Second Circuit Deems Policy Ambiguous Regarding Post-Exhaustion Defense

Originally published by Kevin Merriman.

By David M. Knapp, Ward Greenberg Heller & Reidy LLP

In American Commercial Lines LLC, et al. v. Water Quality Insurance Syndicate, 16-91-cv(L) (2d Cir. Feb. 10, 2017), the Second Circuit reversed a decision from the Southern District of New York, which held that a maritime insurer was obligated to continue defending its policyholder in connection with claims arising from an oil spill in the Mississippi River, even after its policy limits were exhausted. The policy at issue contained indemnity coverage for liability arising from oil spills and provided that defense costs would be paid for “any liabilities covered” under the policy. The policy further provided that such defense costs were in addition to the limits of liability. The insurer argued that once the limits of liability were exhausted from indemnity payments, there no longer were any “liabilities covered” under the policy, and, therefore there no longer was an obligation to pay defense costs. The policyholder argued that the phrase “liabilities covered” referred only to the type of liabilities covered under the policy, without regard to the available limits, and therefore that the insurer was obligated to continue paying defense costs, even after the limits were exhausted. The district court sided with the policyholder. The Second Circuit reversed, however, holding that the interpretations offered by the policyholder and the insurer both were reasonable, and, therefore that the policy was ambiguous. Among other things, the court looked at extrinsic evidence – the parties’ own actions after the limits of the policy were exhausted – and the “overall structure and purpose of the policy” as support for the insurer’s proffered interpretation. The court remanded the case to the district court to “assess the extrinsic evidence as well as further evidence adduced through discovery” to determine the intent of the parties.

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