Guam Indus. Services, Inc. v. Zurich American Ins. Co., 2015 WL 3449891 (9th Cir. June 1, 2015)
Guam Industrial owned and operated a dry dock called the Machinist, located in Apra Harbor, Guam. The dry dock sank on January 2, 2011. When the dry dock sank, it took with it various containers in which were stored approximately 113,000 gallons of oil. None of the containers were breached, however. Following the incident, the Coast Guard issued a letter informing Guam Industrial that it had to remove the sunken containers holding the oil or face the possibility of fines and strict liability for any contamination to the surrounding waters. Guam Industrial recovered the containers, expending approximately $647,000. No oil ever leaked out of the containers and into the water.
Guam Industrial insured the dry dock under two policies: a Hull and Machinery Policy, which was underwritten collectively by Zurich American Insurance Company (“Zurich”) and Starr Indemnity and Liability Company (“Starr”); and an Ocean Marine Policy, which was underwritten by Zurich alone. The Hull and Machinery Policy covered damage to the dry dock resulting from certain specified “perils” that included lightning, earthquake, pirates, assailing thieves, and various types of accidents and malfunctions. As a condition of coverage, the policy required Guam Industrial to obtain and maintain Navy Certification for the dry dock. Such certification ensures that the dock has satisfied a certain level of structural integrity; it is the highest standard in the industry. Guam Industrial did not obtain the required Navy Certification.
The Court held that strict compliance with marine insurance policy warranties was required, even when the breach of warranty did not cause the loss. The Court concluded that Guam Industrial failed to comply with the Navy Certification warranty and therefore, there was no coverage under the Hull and Machinery Policy.
The Ocean Marine Policy covered liability for property damage caused by pollutants. It was undisputed that no oil leaked out of the containers and into the water in the harbor. The Court held that because there was no actual discharge of pollutants, even though the containers of oil were submerged after the sinking of the dry dock, Guam Industrial’s costs of retrieving the containers from the sea were not covered by the policy’s allowance of coverage for cleanup after the “discharge, dispersal, release, or escape” of pollutants.
This case is a reminder of the consequences which can befall an insured for failure to comply with warranties contained in marine insurance policies, even where the breach of warranty played no role in causing the loss.