Egan Marine Corporation, et al v. Great American Insurance Comp
Filing
Filed opinion of the court by Judge Flaum. AFFIRMED. William J. Bauer, Circuit Judge; Joel M. Flaum, Circuit Judge and Diane S. Sykes, Circuit Judge. [6354618-3] [6354618] [11-1266, 11-1346]
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Pages: 33
In the
United States Court of Appeals
For the Seventh Circuit
Nos. 11-1266 & 11-1346
E GAN M ARINE C ORPORATION, et al.,
Plaintiffs-Appellants/
Cross-Appellees,
v.
G REAT A MERICAN INSURANCE C OMPANY OF N EW Y ORK,
Defendant-Appellee/
Cross-Appellant.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 05 C 5295—Matthew F. Kennelly, Judge.
A RGUED N OVEMBER 1, 2011—D ECIDED N OVEMBER 23, 2011
Before B AUER, F LAUM, and SYKES, Circuit Judges.
F LAUM, Circuit Judge. 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
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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.
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1.
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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.” 1
In relevant part, Section B of the policy specified that
GAIC would indemnify EMC and SWS against:
1.
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.
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.
OPA90—Your costs and expenses You have
paid either in avoiding or mitigating the liability
Hereinafter, the Oil Pollution Act of 1990 is referenced as
“OPA90.” The Comprehensive Environmental Response, Compensation, and Liability Act is referenced as “CERCLA.” The
Federal Water Pollution Control Act, colloquially referred to
as the “Clean Water Act,” is referenced as “FWPCA.”
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in 1. OPA90 (Federal) or 2. OPA90 (State) as described above.
4.
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.
2
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)).
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 judgements [sic] or settlements which exhaust the
amount of insurance as stated in the Declarations
Page of this policy.2
Section A of the GAIC policy additionally defines defense
costs as “[a]ll Legal expenses and other similar costs that are
paid by You as a direct result of an incident insured by this
policy.”
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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.
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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 selfpropulsion, 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.
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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.
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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
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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 time, however, did GAIC advise EMC as such or
issue a reservation-of-rights letter in connection with
EMC’s request for coverage.
Moreover, on June 13, 2005, GAIC sent a letter to SWS,
stating that it had exhausted its $5,000,000 policy limit.
At this time, GAIC had not actually paid $5,000,000 to or
on behalf of EMC and SWS. In justified its erroneous
representation, in part, on Global Risk Solutions’ cost
analysis for the companies’ spill management operations:
if GAIC paid the amounts requested by EMC and SWS,
then under advisement, the total amount paid and
payable would exceed the $5,000,000 limit on coverage
for the EMC 423. GAIC later acknowledged that more
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coverage existed, and it made additional payments to
EMC and SWS following its June 13 letter to the contrary.
As GAIC reviewed EMC and SWS’s claimed costs, it
recognized that it would need to independently calculate
their final payment since they declined to provide the
supporting financial details it requested. It determined,
largely through estimation, that it owed EMC and SWS
as much as $588,317 in reimbursement. It excluded from
its calculation any cost incurred after June 7, 2005, the
date that the Coast Guard informed the Illinois Environmental Protection Agency (“IEPA”) that the recovery
phase of cleanup was completed. See discussion infra
at I.A.2.c.
GAIC ultimately paid EMC and SWS $727,000, augmenting the $588,317 owed to exhaust the $5,000,000
coverage limit on the EMC 423. It still refused payment
of any kind for the Lisa E.
In February 2007, GAIC and EMC submitted a joint
claim for reimbursement to the federal Oil Spill Liability
Trust Fund. The claim requested reimbursement for the
total amount GAIC paid in connection with the cleanup,
including to EMC and SWS. It did not suggest that GAIC
overpaid either company. The claim also requested reimbursement for any costs incurred by EMC and SWS,
prior to June 7, 2005, that GAIC had not paid. It requested no reimbursement for any work completed after
that date.
