Wreck Removal Leaves Insured in the Sludge

In December of 2008, Tom’s Welding Inc. (“TWI”) commenced wreck removal/salvage operations pursuant to its agreement with BEI, the owner of the Tank Barge DIA–IA (the “Barge”), which became grounded earlier that year. At or around this time, and in close proximity to these operations, an oil sludge and sheen was observed in the Port of Orange, requiring a clean-up operation in the Sabine River and its tributaries.


TWI contends that they first became aware of the spill on December 15, 2009, when it received notice from the United States Coast Guard, naming TWI as the responsible party. Shortly thereafter, the USGC filed a declaratory action in the Eastern District of Texas to have TWI (along with other defendants not named herein) declared liable for the removal costs associated with the oil spill under the Oil Pollution Act of 1990 (“OPA 90”), as well as civil penalties under the Clean Water Act (“CWA”).


Six months after the filing of this lawsuit, TWI sent notice of the claim to its insurer, Great American Insurance Company of New York (“Great American”). In turn, Great American filed this declaratory judgement, disputing that it owed coverage and/or a duty to defend TWI for potential liability in the underlying suit.


The policy at issue contained a “Marine Commercial Liability Limited Pollution Coverage Endorsement” (the “Limited Pollution Endorsement”), which covered TWI for property damage it became obligated to pay as a result of “the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ “ resulting from its “Maritime Operations” – identified in the policy as “ship repair.”


Ultimately finding in favor of Great American, the Court outlined several reasons why TWI is not owed insurance coverage under its policy with Great American. First, lacking any meaningful legal distinction between wreck removal and ship repair at law, the Court applied the general rule of construction; construing that words in the insurance contract “in accordance with their plain and ordinary meaning,” the Court determined that wreck removal and ship repair are two very distinct functions and call for different policies of insurance. Specifically, the court reasoned that the term “wreck removal” contemplates a vessel that is a total loss that must be removed from navigable channels and, as was the case here, dismantled for scrap while remaining in the water. As such, no aspect of removal of wreckage is contemplated in ship repair, which merely involves moving a vessel from the water to a facility for repair. The function, the risks, and the outcomes are distinct. Accordingly, the Court opined that the Limited Pollution Endorsement does not cover liability arising out of TWI’s wreck removal operations.


Second, because TWI did not provide Great American with notice of the Coast Guard’s 2009 letter until six months after the Texas Litigation was filed, the explicit exclusion to coverage under the Limited Pollution Endorsement, for failure to notify Great American of “an actual or potential pollution accident or occurrence within 30 days of [its] knowledge of the event,” was enforceable against TWI.


Third, because TWI’s potential liability for the cleanup is based on the OPA 90, and for civil penalties under the CWA, and because the Limited Pollution Endorsement expressly excludes coverage for damages arising solely by statute, as well as coverage for “fines, penalties, exemplary or punitive damages,” the court reasoned that Great American had two additional reasons to deny coverage.


Finally, and without much hesitation or discussion, the Court shot down TWI’s contention that Great America breached its duty to defend, stating, “[h]aving already determined that the plain meaning of the terms “wreck removal” and “ship repair” bar coverage, this Court likewise holds that Great American had no duty to defend TWI.


Great American Insurance Company v. Tom’s Welding