Spill Fund Reimbursement Allowed because of Willful Misconduct
January 2008
Recently, the District Court for the District
of Columbia decided a case of first impression concerning the Oil Pollution
Act of 1990 (OPA), 33 U.S. § 2701, et. seq.
In Water Quality Ins. Synd. v. United States of Am.,
2007 WL 4197507 (D.D.C.), the court overturned a decision from the National
Pollution Funds Center (NPFC) which had denied a claim for reimbursement of
uncompensated damages and removal costs. The case appears to be the first reported
opinion allowing a guarantor/insurer the ability to seek reimbursement from
NPFC on the basis of the willful misconduct of a responsible third party.
by Michael
A. Orlando
Meyer Orlando
LLC
Background Facts
The tug Emily S was towing the tank barge
Morris J. Berman, which was half loaded
with fuel oil on a voyage from San Juan, Puerto Rico, to Antigua in January
1994. Not long after sailing, the towline parted but the tug was able to retrieve
the barge quickly. The tug crew repaired the tow wire but, although a metal
"thimble" was available, the crew did not install it. (A "thimble" is used to
prevent the shackle from rubbing against the tow wire in the area of a repair.)
Several hours later, the tow wire parted again, and the barge drifted unnoticed
by the sole watchstander aboard the tug.
The towline parted due to the lack of a thimble being placed where the wire
was repaired the first time. The barge stranded on a reef in Puerto Rico spilling
nearly 800,000 gallons of fuel oil onto the beach and surrounding waters. The
Coast Guard designated the owner and operator of the barge, as well as the bareboat
charterer and operator of the tugboat, as responsible parties for the oil spill.
Water Quality Insurance Syndicate (WQIS) insured the barge for pollution
risks up to $10 million. The responsible parties were named insureds on the
policy. WQIS also had provided a Certificate of Financial Responsibility (COFR)
in the amount of $806,550 for the barge. NPFC sent an interim invoice to WQIS
in the amount of approximately $7.3 million for oil removal expenses. WQIS paid
the COFR amount initially, but then also paid the fund an additional $3.7 million.
WQIS additionally paid around $5 million directly to contractors for oil removal
expenses, thus having incurred claims under the policy for approximately $9.5
million.
In September 1996, the barge owner/operator, the tug charterer/operator,
and Pedro Rivera, a shore side manager for the tug operator, were convicted
of violating 46 U.S.C. § 10908 for knowingly sending the
Emily S to sea in an unseaworthy condition
likely to endanger life. Only Mr. Rivera appealed the conviction. In December
1997, the Court of Appeals for the First Circuit,
en banc, reversed Mr. Rivera's conviction,
finding that while the evidence at trial was sufficient to show that he knew
the vessel was unseaworthy when it departed (based on the poor condition of
the towline), the evidence was insufficient to show that he knew the vessel's
unseaworthy condition was likely to endanger the life of an individual. The
convictions of the corporate responsible parties stood because they were not
appealed.
In December 1998, WQIS submitted a claim to the NPFC for approximately $9.5
million. The claim was denied, and WQIS sought judicial review of a final agency
action. A court may set aside an agency action, finding, or conclusion only
when such is arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with the law.
In this case, WQIS was a guarantor for the COFR amount and otherwise was
an insurer for the remainder of the $10 million in insurance limits. The principal
provision of OPA that the court had to consider was found in 33 U.S.C. § 2716
(f) (1), which states as follows:
[A] claim for which liability may be established under Section
2702 of this title may be asserted directly against any guarantor providing
evidence of financial responsibility for a responsible party liable under that
section for removal costs and damages to which the claim pertains.
In defending against such a claim, the guarantor
may invoke … the defense that the incident was caused by the willful misconduct
of the responsible party. The guarantor may not invoke any other defense
that might be available in proceedings brought by the responsible party against
the guarantor. (Emphasis added.)
Id. at *3. The court then noted that
the oil spill liability trust fund is available for payment of claims for uncompensated
removal costs or uncompensated damages as provided in 33 U.S.C. § 2712 (a)(4).
The court also noted that the definitions for "claimant" and "person" are quite
broad.
In the agency decision, the NPFC denied WQIS's claim on two grounds:
(1) Regarding the COFR guarantee payment, the NPFC found that
WQIS had not proved that the incident was caused by the willful misconduct of
[any] responsible party because
(a) the sole proximate cause of the spill was the improper
repair of the tow wire, a negligent act;
(b) willful misconduct cannot be a negligent act; and
(c) a series of negligent acts does not constitute willful
misconduct; and
(2) the NPFC found that with respect to the money paid by
WQIS above the COFR guarantee, WQIS could not rely on its willful misconduct
policy exclusion because, according to the NPFC, claims by insurers asserting
policy defenses are not covered by 33 U.S.C. § 2716.