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Government Involvement
On May 18, 2005, the Coast Guard’s On-Scene Coordinator3 sent EMC a letter entitled “termination of emergency
response.” The letter stated that the EMC 423 “no longer
represent[ed] a substantial threat of discharge of oil or
a hazardous substance.” Accordingly, it continued,
that portion of this emergency response relating
to the barge EMC 423 and the cargo contained
therein, . . . is complete, effective at the time the EMC
423 was successfully moored at [SWS]. . . . The only
remaining emergency operations that remain under
aegis of my [federal on-scene coordinator] authority
are the operations related to the removal of oil related
to this incident which remains on the bottom of the
[canal] in the vicinity of the original explosion, fire
and subsequent removal operations. You will be
advised under separate cover how to proceed with
these operations.
On that same day, the Coast Guard’s Captain of the
Port sent EMC a second letter, under its vessel policing
authority, 33 U.S.C. § 1223, directing EMC to remove the
remaining oil onboard the EMC 423. Ultimately, EMC
delivered to its original customer the balance of the
petroleum in the EMC 423’s storage tanks. A significant
amount of petroleum remained outside of the storage
tanks, where it had been propelled by the explosion.
Because GAIC stopped making payments to EMC and
3
Captain T.W. Carter served as both On-Scene Coordinator and
Captain of the Port for the Coast Guard.
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SWS, see discussion supra at I.A.2.b, the companies did
not completely clean the petroleum outside of the tanks
as requested by the IEPA. The EMC 423 remains in storage.
On June 7, 2005, the Coast Guard’s On-Scene Coordinator
sent a letter to the IEPA. He informed the agency that,
although some petroleum remained on the bottom of
the canal, further recovery efforts would undermine the
IEPA’s remediation goals. He, thus, declared completed
the recovery efforts for the spill event. He then noted
his understanding that the IEPA would be seeking complete site remediation from EMC.
d. Federal and State Liabilities
i. State Agency Actions
EMC and SWS faced several accusations of liability as
a result of the explosion, contamination, and cleanup
efforts in this case. The IEPA, in September 2005, issued
notice to EMC that it violated the law when it removed
the petroleum residue from the EMC 423. Disposal of the
residue, it alleged, threatened further contamination of
the canal. In response, EMC retained counsel and an
environmental consultant, as well as engaged in additional cleanup work. EMC allegedly incurred $10,215
in consulting fees, $18,400 in attorney’s fees, $9,440 in
disposal costs, and $72,320 in labor and machinery costs
as a result of these efforts.
The IEPA also sued EMC in Illinois state court under
the Illinois Environmental Protection Act, 415 ILCS 5/42(d)(e). The agency claimed that 2,000 to 2,500 gallons of
petroleum remained at the bottom of the canal as a
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result of the explosion. It also contended that, during
the salvage and transportation of the barge, an unnamed
EMC tugboat discharged thirty gallons of diesel fuel
into the canal, leaving an oil sheen on the canal’s surface.
It requested an injunction against further violations by
EMC; civil penalties; all costs expended by the state in
the suit, including expert witness, consultant, and attorney’s fees; and any other equitable relief the court
deemed appropriate. The IEPA’s request for an injunction served as a vehicle by which it hoped to compel
further cleaning by EMC.
EMC requested that GAIC represent it against the IEPA.
GAIC agreed to represent EMC, understanding that the
litigation could result in an order for additional cleaning
at the spill site. GAIC claims that its representation
was subject to the terms of EMC’s insurance policy—
in particular, the policy’s limitations and exclusions
regarding actions by state governmental agencies. When
GAIC agreed to represent EMC, however, the letter it
sent contained no reservation of rights and no specific
reference to the policy’s limitations and exclusions. It
stated only that its defense would be subject to the insurance policy’s terms and conditions.
GAIC, at an unspecified date and for unspecified reasons, stopped paying for EMC’s defense. EMC continued
to defend the suit with both its original attorney and inhouse counsel. It incurred $32,154.75 in not-yet-reimbursed attorney’s fees and expenses for the original
counsel. It also expended $694.29 in not-yet-reimbursed litigation expenses. Although it originally
claimed its costs for its own in-house counsel, EMC
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withdrew this reimbursement request during the proceedings below.
ii. Federal Actions
In June 2008, the federal government pursued in rem
claims against the Lisa E and the EMC 423, suing under
OPA90, the FWPCA, and the Rivers and Harbors Act.
United States v. Egan Marine Corp., No. 08 C 3160, slip op. at
1-17 (N.D. Ill. Oct. 13, 2011). Under OPA90, it claimed
$1,500,000 in removal costs expended by the Oil Spill
Liability Trust Fund and in compensation paid to
GAIC and EMC. It also requested $25,000 in civil
penalties for each day of the spill cleanup.
