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Court Interprets Provision in Pollution Insurance Policy To Contain No Limits on Defense and Investigation Indemnification

In a recent decision from the Southern District of New York, Judge Kaplan held that an insurance provider's "contractual obligation under the policy to reimburse [the insured] for costs incurred and to be incurred by [the insured] in the investigation and defense of all claims asserted against [the insured] as the result of an oil spill incident continues until all such costs are reimbursed, regardless of whether other indemnity limits under the policy have been reached."  American Commercial Lines LLC v. Water Quality Insurance Syndicate, Docket No. 09 Civ. 7957 (LAK) (S.D.N.Y. March 29, 2010).

This action involved a dispute between American Commercial Lines LLC ("ACL") and its insurer, the Water Quality Insurance Syndicate ("WQIS") about whether WQIS's insurance policy covered certain investigation and defense costs related to an oil spill on the Mississippi River in July 2008. "Coverage A" of the policy provided coverage for six (6) categories of liability related to the Oil Pollution Act of 1990, while "Coverage C" provided for WQIS to reimburse ACL for "[c]osts and expenses incurred by [ACL] with prior consent of WQIS for investigation of, or defense against, any liabilities covered under [Coverage A]."  The relevant limits on WQIS's liability under the policy were contained in "Part II, Article A", which provided that "Coverage A" would be limited to the amount stated on the Vessel Schedule contained within the policy. With respect to Coverage C, the policy provided that "[t]he amounts payable for costs and expenses incurred by [ACL] with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under COVERAGE A . . . shall be in addition to the limits of liability stated in ARTICLE A(1) . . ." (emphasis added). WQIS argued that because its payments under Coverage A had reached the policy limits, it was no longer obligated to reimburse ACL for investigation and defense costs under Coverage C. 

Applying the governing New York law to the contract, Judge Kaplan first noted that insurance policies are "interpreted to give effect to the intent of the parties as expressed in the clear language of the contract."  Accordingly, he first determined whether the contract was "unambiguous" with respect to the issue disputed by the parties. Upon reading the policy as a whole, Judge Kaplan found that its language was unambiguous. The Judge found that the language contained in the limits to Coverage C expressly provided that the limits "shall be in addition to the limits" imposed on Coverage A, which "makes clear that the parties did not intend to limit WQIS's obligations" for investigation and defense costs.

In so holding, the Court rejected WQIS's contention that its obligation to pay for investigation and defense costs ended when its payments under Coverage A reached its limits. The Court found that the Policy expressly provided for coverage in addition to the limits of liability for Coverage A; that the text of the policy as a whole showed that "[t]he parties knew how to restrict WQIS's reimbursement obligations when they wanted to do so"; and that although the "limits of liability" provision capped the maximumamount to be paid by WQIS for any particular incident, it did not limit the scope of the coverage provided under those provisions. 

Read a copy of Judge Kaplan's decision

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