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Egan Marine Corporation, et al v. Great American Insurance Company of New York

November 23, 2011


Appeals from the United States District Court for the Northern District of Illinois, Eastern Division. No. 05 C 5295--Matthew F. Kennelly, Judge.

The opinion of the court was delivered by: Flaum, Circuit Judge.


Before BAUER, FLAUM, and SYKES, Circuit Judges.

Egan Marine Corporation ("EMC") and Service Welding and Shipbuilding, LLC ("SWS") are embroiled in a contract dispute with their insurance company, Great American Insurance Company of New York ("GAIC"). The dispute centers on the terms and scope of the plaintiffs' insurance policy, which indemnifies them against liability under several federal environmental protection laws or those laws' state-law equivalents. EMC and SWS attempted to invoke their policy for up to $10 million in coverage following an explosion on one of their vessels that resulted in an oil spill in the Chicago Sanitary and Ship Canal. They intended to apply that amount against any legal liability and costs they incurred as a result of the incident. GAIC contends that, under the terms of the policy, the spill rendered available only $5 million in coverage.

Additionally, the parties disagree about the amount GAIC owes EMC and SWS pursuant to a post-explosion agreement between them that EMC and SWS would provide cleanup and spill management services on their own behalf--a function contractually designated to GAIC. Under this arrangement, EMC and SWS agreed to charge GAIC at "cost," but each party disputes the other's understanding of and method of calculating "cost."

For the reasons discussed below, we affirm the judgment of the district court.

I. Background

A. Factual Background

EMC transports products on waterways. Its sister company, SWS, runs the shipyard where EMC maintains its vessels. Dennis Egan principally owns both EMC and SWS. EMC and SWS obtained insurance coverage from GAIC.

1. The Insurance Policy

The GAIC policy covered a number of EMC vessels against "incidents" during the policy's effective period. The policy defined "incident" as "[a]n event that exposes You to liability under [the Oil Pollution Act of 1990] or [the Comprehensive Environmental Response, Compensation, and Liability Act] or [the Federal Water Pollution Control Act] for which Section B [of this policy] provides coverage."*fn1

In relevant part, Section B of the policy specified that GAIC would indemnify EMC and SWS against:

1. OPA90 (Federal)--Removal costs and expenses paid by You under Section 1002 of OPA90 (33 U.S.C. Section 2702), for which liability would have been imposed under the Laws of the United States if You had not voluntarily undertaken the removal of oil.
2. OPA90 (State)--Your liability under State law for those removal costs and expenses referred to in Section 1002 (22 U.S.C. Section 2702) of OPA90 but only to the extent that these could have been recovered under OPA90.
3. OPA90--Your costs and expenses You have paid either in avoiding or mitigating the liability in 1. OPA90 (Federal) or 2. OPA90 (State) as described above.
4. CERCLA--Costs and expenses You have paid where liability would have been imposed upon You if You had not acted voluntarily under 107 (a)(1)(A) and (B) of CERCLA (42 U.S.C. Section 9607(a)(1)(A)) and with specific regard to "removal" "response" or "remedial action" as these terms are defined and applied under Section 101 (23)-(25) of CERCLA (42 U.S.C. Section 9601(23)-(25)). This coverage includes claims for contributions [sic] under Section 1013 (f)(1) of CERCLA (42 U.S.C. Section 9613(f)(1)).
5. Miscellaneous Spill Liability--Costs and expenses paid by You to mitigate liabilities for incidents where such occurrences are insured by this policy, but subject to our written expressed pre-approval.
6. Defense Costs--Costs and expenses paid by You to investigate and pursue a legal defense against claims or liabilities insured by this Policy. This coverage will terminate upon payment of judge ments [sic] or settlements which exhaust the amount of insurance as stated in the Declarations Page of this policy.*fn2
7. Firefighting and Salvage--Firefighting, salvage, offloading, and disposal of Cargo, but only to the extent that such actions contribute to stopping a discharge or release, or prevent a substantial threat of a discharge or release under OPA90, CERCLA, or the FWPCA.

8. Limited Administrative Penalties--Your liability under the section of the [FWPCA] that was amended by OPA90 to allow for administrative penalties against You under Section (b)(6)(A)(l) of the FWPCA. The maximum amount of insurance payable by this Policy for this coverage is two hundred and fifty thousand dollars ($250,000) per incident, per Vessel, and shall be a separate limit from the amount of insurance shown elsewhere in the Policy. Penalties imposed under any other section of FWPCA, any other Federal Statute, or the laws of any State or subdivision thereof are specifically excluded. . . (emphasis in original removed). The policy covered each listed vessel for $5,000,000. It excluded from coverage "[a]ny liability imposed on You under any state law which liability is greater, broader, and/or more extensive than the liability that would be imposed under Section 1002 of OPA90 (33 U.S.C. Section 2702) or under CERCLA."