The government’s complaint names the Lisa E as the
EMC 423’s only source of propulsion, and it identifies the
owners and operators of both vessels as the responsible
parties under OPA90.
This lawsuit, still ongoing, is not directly relevant to
this appeal. EMC, however, supports its claim that the
explosion implicated its $5,000,000 policy on the Lisa E
by relying, in part, on the federal government’s conclusion in its suit that the Lisa E was a party responsible
for the explosion and cleaning costs. GAIC continues to
dispute that it owes coverage under the Lisa E’s policy.
B. Procedural Background
1.
Initial Proceedings
On September 15, 2005, EMC and SWS sued GAIC in
the United States District Court for the Northern District
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of Illinois. They claimed that GAIC owed them at least
$1.8 million for their recovery and remediation efforts
and, additionally, wrongly refused to honor their policy
on the Lisa E. These actions, they claimed, constituted
(1) a breach of contract and (2) a breach of good faith
and fair dealing.
EMC and SWS moved for summary judgment, requesting that the district court find that they were entitled to at least $10 million in coverage and that GAIC
breached its contract and duty of good faith and fair
dealing by not honoring its policy with respect to the
Lisa E. GAIC also moved for summary judgment. It
asked the court to find that the $5,000,000 paid to EMC
and SWS discharged its obligations under the policy and
that the companies were not entitled to any further disbursements.
On June 13, 3007, the district court granted GAIC’s
motion for summary judgment and denied EMC and
SWS’s motion.
On June 13, 2008, EMC appealed and requested relief
from judgment under Federal Rule of Civil Procedure
60(b), claiming that the lawsuit filed against it by the
federal government constituted new evidence with
regard to the coverage implicated by the Lisa E, see discussion supra at I.A.2.d.ii. This Court granted EMC’s
motion to vacate and remanded the case back to the
district court.
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Summary Judgment
GAIC filed counterclaims against EMC and SWS. It
sought declaratory judgment that (1) it lacked any duty
to defend EMC and SWS against the federal government’s suit and (2) it exhausted its obligations under
the policy and owed no disbursements to EMC and SWS
for the Lisa E’s involvement in the spill. It moved for
judgment on the pleadings.
EMC and SWS cross-moved for summary judgment.
They asked the district court to find that (1) they were
entitled to $5,000,000 in coverage for the Lisa E’s involvement in the spill; (2) GAIC was required to defend
them against the federal government’s suit; and (3) GAIC
breached its duty of good faith and fair dealing by
refusing to indemnify them with respect to the Lisa E.
The district court granted GAIC judgment on the pleadings with respect to the following: (1) it owed $5,000,000
per vessel, per incident and had fully honored the
policy with respect to the EMC 423; (2) it owed no
coverage for either the Lisa E or the EMC 423 for in rem
liability. It denied any further judgment on the pleadings.
The district court then granted EMC and SWS’s motion
for summary judgment on their breach of contract claim,
finding that GAIC owed $5,000,000 in coverage for the
Lisa E, was obligated to pay defense costs up to that
amount, and had breached its contract by not doing so. It
denied summary judgment on their claim that GAIC
breached its duty of good faith and fair dealing.
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The Bench Trial and the District Court’s Rulings
The district court held a bench trial to consider the
following: (1) what damages, if any, GAIC owed based
upon its refusal to apply the Lisa E’s coverage; (2) whether
GAIC breached the insurance policy by failing to pay
all of the amounts that EMC and SWS claimed to
have expended in responding to the explosion; and
(3) whether GAIC breached its duty of good faith and
fair dealing.
With respect to the first issue, the district court ruled
that GAIC’s refusal to make available coverage for the
Lisa E did not result in any damages beyond unpaid
defense costs. It found “no evidence that GAIC’s decision that there was only $5 million in coverage . . . led it
not to pay the plaintiffs’ remaining invoices for the recovery work and to cut off reimbursement for costs
incurred after June 7, 2005.” GAIC was, however, liable
for the unpaid defense costs. The court stated:
[GAIC] was well aware that as of [June 7, 2005], the
IEPA was still contending that further cleanup of
the canal was required due to petroleum product
that remained there following the explosion. [GAIC]
also knew that the IEPA required further cleanup
of petroleum residue that remained aboard the
EMC 423. This, presumably, is why GAIC initially
funded EMC’s defense in the IEPA suit, which was
filed at the end of August 2005. . . . Plaintiffs have
proven beyond a preponderance of the evidence
that GAIC breached the policy by cutting off its defense of EMC in the IEPA lawsuit. Plaintiffs
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have also proven that they were damaged in
the amount of $32,840.04 due to that particular breach.
