured.” Yasuda Fire & Marine Ins. Co.
v. Heights Enterprises, 1998 Guam 5 ¶ 12–13 (emphasis
added) (internal quotation marks omitted). However, we find
no ambiguity in the terms of the Ocean Marine Policy.
Without an ambiguous term or provision, we have nothing to
“construe” in favor of the insured. Surely, the dissent cannot
intend to suggest that any time an insurer and an insured have
a genuine disagreement concerning an insurance contract
provision, a reviewing court must accept the insured’s
interpretation. That contention has absolutely no support in
our precedent. See Klamath Water Users Protective Ass’n,
204 F.3d at 1210 (“The fact that the parties dispute a
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 13
contract’s meaning does not establish that the contract is
ambiguous . . . .”).
Instead, our precedent clearly requires that we apply the
ordinary meaning of the contract terms. See, e.g., id. at 1210.
Utilizing Guam Industrial’s own “ordinary meanings” of the
terms in Endorsement No. 10, we conclude that Guam
Industrial’s damages were not covered by the Ocean Marine
Policy.
At least one other Circuit has expressly held that the
relevant act of pollution for purposes of similar insurance
coverage occurs when the contaminant leaks out of a
container, not when the container is disposed of. In Patz v.
St. Paul Fire & Marine Ins. Co., 15 F.3d 699, 702 (7th Cir.
1994), the Seventh Circuit addressed a similar insurance
clause that provided coverage for accidental “discharge,
dispersal, release, or escape” of contaminants or pollutants.
The insured had put sludge into barrels and then buried the
barrels. Id. at 703. The insurer had contended the burial
constituted the pollution and was not accidental. The court
held that the relevant act of pollution occurred not when the
barrels were buried but when the sludge leaked out of the
barrels. Id. (“As the barrels themselves were not
contaminants, no discharge of contaminants into the soil
occurred until the barrels leaked or broke.”).
We agree with the Seventh Circuit that the containers
themselves are not pollutants. Just as there was no pollution
in Patz when the barrels were buried in the ground, there was
no pollution in this case when the dry dock sank and the
containers fell into the water. Under the pollution clause in
the insurance policy, pollution would have occurred only
14 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
when and if the oil leaked out of the containers, which it did
not.
The district court correctly ruled that since there was no
actual discharge of pollutants, even though the containers of
oil were submerged after the sinking, Guam Industrial’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.
CONCLUSION
The district court correctly granted summary judgment in
favor of the defendant insurance companies on both the Hull
and Machinery Policy, and on the Ocean Marine Policy.
AFFIRMED.
KOZINSKI, Circuit Judge, dissenting in part:
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.
Zurich’s Ocean Marine Policy covers claims “arising out
of the discharge, dispersal, release, or escape of . . . oil . . . or
pollutants into . . . any watercourse or body of water.” Guam
Industrial paid for this coverage and Zurich happily accepted
the premiums. (Insurance companies seldom have trouble
with this part of the bargain.) What risk was Zurich paid to
assume? The risk that something nasty would get into the
water and Guam Industrial would be under a legal obligation
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 15
to clean it up. That’s just what happened here: Some very
nasty stuff—barrels containing over 100,000 gallons of
industrial oil—plunged into the harbor when the dry dock
sank. To no one’s surprise, the Coast Guard immediately
issued Guam Industrial a clean-up notice. This wasn’t an
invitation to the prom; it was a clean-up-or-else-we’ll-do-it-
ourselves-and-make-you-pay-through-the-nose notice. Guam
Industrial did what the law required of it and, thanks to its
careful efforts, none of the oil mixed with the water. Why
should Zurich’s obligation to pay for the clean-up turn on the
largely fortuitous circumstance that none of the barrels leaked
right away? Sooner or later the monkey will rip off the silk
suit and the barrels at the bottom of the ocean will release
gunk where the fishes live. Which is no doubt why the Coast
Guard gave Guam Industrial a notice to clean up the barrels
of oil but not the other debris from the sinking.
Like the majority, I start with the dictionary definitions of
“discharge,” “dispersal,” “release” and “escape” to ascertain
their ordinary meaning. A “discharge” is a “release from
confinement, custody, or care.” Merriam-Webster’s
Collegiate Dictionary 356 (11th ed. 2003). A “dispersal” is
the act of “spread[ing] or distribut[ing] from a fixed or
constant source.” Id. at 361. A “release” is the act of
“set[ting] free from restraint [or] confinement,” id. at 1051,
and an “escape” is “flight from confinement,” id. at 425. The
majority concludes that “barrels or containers were
discharged, dispersed, and released” from the dry dock. Op.
at 11. It then follows that the contents of those barrels were
likewise “discharged, dispersed, and released” from the dry
dock.
Let’s say you place your cell phone in your backpack
while hiking, and the backpack falls into a crevice and can’t
16 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
be recovered. You’d certainly be right in claiming that you
lost your cell phone, even though the phone is still inside your
backpack. What matters is that the backpack and its contents
are no longer in your control. If the phone was insured
against loss, no insurance company (except maybe Zurich)
would claim that the phone isn’t lost because it’s still inside
your backpack.
Endorsement No. 10 lists the “discharge, dispersal,
release, or escape” of “smoke, vapors, soot, fumes, alkalis,
toxic chemicals, liquids or gases, waste materials, oil or other
petroleum substance or derivative . . . or other irritants,
contaminants or pollutants” as hazards covered by the policy.
