Unclear Policy Endorsement Makes Excess Insurer Liable for Fuel Spill

By Claims Journal staff | December 21, 2020

Confusing language in a policy issued by an excess insurer puts the carrier on the hook for up to $5 million in clean-up costs after a policyholders’ tanker truck overturned and spilled its load of fuel, the 1st Circuit Court of Appeals ruled Friday.

The appellate panel reversed a decision by the U.S. District Court in Worcester to dismiss a lawsuit filed against General Star Indemnity Co. and ordered judgment in the policyholder’s favor. The 8th Circuit said a special hazards endorsement in the policy could be interpreted to bar coverage, or to guarantee certain kinds of coverage, depending on how it is read.

“In these circumstances, the plain text of the special hazards endorsement is ambiguous,” the court said. “Nothing in the text of the endorsement conclusively favors one interpretation over the others.”

Performance Transportation Inc., based in Fitchburg, Mass., purchased a $1 million primary insurance policy from Utica Mutual Insurance Co. and a $5 million excess policy from General Star. On Feb. 19, 2019 one of PTI’s trucks overturned in North Salem, N.Y. and spilled 4,300 gallons of gasoline and diesel fuel onto the roadway and into a nearby reservoir.

Remediation work by the New York State Department of Environmental Conservation and PTI has cost almost $3 million to date, the court said. After PTI’s primary coverage was exhausted, the company filed a claim with its excess insurer.

General Star denied the claim, arguing that no coverage was available because of a “total pollution exclusion” in the policy. PTI and Utica argued that language in the special hazards endorsement created an exception to that exclusion.

After asking General Star twice to reconsider its denial, PTI and Utica filed a lawsuit alleging breach of contract and bad faith.

U.S. District Judge Timothy S. Hillman rejected PTI’s argument that coverage was clearly owed, or that General Star’s policy was ambiguous, and dismissed the suit. Hillman found that as a general rule under Massachusetts law, if a total pollution exclusion bars coverage for an accident, then a special hazards endorsement cannot create ambiguity.

But the 8th Circuit panel found that the meaning of the endorsement was ambiguous.

The special hazards endorsement states, in summary, that “this exclusion” does not apply to accidents involving “drilling fluids” if damages result from 1. heat, smoke, fumes or fire; 2. an overturn or upset of an auto; 3 a collision. An item numbered “4” states that coverage for “drilling fluid events” will be available for bodily injury or property damage but not damage to real estate or any body of water.

The panel said the language could be read in three different ways. PTI reads it to make explicit and qualify a coverage guarantee in four specific areas, with a limit on coverage in the fourth area. As General Star reads it, the language means coverage is not available in any of the four areas if there is an exclusion elsewhere in the policy.

The court said the endorsement could be interpreted a third way, that limited coverage is available only for “drilling fluid events” not caused by heat, smoke or fire, an overturn or a collision, but limited coverage is available for other drilling fluid events. The court said Massachusetts courts read insurance contracts to “avoid surplusage.”

“For that reason, we cannot rely on the total pollution exclusion to resolve the ambiguity in the text of the special hazards endorsement,” the opinion says.

The court said ambiguous language is interpreted to favor the policyholder, and reversed the trial court. But the panel rejected PTI’s argument that General Star’s actions were deceptive or meritless and dismissed that claim.

“In setting aside the District Court’s decision, the Appeals Court found the purpose and effect of the Special Hazards Endorsement under the policy was not so clear-cut as to be read as an exclusion with exceptions,” attorney Douglas T. Radigan said in an email Monday. “When faced with contradictory interpretations of the policy, the Appeals Court appropriately construed the ambiguity in favor of the insured and affirmed coverage. Both my client and I are pleased with the result.”

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