Pollution: 2nd Cir. Orders Extrinsic Evidence To Be Considered

Deems policy language ambiguous and, without applying contra proferentem, remands for consideration of custom and practice.

The Second Circuit, applying New York law, in a ruling by summary order, vacated the ruling of the district court and held that the maritime policy at issue was ambiguous with regard to its duty to pay investigation and defense costs incurred after the insurer had paid out the indemnity limits.  Without reference to the doctrine of contra proferentem, the Second Circuit found the insurer’s interpretation reasonable and remanded the matter with instructions for the district court to assess extrinsic evidence in its interpretation of the policy.

The coverage action stems from claims arising when a barge owned by American Commercial Lines LLC (“American”) spilled 300,000 gallons of oil into the Mississippi River.  Water Quality Insurance Syndicate (“WQIS”) issued American primary insurance during the relevant timeframe.  Coverage A of the WQIS policy provides for $5 million of coverage per vessel for liability associated with the discharge of oil.  Coverage C insured American for “[c]osts and expenses incurred by [American] with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under COVERAGE A …”  The insurance under Coverage C is “in addition to the limits of liability [of Coverage A].”  The parties do not dispute that WQIS’s liabilities under Coverage A exhausted the $5 million limit.

American filed a coverage action alleging that WQIS breached its obligations under Coverage C when it refused to pay $300,000 in defense costs that American incurred prior to the exhaustion of Coverage A, as well as over $2 million in defense costs that American incurred after WQIS had paid $5 million under Coverage A.  The district court granted American’s motion for partial judgment and held that WQIS was obligated to pay defense costs even after the indemnity limit under Coverage A had been reached.  The district court entered judgment against WQIS for $3,552,453.05.

The principle question on appeal was whether WQIS was obligated to pay investigation and defense costs under Coverage C after WQIS had exhausted the $5 million indemnity limit under Coverage A.  The parties disputed the meaning of “liabilities covered” as used in Coverage C.   WQIS contended that “liabilities covered” refers only to claims that it must actually pay under Coverage A, such that its liability under Coverage C ends after it meets its obligation to pay $5 million under Coverage A.   American argued that “liabilities covered” refers to the type of risk covered by Coverage A, irrespective of whether Coverage A is exhausted.

The Second Circuit held that the policy language was ambiguous:  “While Coverage A and Coverage C could be read, as the district court concluded, as operating independently of each other, a reasonably intelligent person who has considered the context of the Policy as a whole and who is cognizant of the customs and practices of the trade could conclude that [WQIS’s] liability under Coverage C ceased once the Coverage A limit was reached.”  The Second Circuit noted that this interpretation was supported by the overall structure and purpose of the policy because otherwise WQIS would be responsible for defense costs even when it no longer had an interest in defending or minimizing liability for the incident.  Based on its finding that the policy language was ambiguous, the Second Circuit remanded the case to the district court and instructed it to use extrinsic evidence to interpret the policy based on the intent of the parties.  American Commercial Lines LLC v. Water Quality Insurance Syndicate, No. 16-91-cv(L) and No. 16-119-cv(XAP) (2nd Cir. Feb. 10, 2017).