The court also awarded $10,215 in unpaid consulting
costs that EMC and SWS expended to defend against
their alleged IEPA violation for disposing of the oil
from the EMC 423, see discussion supra at I.A.2.d.i.
Regarding the second issue, the district court held that
GAIC did not breach its contract by failing to pay the
total sum claimed by EMC and SWS as costs. It concluded:
[t]he fact that charges for equipment use, Egan’s
time, etc. were incorporated into the rates unquestionably indicated that the companies were not trying
to gouge GAIC. But a conclusion that plaintiffs
proved by a preponderance of the evidence that
the unpaid charges represented their costs and not
a profit would require too many inferential leaps.
Indeed, plaintiffs made no real attempt to prove in
the lawsuit that the charged rates represented their
costs. Rather, they relied on what they contended
was an agreement by Neumann on GAIC’s behalf to
pay the invoiced rates. As the Court has found, however, plaintiffs failed to prove by credible evidence
that there was such an agreement. Indeed, their
claim of an agreement was directly refuted . . . by
contemporaneous and near-contemporaneous documentary evidence that made it clear that EMC and
SWS’s claimed costs—not just employee hours–were
subject to audit and verification. . . . That is not to
say that GAIC . . . properly handled the matter of
billing during the salvage and recovery phase of the
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project. . . . The Court is unpersuaded, however, that
EMC and SWS were harmed by this in any way
that they could not overcome. They were given, and
had, ample opportunity (both in 2005 and this action)
to try and show that they had, in fact, billed at cost.
But they were unable or unwilling to prove this,
either to . . . GAIC in 2005 or to this Court at trial.
The district court concluded, however, that GAIC
did breach its contract by refusing to indemnify EMC and
SWS for any costs after June 7, 2005. GAIC’s contention
that it owed nothing on the policy after the Coast Guard
declared recovery work completed on June 7, the district
court ruled, “[wa]s far too simplistic.” The court stated:
[P]laintiffs have proved by a preponderance of the
evidence that even after May 18, 2005 and June 7, 2005,
[they] were still exposed to liability under OPA90
or the Illinois equivalent based on the material that
remained on board the EMC 423. The [IEPA complaint filed in state court at the end of August 2005],
however, is sufficient to support an inference that
plaintiffs were no longer exposed to OPA90 or stateequivalent liability a[t] the end of August 2005. Plaintiffs, who bore the burden of proof, failed to
prove otherwise. For these reasons . . . [t]he Court
concludes . . . that plaintiffs have shown by a preponderance of the evidence that storage and
cleanup costs they incurred after June 7, 2005
(GAIC’s apparent cutoff date) and before August 31,
2005 are covered by, at a minimum, paragraphs 3
and 7 of the coverage section of the GAIC policy.
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The court ruled that EMC and SWS could recover the
same 80% of their invoices between June 7 and August 31,
2005 that GAIC paid on their pre-June 7 invoices. As
such, GAIC owed EMC and SWS $335,356 on its postJune 7 invoices.
Finally, the court considered EMC and SWS’s claim
that GAIC breached its duty of good faith and fair
dealing, holding that they could not prevail against
GAIC. First, the court found no basis in admiralty law
to support an independent tort claim for breach of a
duty of good faith and fair dealing in connection with
a maritime insurance policy. Applying New York law,
it concluded that EMC and SWS could not bring an independent claim for breach of good faith and fair dealing
if it was based only on the conduct that formed the
basis for a breach of contract claim as well. The court
concluded that EMC and SWS alleged no “conduct separate from GAIC’s contractual breaches that would give
rise to a tort claim.” Accordingly, it ruled in favor of GAIC.
In total, the court ordered GAIC to pay EMC and SWS
$378,624, the aggregate of the $10,215 in consulting fees,
the $32,840 spent defending against the IEPA lawsuit,
and the $335,356 in invoiced costs.
