‘Absurd’ Insurance Denial in Oil Cleanup

When a dry dock, loaded with barrels of oil sank during a typhoon, a Guam a company tried to recover the cost of damage to the dock and the clean up done before any of the 113,000 gallons of oil leaked into the Pacific Ocean.

But a federal appeals court ruled Monday rejected the claim.  The 9th U.S. Circuit Court of Appeals held that the policy covered cleanup after pollutants from accidental “discharge, dispersal, release or escape” into the environment.  The court said the sinking of the tanks on the dry dock did not amount to “discharge” because the oil was not released into the ocean.

In dissent, Judge Alex Kozinski called the result “absurd.”

He said Guam Industrial had a legal obligation to clean up the sunken oil tanks and Zurich American Insurance Co. covers claims arising out of the discharge or oil into bodies of water.

Some very nasty 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,” h said.  Guam Industrial spent more than $600,000 to make sure none of it spilled into the ocean.

“If you slap a silk suit on a money, 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,” he said.

But the majority prevailed in holding 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 seal were not covered by the policy’s allowance of coverage for cleanup after the ‘discharge’… of pollutants,” the majority wrote.

The two judges signing jointly on the majority were Judges Mary Schroeder and N. Randy Smith.

Case: Guam Industrial Services v. Zurich American Insurance Co. No. 13-17005



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