“Slimy Conduct That Gives Insurance Companies a Bad Name:” Some Quotes from Judge Alex Kozinski

We do not normally focus on dissents in our blogging but we made an exception here with a published Per Curiam opinion from the Ninth Circuit Court of Appeals, Guam Industrial Services, Inc. v. Zurich American Insurance Co., 2015 DJDAR 5948 (9th Cir. June 1, 2015).  This insurance coverage case arose 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 associated cleanup 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, an Ocean Marine Policy, covered liability for property damage caused by pollutants, issued by Zurich American Insurance Company (“Zurich”). After the dock sank, Guam Industrial filed a claim under each policy. Zurich denied the claim, 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 appealed the decision and the Ninth Circuit affirmed.

The court found no ambiguity in the terms of the policy, and under the ordinary meaning of the relevant endorsement, Zurich would have to provide coverage of Guam Industrial’s damages if either oil or pollutants were discharged into the water. However, the court determined that although the barrels or containers were discharged, the oil was not. The parties agreed that the oil remained sealed inside its containers at all relevant times. Thus, the majority found that under the ordinary meaning of applicable endorsement, Zurich’s coverage was not triggered by a “discharge, dispersal, release, or escape” of oil. Furthermore, it ruled that sealed containers did not qualify as “pollutants” under the plain meaning of the Policy, which limited the term “pollutants’ to chemicals and other hazardous substances.

Judge Alex Kozinski dissented.  His incendiary comments on Zurich’s actions are particularly notable:

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 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 . . . .

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 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.

* * *

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.

Judge Kozinski will not be taking Zurich to the prom any time soon.

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