Both parties presently and timely appeal.
II. Discussion
We review a grant of summary judgment de novo. See
Edwards v. Briggs & Stratton Retirement Plan, 639 F.3d 355,
359 (7th Cir. 2011). Summary judgment is appropriate
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when no issue of material fact exists to be tried, and the
moving party is entitled to judgment as a matter of law.
F ED. R. C IV. P. 56(c); see Trentadue v. Redmon, 619 F.3d 648,
652 (7th Cir. 2010). As it examines the record, the Court
considers all facts and draws all inferences in the light
most favorable to the non-moving party. See Egan v.
Freedom Bank, No. 10-1214, 2011 WL 4600471, at *1 (7th
Cir. Oct. 6, 2011).
In an appeal from a bench trial, “we review a district
court’s conclusions of law de novo, and we review its
findings of fact, as well as applications of law to those
findings of fact, for clear error.” Trustees of Chicago
Painters and Decorators Funds v. Royal Int’l Drywall and
Decorating, Inc., 493 F.3d 782, 785 (7th Cir. 2007) (quoting
Keach v. United States Trust Co., 419 F.3d 626, 634 (7th
Cir. 2005)).
A. EMC and SWS Claims on Appeal
EMC and SWS challenge the district court’s damages
award for their breach of contract claim. They argue
that the district court should have ordered their full
reimbursement for their claimed costs, not merely for
80% as paid by GAIC. They also contend that the district
court improperly truncated their right to collect on
their policy on August 31, 2005.
EMC and SWS further maintain that the district court
erred in ruling against them on their claim for breach
of good faith and fair dealing. They assert they successfully raised and proved their claim under New York law.
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22
1.
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The District Court’s Determination that EMC
and SWS Were Not Entitled to Full Payment of
Their Claimed Costs Was Not Clear Error
EMC and SWS claim that GAIC agreed to pay them
80% of their standard rates and that the reduced rate
would constitute charging at cost. GAIC counters that
they agreed to the 20% reduction subject to review and
approval. Accordingly, they did not have to pay any
invoice that did not substantiate that the 20% reduction
reflected EMC and SWS’s true costs sans profit.
The district court considered the evidence presented
by the plaintiffs, namely testimony by Dennis Egan and
Robin Chanda, but it found their testimony “unpersuasive.” It held that EMC and SWS proved neither that
GAIC agreed to treat the 20% reduction as cost nor that
their charged rates were, in fact, their costs. See discussion supra at I.B.3.
Indeed, both GAIC in 2005 and the court invited EMC
and SWS to reconstruct their costs as best they could and
provide numerical justification for their invoices. They
refused both invitations, asserting that their agreement
with GAIC precluded them from tracking the necessary
billing details during the cleanup operations and that
there was no feasible way to meaningfully capture those
specifics ex post. The district court recognized the difficulty posed by EMC and SWS’s task, but found “no
indication that evidence that would have permitted
[them] to prove their costs was unavailable to them.” As
the court elaborated:
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[P]laintiffs could have provided estimates of their
unrecorded time for equipment usage and the work of
Egan as salvage master . . . . Alternatively, plaintiffs
could have offered in this litigation (just as they
could have done in 2005) an accounting analysis or
other evidence to show that they had charged at
rates that amounted to their costs relating to the
salvage and recovery project. Or they could have
tried to document Egan and Chanda’s claim that
they were charging at rates that actually were the
same rates that resulted in zero profit or a loss in
2004. . . . But [they] did not take any of these routes.
Rather, they chose to rely on a theory that [GAIC]
agreed up-front to the particular rates [they] quoted
and on the proposition that GAIC admitted the accuracy of those rates after the fact. That theory and
proposition were insufficiently supported . . . .
Based on the evidence submitted by EMC and SWS, we
conclude that the district court’s analysis contains no
clear error. EMC and SWS did not provide sufficient
support either that GAIC agreed to the 20% rate
reduction whole-cloth or that the amounts they claimed
reflected their true costs. They are not entitled to any
additional payments under this theory.
2.
