EGAN MARINE CORP. v. GREAT AMERICAN INSURANCE COMPANY OF NEW YORK (November 23, 2011)
Egan Marine Corporation operates vessels on the Chicago Sanitary and Ship Canal. Its sister company, Service Welding and Shipbuilding operates the shipyard. Egan and SWS obtained insurance from the Great American Insurance Company against an event that exposed either to specific federal statutory environmental liability. The policy covered each of the companies’ vessels up to $5 million. In January of 2005, an Egan tugboat was pushing an Egan barge filled with slurry oil up the canal when the barge exploded. The Coast Guard designated the barge as the source of the discharge and notified Egan that it could be held financially responsible for all damages. Great American hired Egan and SWS to conduct spill management, cleanup, and salvage operations. The companies agreed to provide those services at cost. A dispute arose between the parties regarding Egan's billing methodology. The parties also were at odds over the amount of coverage. Great American took the position that the barge was the only vessel involved in the incident and the coverage was therefore limited to $5 million. Egan took the position that both the barge and the tugboat were involved and that coverage extended to $10 million. The Coast Guard sent a letter on May 18, 2005 indicating that the emergency response was complete except for oil remaining in the canal, which it directed Egan to remove. The Illinois EPA filed suit for an injunction, civil penalties, and costs. Great American paid for Egan's expense for some time, but then stopped. The United States also brought suit, seeking removal costs and civil penalties. The suit names both the tugboat and the barge as responsible. Egan and SWS brought suit against Great American alleging breach of contract and breach of good faith and fair dealing. Great American counterclaimed for a declaratory judgment. On summary judgment, Judge Kennelly (N.D. Ill.) ruled that Great American satisfied its policy obligations with respect to the barge but that it breached the policy by not honoring the $5 million coverage for the tugboat. After a bench trial, the court ruled that the only damages from the breached contract were unpaid defense costs, that Great American did not breach the contract by disputing and refusing to pay the total amounts claimed by Egan for the recovery efforts, that Great American breached the contract by refusing any coverage after the Coast Guard letter, and that Great American did not breach its duty of good faith and fair dealing. Both parties appeal.
In their opinion, Seven Circuit Judges Bauer, Flaum, and Sykes affirmed. First, the Court concluded that Great American's refusal to pay the amounts claimed by Egan on the ground that they did not represent Egan's "costs," was not clear error. Egan had refused an opportunity to provide additional justification for its claims to Great American and the record evidence did not support a conclusion that they were entitled to the money claimed. Second, the Court also found no error in the district court's conclusion that coverage extended beyond the date of the Coast Guard letter but did not extend beyond the date of the Illinois EPA's lawsuit, in which there was no mention of any ongoing threat of contamination. Third, the Court concluded that New York law does not recognize an independent breach of good faith claim that is based on the same evidence as a breach of contract claim. Fourth, the Court agreed that the tugboat was entitled to coverage in that it was a "vessel" under federal pollution statutes, that it was the barge's sole means of propulsion, and that it therefore posed a substantial threat of discharge. Finally, the Court concluded that Egan incurred defense costs in the Illinois EPA suit as part of its exposure under federal and state pollution statutes. The defense costs were therefore covered under the policy.