The policy also stated that, absent any controlling or applicable general maritime law, the laws of the State of New York governed the policy.

6 Nos. 11-1266 & 11-1346

2. The Explosion, Its Aftermath, and Removal and

Remediation Efforts

In January 2005, EMC was hired to transport several loads of clarified slurry oil from the Exxon/Mobil refinery in Joliet, Illinois to Ameropan Oil Company via the Chicago Sanitary and Ship Canal.

On January 19, 2005, the tank barge EMC 423, carrying the petroleum cargo, exploded in the Chicago Sanitary and Ship Canal. The barge lacked any means of self-propulsion, navigation, or crew, so, prior to the explosion, its movement was dictated by the tugboat Lisa E, which pushed it up the canal. Following the explosion, the EMC 423 discharged some of its petroleum cargo into the canal. Most of the cargo remained aboard the barge, which ultimately sank along the side of the canal. The EMC 423 and the Lisa E were insured under the GAIC policy.

The United States Coast Guard immediately requested Heritage Environment, a private company, remediate the spill site. Heritage set up a "containment boom" around the EMC 423. It also cleaned the Lisa E, which was covered in oil.

Simultaneously, EMC contacted GAIC. Pursuant to its agreement to provide EMC and SWS with spill management services as necessary, GAIC, through its emergency response consulting firm, Meredith Management Group, Inc., sent a representative, Captain Thomas Neumann, onsite. He arrived within 24 hours of the explosion on January 20, 2005. While present, Neumann undisputedly acted on behalf of GAIC.

On January 21, 2005, the Coast Guard sent EMC a letter designating the EMC 423 as the source of the discharge of oil into the canal. On January 26, 2005, the Coast Guard issued a "notice of federal interest," informing EMC that it could be held financially responsible for the spill, its removal costs, and damages. The notice instructed EMC to cooperate with the federal "on-scene coordinator," a Coast Guard officer, and to remove the discharged petroleum.

a. Agreement Between EMC and GAIC

Neumann agreed that EMC should conduct spill management for GAIC. EMC, thus, effectively contracted to provide its own spill management. EMC would raise the EMC 423 from the canal in order to salvage the ship, correct existing pollution, and avoid further contamination. Per Neumann's approval, EMC hired SWS to conduct the salvage operation. Neumann and EMC agreed that EMC and SWS would bill GAIC at cost because, as a contractor for GAIC, EMC could not make a profit from conducting spill management on behalf of its own insurer.

EMC and SWS proposed to reduce their standard rates by 20% to reflect cost and eliminate profit. SWS would bill only for employee time and not charge separate hourly or daily rates to use machinery and equipment. Dennis Egan agreed not to charge at all for his personal time as salvage master, which he testified would normally cost $1,500 per day.

GAIC agreed to pay 80% of EMC and SWS's invoices pending review and approval to ensure that the invoices reflected their true costs. Notably, however, neither party expressly communicated to the other its definition of "cost."

EMC and SWS proceeded with the salvage operation, and the EMC 423 was raised with much of the petroleum still in it. They ultimately transported it to the SWS shipyard.

GAIC, again through Meredith Management, retained Global Risk Solutions to review and audit EMC and SWS's invoices.

At least as early as April 2005, Global Risk Solutions expressed concern that it could not verify that EMC and SWS were billing at cost. It communicated to EMC and SWS, via their respective Secretary-Treasurer and Controller, Robin Chanda, that the financial statements submitted did not support the hourly rates they were charging GAIC. Global Risk Solutions informed them that it intended to analyze their costs from scratch. Accordingly, it asked EMC and SWS to recalculate the basis for their charges, including the number of hours of equipment use, Egan's time, embedded expenses, and support for labor-related charges.

EMC and SWS did not provide the requested information to Global Risk Solutions. In part, they did not do so because they were concerned that any recalculation of the charges would not capture their true costs: due to the terms of billing, they had not been tracking those details. Although Global Risk Solutions estimated that EMC and SWS's invoices might exceed their actual costs by at least several hundred thousand dollars, it never obtained sufficient information to establish EMC and SWS's cost rates.

b. GAIC's Refusals to Pay

For many reasons, GAIC took issue with the indemnification amounts requested by EMC and SWS. GAIC concluded that the explosion implicated only the EMC 423 and its corresponding $5,000,000 of coverage. It based its conclusion on the Coast Guard's January 21, 2005 letter to EMC, in which it identified the EMC 423 as responsible for the oil spill, but did not similarly designate the Lisa E as responsible. In short, GAIC did not believe that it owed any indemnification for the Lisa E. At no ...

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