EMC and SWS Were Not Entitled to Payments after
August 31, 2005
EMC and SWS contend that the EMC 423 was not
completely cleaned on August 31, 2005 and, accordingly,
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GAIC was required to continue indemnification under
the policy. GAIC cross-appeals that its indemnification
responsibilities ended on June 7, 2005, after the Coast
Guard deemed oil recovery efforts terminated.
The district court reasoned that, under the terms of the
policy, GAIC owed EMC and SWS coverage on salvage
operations, offloading, and disposal of cargo “to the
extent that such actions contribute[d] to stopping a discharge or release, or prevent[ed] a substantial threat of
a discharge or release under OPA90, CERCLA, or the
FWPCA.” See discussion supra at I.A.1. The policy also
demanded coverage for expenses to mitigate liability
under OPA90 and CERCLA. Id.
The district court found that coverage ended on
August 31, 2005 because, in its September 2005 lawsuit
against EMC and SWS, the IEPA “referenced only the
actual spills and not any ongoing threat of further contamination.” This, it concluded, “support[ed] an inference that the plaintiffs were no longer exposed to
OPA90 or state-equivalent liability a[t] the end of
August 2005[,] [and] [p]laintiffs, who bore the burden
of proof, . . . failed to prove otherwise.” See discussion
supra at I.B.3.
On the evidence before us, we find no error in the
district court’s ruling. EMC and SWS, enjoyed and continue to enjoy the burden of proof on this issue, and
nothing they have provided the district court or this
Court convinces us that they were entitled to further
payments after August 31, 2005. The district court did
not err by tailoring its damage award.
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The District Court Did Not Err By Denying
EMC and SWS’s Breach of Good Faith and Fair
Dealing Claim
The district court rejected EMC and SWS’s claim that
the GAIC breached its duty of good faith and fair
dealing because admiralty law did not support such a
claim and New York law, to the extent that it did, precluded claims where the conduct underlying the breach
of good faith and fair dealing claim was the same
conduct generating a breach of contract claim.
In reaching this conclusion, the district court relied on
Cary Oil Co. v. MG Refining and Marketing, Inc., 90 F. Supp.
2d 401, 419 (S.D.N.Y. 2000) (“Under New York law, a
claim for breach of the implied covenant will be dismissed as duplicative if the conduct allegedly violating
the implied covenant is also the predicate for breach of
the underlying contract.”).
EMC and SWS find Cary inapposite. They argue, first,
that Cary is not an insurance case and, thus, not controlling. Second, they assert that Cary fails to govern after
2008, when the New York Supreme Court, Appellate
Division, in Panasia Estates, Inc. v. Hudson Ins. Co., clarified
that a plaintiff could recover “consequential damages
resulting from a breach of the covenant of good faith
and fair dealing . . . in an insurance contract context,
so long as the damages were within the contemplation
of the parties as the probable result of a breach at
the time of or prior to contracting.” 10 N.Y.3d 200, 203
(N.Y. App. Div. 2008) (quoting Bi-Economy Mkt., Inc. v.
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Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187, 192 (N.Y.
App. Div 2008)) (internal quotation marks omitted).
GAIC rightly points out, however, that New York
courts—subsequent to Panasia and Bi-Economy—view
claims for breach of good faith and fair dealing as “duplicative of a claim sounding in breach of contract.” See, e.g.,
Goldmark, Inc. v. Catlin Syndicate Ltd., No. 09-CV-3876,
2011 WL 743568, at *4 (E.D.N.Y. Feb. 11, 2011). A breach
of the duty of good faith may justify the recovery of
consequential damages in addition to the loss insured
by the policy at issue, but that breach is another means of
recovery under the contract and not a separate cause of
action in and of itself. Id. To this end, EMC and SWS
may not recover on an independent breach of good
faith claim.
EMC and SWS also do not recover consequential damages for bad faith under their breach of contract claim.
The district court held that GAIC’s breaches “were made
in good faith and without malice.” EMC objects to this
characterization, arguing that GAIC’s misrepresentations that the policy was exhausted when it was not
constitutes bad faith dealings that merit damages:
GAIC “consistently refused to communicate with the
insured, never once reserved its rights, has repeatedly
ignored its duty to independently evaluate the coverage
under the policy (including for cargo removal), and has
misrepresented the coverage under the policy . . . , including the claim that the policy was exhausted.”