The majority claims that “[s]olid, non-hazardous items, such
as barrels, are not similar in type to the specifically
enumerated hazardous substances” in the Endorsement. Op.
at 12. But we’re not talking here about empty barrels; we’re
talking about barrels filled with a known pollutant. Nor are
we talking about indestructible barrels—something that exists
only in graphic novels. In the real world, barrels are merely
temporary containment devices that will corrode or break
over time. At that point, whatever lurks inside—oil, acid,
arsenic, radioactive waste, you name it—will spill out.
Of course, we must read the catchall clause, “or other
irritants, contaminants or pollutants,” as “bringing within a
[contract] categories similar in type to those specifically
enumerated.” Paroline v. United States, 134 S. Ct. 1710,
1721 (2014) (internal quotation marks omitted). But are oil
barrels all that different from “waste materials” or the very
substance contained within the barrels—industrial oil? Once
underwater, barrels filled with oil pose a threat to the
environment and will eventually cause the same kind of harm.
Would you let your kids swim in waters where there are
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 17
submerged barrels filled with toxic waste? Would you drink
from a well in which such barrels were dropped? Most
people wouldn’t. The Coast Guard certainly considered the
barrels sufficiently polluting to order that Guam Industrial
remove them.
The majority misplaces its reliance on a Seventh Circuit
case that held for the insureds. See Patz v. St. Paul Fire &
Marine Ins. Co., 15 F.3d 699 (7th Cir. 1994). The insureds
in Patz buried sealed barrels of paint sludge on their property.
A few years later, the sludge leaked from the barrels and the
Patzes were ordered to clean up the mess. Id. at 702. They
sought reimbursement for their clean-up costs under a policy
that covered the accidental “discharge, dispersal, release or
escape” of contaminants or pollutants. The insurance
company denied coverage, arguing that the discharge was not
accidental because the Patzes had buried the barrels of sludge
intentionally. Id. 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. It acknowledged
that “[a]t first and even second glance, [the insurance
company’s] interpretation . . . has a great deal to recommend
it. Excluded from coverage, on the most natural reading of
the clause, are all discharges (etc.) of waste materials, except
those that are sudden and accidental.” Id. Construing the
Patzes’ burial of the barrels as an act of pollution may have
been the more plausible interpretation, but the Seventh
Circuit adopted the less plausible interpretation which
favored the insureds.
18 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
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. “A well settled general principle of
insurance law is that . . . ambiguities . . . are to be liberally
construed in favor of the insured.” Yasuda Fire & Marine
Ins. Co. v. Heights Enters., 1998 Guam 5 ¶ 12. An
ambiguous term must be interpreted “in the manner in which
the promisor believed the promisee understood it at the time
of its making” so as to “protect[] . . . the objectively
reasonable expectations of the insured.” Id. at ¶ 13 (internal
quotation marks omitted). The majority has hung this
venerable maxim of insurance law by its tail.
Guam Industrial argues that the language of Endorsement
No. 10 unambiguously covers the sinking of the oil barrels,
while Zurich argues that the language unambiguously
excludes such coverage. Where “both parties claim a contract
is unambiguous but advance different rational arguments as
to its meaning, a court is not limited by the parties’ failure to
specifically assert ambiguity.” Minex Res., Inc. v. Morland,
467 N.W.2d 691, 696 (N.D. 1991); see also Comm’r of the
Gen. Land Office of Tex. v. SandRidge Energy, Inc.,
454 S.W.3d 603, 612 (Tex. App. 2014) (“We may conclude
that a contract is ambiguous even when, as is the case here,
the parties do not assert ambiguity.”).
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.
It doesn’t matter whether oil mixes with water immediately
or sometime later; the risk is the same. After all, dry dock
owners have every reason to expect that the Coast Guard will
GUAM INDUS. SERVS. V. ZURICH AM. INS. CO. 19
order the immediate removal of barrels filled with pollutant,
whether or not they ruptured when the dry dock sank. See
33 U.S.C. § 1321(c)(1)(A) (requiring the President, acting
through the Coast Guard, to ensure “mitigation or prevention
of a substantial threat” of an oil spill).
The policy’s pollution exclusion clause is designed to
exclude coverage for pollution occurring during the normal
course of an insured’s business. See Minerva Enters., Inc. v.
Bituminous Cas. Corp., 851 S.W.2d 403, 404 (Ark. 1993)
(“the [pollution] exclusion is intended to prevent persistent
polluters from getting insurance coverage for general
polluting activities”); Thompson v. Temple, 580 So. 2d 1133,
1134–35 (La. Ct. App. 1991) (“Pollution exclusion clauses
are intended to exclude coverage for active industrial
polluters, when businesses knowingly emitted pollutants over
extended periods of time.”) (citing cases); Molton, Allen &
Williams, Inc. v. St. Paul Fire & Marine Ins. Co., 347 So. 2d
95, 99 (Ala. 1977) (“It is believed that the intent of the
‘pollution exclusion’ clause was to eliminate coverage for
damages arising out of pollution or contamination by
industry-related activities. . . . The pollution exclusion was no
doubt designed to decrease the risk where an insured was
putting smoke, vapors, soot, fumes, acids, alkalis, toxic
chemicals, liquids or gases, waste materials or other irritants,
contaminants or pollutants into the environment.”). Losing
control of pollutants as a result of an unexpected and
unintended event—here, the sinking of the dry dock during
high surf conditions—is nothing like the types of events
contemplated by the pollution exclusion clause. Endorsement
No. 10 clears up any doubt by specifying that “[t]his
[pollution] exclusion shall not apply” where “the occurrence
[that] arose from Maritime Operations” was “caused by some
20 GUAM INDUS. SERVS. V. ZURICH AM. INS. CO.
intervening event neither foreseeable nor intended by the
insured.” This is just what happened here.
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. 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.