With regard to the second ground for denial of the claim, the NFPC had taken
the position that for sums expended but not covered by the guarantee, the insurer
"steps into the shoes" of the responsible party, and the insurer's rights would
be the same as the responsible party's rights. Thus, if the responsible party
was guilty of willful misconduct, then the insurer would be painted with the
same brush and therefore could not recover from the fund.
The court undertook a thorough analysis of both of the NPFC's grounds for
denial of the claim.
OPA Guarantee Amount Claim
The court ruled that the NPFC was wrong for at least two reasons in denying
the OPA guarantee amount. In what some might characterize as splitting hairs,
the court frames part of the issue as:
The relevant question for this case is not whether the willful misconduct
was the proximate cause of the oil spill,
rather, the relevant question is whether the "incident was caused by the
willful misconduct of the responsible party." 33 U.S.C. § 2716 (f)(1)(C).
Id. at *5. The court found that the agency
made the erroneous conclusion that a series of negligent acts cannot constitute
willful misconduct. The court noted that "incident" is defined in the statute
as "any occurrence or series of occurrences
having the same origin, involving one or more vessels, facilities, or any combination
thereof, resulting in the discharge or substantial threat of discharge of oil[.]"
33 U.S.C. § 2701 (14) (emphasis added). The court concludes that the "incident"
is not the oil spill but rather "what caused the spill."
Id. at *5. (Hair splitting again?)
The court goes on to find that "while the faulty repair of the towline was
part of the series of occurrences that led to the discharge of the oil, the
agency was wrong under the statute to focus on any one occurrence, event, or
cause as the proximate cause of the spill. It should have looked at the "series
of occurrences" or events that together constitute the "incident" that led to
the spill." Id. at *5.
Next, because the court was persuaded that the decision of the responsible
parties knowingly to send an unseaworthy vessel to sea, along with the accumulation
of other acts that resulted in the oil spill, constituted reckless disregard
and willful misconduct, the agency erred when it concluded that the OPA defense
of willful misconduct did not apply.
Policy Exclusion for Willful Misconduct
The court went on to discuss whether WQIS could make avail of the exclusion
in its policy for any loss arising from the willful misconduct of the assured,
or the willful misconduct of the owner or operator of the vessel if within the
privity or knowledge of the assured. Quite interestingly, the court found that
WQIS's rights did not concern the legal doctrine of subrogation, which was the
basis on which the NPFC denied that portion of WQIS's claim. The court noted
that the NPFC was not able to cite any cases under OPA for the conclusion that
WQIS's rights were based on subrogation.
Paradoxically, the court cites no case for its conclusion that "the claim
that Plaintiff WQIS is pursuing is not based on the subrogated rights of the
OPA 'responsible parties' that it insured, but rather is its
own claim against the fund under the OPA."
Id. at *7. The court supports that conclusion
by noting that WQIS's policy expressly excluded coverage for any loss arising
from willful misconduct and that since the incident was caused by the willful
misconduct of a responsible party "it follows that it necessarily "arose from"
such willful misconduct, thus providing an exception for liability for WQIS
under its insurance policy." Id. at *8.
The court noted that the plaintiff had asserted that it paid out money for
removal cost that it was not required to pay out under the policy and was thus
seeking compensation from the fund for itself, not for its insured.
While the NPFC argued that WQIS could not present a claim on its own behalf,
the court dismissed that argument based on the broad definitions in OPA that
did not exclude WQIS as a claimant. The court concluded, quite rightly, that
"the statute does not purport to exempt
the fund from liability for claims of guarantors and insurers, such as plaintiff,
which asserts that a policy defense exempts it from liability."
Id. at *8.
The court then concluded that the agency's denial of WQIS's claim was based
on legal errors, both with respect to the statutory willful misconduct defense
and with respect to plaintiff's direct claim against the fund. Because the agency
denied the claim on a threshold issue, it made no evaluation or determination
as to the validity of the amounts submitted in the claim. As a result, the court
remanded the case to the agency for further proceedings consistent with its
opinion.
Conclusion
This decision sheds much needed light on reimbursement claims and should
be considered helpful to a better understanding of all parties' rights under
OPA 90. At the time of this writing, there has been no further activity in terms
of a rehearing motion or an appeal.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.