With these facts before it, the district court did not
find bad faith, and the plaintiffs present no new evidence
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to suggest that its decision was clearly erroneous. Cf. Am.
Nat’l Fire Ins. Co. v. Kenealy, 72 F.3d 264, 270 (2d Cir. 1995)
(“The district court did not find bad faith and we
discern no facts here that would justify reversing that
finding. . . . [I]t is not bad faith for an insurer to
fight liability when policy coverage is unclear.”).
B. GAIC’s Cross-Appeals
GAIC challenges that (1) the district court improperly
granted summary judgment in favor of the plaintiffs
that it owed coverage on the Lisa E; (2) it owes no
coverage for any cleanup costs following June 7, 2005;
(3) it owes no coverage for any IEPA suits regarding
remnant oil on the EMC 423; and (4) it owes no defense
costs with respect to the IEPA’s suit against EMC and
SWS for injunctive relief.
1.
The Lisa E’s Coverage Applied
GAIC contends that the explosion did not implicate the
policy on the Lisa E and the district court mistakenly
granted summary judgment in favor of the plaintiffs.
OPA90, it argues, only holds liable the vessel that spilled
the oil—the EMC 423. OPA90 states:
Notwithstanding any other provision or rule of law,
and subject to the provisions of this Act, each responsible party for a vessel or a facility from which oil
is discharged, or which poses the substantial threat of
a discharge of oil, into or upon the navigable waters
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or adjoining shorelines or the exclusive economic
zone is liable for the removal costs and damages
specified in subsection (b) of this section that
result from such incident.
33 U.S.C. § 2702(a). OPA90 defines “responsible party” as,
“in the case of a vessel, any person owning, operating, or
demise chartering the vessel.” 33 U.S.C. § 2701(32)(A). It
defines vessel as “every description of watercraft or
other artificial contrivance used, or capable of being
used, as a means of transportation on water, other than
a public vessel.” 33 U.S.C. § 2701(37).4 Because the Lisa E
did not, itself, discharge any oil into the canal, GAIC
maintains that the vessel is beyond the scope of coverage.
Assuming arguendo that, despite the EMC 423’s dependence upon the Lisa E for propulsion and navigation,
the two vessels may not be considered a single vessel
for purposes of OPA90, GAIC ignores that OPA90
holds liable not only those vessels that discharge oil, but
also that “pose[] the substantial threat of a discharge of
oil” as well. 33 U.S.C. § 2702(a).
The Lisa E satisfies OPA90’s definition of “vessel.”
Furthermore, while the tug did not itself house the petro-
4
GAIC is correct that OPA90 separately defines “tank vessel”
as “a vessel that is constructed or adapted to carry, or that
carries, oil or hazardous material in bulk as cargo or cargo
residue . . . .” 33 U.S.C. § 2701(37). However, it does not clearly
articulate why this distinction is relevant for purposes of
understanding liability under OPA90, which does not distinguish between a vessel and a tank vessel with respect to its
elements of liability. See U.S.C. 33 § 2702(a).
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leum cargo within its hull, it was attached to the EMC
423, which did. Specifically, the Lisa E was the sole
means of propulsion and navigation for the EMC 423. By
virtue of its propelling the EMC 423 and its petroleum
cargo through Illinois’ waterways, the Lisa E posed a
substantial threat of a discharge of oil and is, therefore,
subject to liability under OPA90.5
Interpreting the statute as GAIC suggests and treating
the Lisa E and EMC 423 as entirely separate entities for
purposes of coverage yields a curious result. For purposes of OPA90, a vessel is a watercraft “used, or capable
of being used, as a means of transportation on water.” 33
U.S.C. § 2701(37). Without the Lisa E, or another means
of propulsion, the EMC 423 would not satisfy this definition: it would not be used or would be capable of being
used as a means of transportation on water because it
could not power itself or steer. The EMC 423 and its
petroleum cargo would be exempt from liability under
OPA90.6 This perverse result thwarts OPA90’s intent
and suggests that the Lisa E, to the extent it subjects
the EMC 423 to coverage and, by propelling the barge,
5
We note that OPA90 offers no further definition or elaboration for the term “substantial threat.”
