Opinion ID: 617714
Heading Depth: 3
Heading Rank: 2

Heading: The Explosion, Its Aftermath, and Removal and

Text: 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 self- propulsion, 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. Nos. 11-1266 & 11-1346 7 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.
Neumann agreed that EMC should conduct spill man- agement 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 be- cause, 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. 8 Nos. 11-1266 & 11-1346 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 informa- tion 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 Nos. 11-1266 & 11-1346 9 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.
For many reasons, GAIC took issue with the indem- nification 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 10 Nos. 11-1266 & 11-1346 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, aug- menting 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 re- quested no reimbursement for any work completed after that date. Nos. 11-1266 & 11-1346 11
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. 12 Nos. 11-1266 & 11-1346 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.

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 Nos. 11-1266 & 11-1346 13 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 14 Nos. 11-1266 & 11-1346 withdrew this reimbursement request during the proceedings below.
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.