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"Monkey Business?" – Ninth Circuit Court of Appeals Affirms Denial of Insurance Coverage in Coast Guard Mandated Clean-Up

In Guam Industrial Services, Inc. v. Zurich American Insurance Company, The United States Court of Appeals for the Ninth Circuit affirmed the District Court for the District of Guam's grant of summary judgment in favor of Zurich American Insurance Company ("Zurich") and its denial of coverage for Guam Industrial Services' ("Guam Shipyard") insurance claims for the sinking of its dry dock. Guam Shipyard filed claims on two insurance policies when its dry dock sank while being repaired so that it could be recertified. Guam Shipyard was seeking certification to fulfill a warranty in their hull and machinery insurance policy. Sinking with the dry dock were a number of sealed barrels and other containers of oil which the Coast Guard demanded be removed before recovery and salvage could begin, despite the fact that the containers never opened and no pollutants escaped. Zurich denied both claims; the first because Guam Shipyard did not have a certificate of any sort at the time of the sinking, and the second because there was no pollution as defined in the policy because none of the pollutants went in to the water.

The Ninth Circuit agreed with the District Court that the insurer Zurich was within their rights to deny the claims. Regarding the first claim, Guam Shipyard argued that, because Zurich had accepted commercial, rather than naval, certification in the past, they had waived their right to ask for naval certification. The Court, however, held that, while Zurich may or may not have waived their right to require Navy certification, they did not waive their right to ask for any sort of certificate.

As to the second claim, the Ninth Circuit also accepted Zurich's argument that since the language of the policy was that it would cover costs of any damage caused by accidental "discharge, dispersal, release, or escape" of pollutants, Zurich was within their rights to deny coverage. The Court reasoned that, since it was only the containers that touched the environment, it could not be said that the oil had been discharged, dispersed, released, or escaped under those words' "common meanings." Because the words all had plain meanings and a dispute about applying them would create an ambiguity, the Court held that there was no imperative to construe the meaning of the terms in favor of the insured.

In a scathing dissent on the pollution coverage claim, Judge Kozinski excoriated Zurich for its "slimy conduct" in denying the claim from Guam Shipyard. He deemed it "absurd" to think that a rational dry dock owner would want an insurance policy that would pay based on the whether or not the container lets pollutants out right away or not. Whether it does or not, the company has to pay cleanup costs mandated by the Coast Guard, which was precisely what Guam Shipyard was seeking to have covered by their maritime pollution policy. He explained that "[i]f 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," advocating for the need to look at the reality of the situation and giving contracts the intent of the parties.

To read a copy of the Ninth Circuit's decision, click here.

For more information about the Court's decision and how it may apply to specific facts and circumstances, please do not hesitate to contact us at info@chaloslaw.com.

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