6
One could argue that EMC 423 could satisfy OPA90’s definition of “facility,” which is “any structure, group of structures,
equipment, or device (other than a vessel) which is used for
one or more of the following purposes: exploring for, drilling
for, producing, storing, handling, transferring, processing, or
transporting oil,” 33 U.S.C. § 2701(9), but this is a definitional
stretch not worth pursuing.
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threatens a discharge of oil, must be subject to liability
under the statute.
The district court appropriately granted summary
judgment in favor of EMC and SWS on this point, and the
explosion implicated the Lisa E’s $5,000,000 policy such
that those funds are available to the plaintiffs.
2.
GAIC Must Indemnifty EMC and SWS for Their
Cleanup Costs Between June 7, 2005 and August 31,
2005
GAIC argues, first, that it owes no coverage after June 7,
2005 because, on that date, the Coast Guard announced
recovery operations for the spill concluded. Second, it
asserts that if it does owe coverage, the district court
erred in awarding $355,569 in damages because it also
held that EMC and SWS could not substantiate its
costs, including those after June 7, 2005.
As an initial matter, the district court did not clearly err
when it found that GAIC owed coverage after June 7, 2005.
See discussion supra at I.B.3. On appeal, GAIC reiterates
its argument that the Coast Guard’s On-Scene Coordinator declared the spill over on June 7, 2005. It disputes the district court’s finding that EMC and SWS
faced requests from the IEPA to continue its cleaning
operations both in the canal and with respect to the EMC
423 after June 7 as based on heresay; however, it offers
no new arguments or evidence to undermine the district
court’s analysis. GAIC, in short, simply disagrees with
the outcome.
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As the district court acknowledged, determining GAIC’s
exposure for EMC and SWS’s post-June 7 invoices is
“difficult.” The parties never established and presently
disagree about what amounts appropriately constitute
EMC and SWS’s true costs. EMC and SWS claim they
are owed the full amount they invoiced—$723,710—and
GAIC asserts that it owes nothing.
Confronted with circumstances like these, where the
terms of an oral contract are ambiguous, New York law
considers “the acts of the parties thereunder [as] of controlling importance in its true interpretation.” Johnsten
v. Dahlgren, 62 N.Y.S. 1115, 1119 (N.Y. App. Div. 1900).
In this case, the district court calculated that GAIC willingly paid 80% of EMC and SWS’s claimed costs prior
to June 7, 2005, at which time it was already aware of
the substantiation problems presented by their method
of invoicing. It was not clear error, therefore, to infer
that GAIC would and should pay 80% of the post-June 7
invoices, particularly since GAIC offered the district
court no alternative calculation of what it owed for
the post-June 7 invoices. We affirm the district court’s
awarding EMC and SWS $355,569 in damages.
3.
GAIC is Liable for the Consulting Costs Expended
to Defend Against the IEPA’s Charges Regarding
the Disposal of the Remnant Oil on the EMC 423
The district court awarded EMC and SWS $10,215 for
consulting costs it incurred addressing the IEPA’s claim
that its removal of the petroleum residue from the EMC
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423 violated the law. See discussion supra at I.A.2.d.i; I.B.3.
GAIC argues that there is “no proof to suggest the
removal of cargo from [EMC 423] after May 18[, 2005] as
the result of the [Captain of the Port] Order to remove
the cargo from the uncertified Barge had anything to do
with avoiding an OPA90 or similar Illinois state statute.
Nor does it involve a CERCLA exposure.”
Based on the evidence before us, we hold that the
district court did not commit clear error when it awarded
EMC and SWS $10,215 in consulting costs to defend
against these charges. The court reasonably concluded
that the fees were covered by the policy, and we find
no compelling reason to disturb its ruling.
4.
GAIC is Liable for Legal Costs Incurred Defending
Against the IEPA’s Claim for Injunctive Relief
GAIC challenges that it is not responsible for any of
EMC and SWS’s defense costs with respect to the IEPA
suit, including the $32,840 awarded by the district court.
See discussion supra at I.B.3. The district court reasonably determined that EMC and SWS incurred these
costs as they confronted potential liability under OPA90
and its state-law equivalents. The costs are, therefore,
covered by the policy such that GAIC owes indemnification. Based on the evidence before us, we conclude that
the district court did not clearly err in so finding, and
we decline the invitation to overturn its damage award.
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III. Conclusion
For the foregoing reasons, we A FFIRM the judgment of
the district court.
11-23-11
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