Source: http://www.businessinsurance.com, June 2, 2015
By: Judy Greenwald

An insurer is not obligated to provide coverage under a pollution policy if barrels containing oil are submerged in water but no oil leaks out, says an appeals court in a divided opinion with a strongly worded dissent.

Santa Rita, Guam-based Guam Industries Services Inc. owned and operated a dry dock in Apra Harbor, Guam, that sank during a typhoon on Jan. 2, 2011, according to Monday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Guam Industries Services Inc. et al. v. Zurich American Insurance Co. et. al.

Guam Industries had insured the dry dock under two policies: an ocean marine policy underwritten by Schaumburg, Illinois-based Zurich American Insurance Co. that covered liability for property damage caused by pollutants, and a hull and machinery policy written collectively by Zurich and New York-based Starr Indemnity & Liability Co.

When the dry dock sank, it took with it various containers that stored about 113,000 gallons of oil, although none of the containers were breached, according to the ruling. Guam Industries spent about $647,000 recovering the containers.

It filed a claim under the Zurich ocean marine policy, which provided coverage for claims “arising out of the discharge, dispersal, release or escape of … oil … or pollutants into or upon … any watercourse or body of water,” according to the ruling. Zurich denied the claim because no actual discharge of pollutants had occurred.

Guam Industries also filed a claim with Zurich and Starr under the hull and machinery policy, which covered damage to the dry dock, which the insurers denied on the basis that the company had failed to obtain the required navy certification for the dry dock.

Guam Industries sued the insurers in U.S. District Court in Guam, which granted the insurers summary judgment dismissing the case.

That ruling was upheld by the 9th Circuit’s majority.

“It is clear that barrels or containers were discharged, dispersed, and released but that oil was not,” said the appeals court in its 2-1 ruling. “Sealed barrels, regardless of their contents, do not qualify as ‘pollutants’ under the plain meaning” of the policy.

In a dissenting opinion, Judge Alex Kozinski said the pollution policy should still apply.

“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,” he said.

“Zurich’s denial of coverage is the type of slimy conduct that gives insurance companies a bad name,” he said.

The panel agreed with the lower court that the hull and machinery policy did not provide coverage.