West Bay Exploration Co. v. AIG Specialty Agencies of Texas, Inc.

• Decision Date: 03 October 1990
• Docket Number: No. 89-2252,89-2252
• Citation: 915 F.2d 1030
• Parties: WEST BAY EXPLORATION COMPANY, a Michigan corporation, Plaintiff-Appellant, v. AIG SPECIALTY AGENCIES OF TEXAS, INC., a Texas Corporation, formerly known as AIG Oil Rig of Texas, Inc., et al., Defendants, International Surplus Lines Insurance Company, an Illinois corporation; Great Southern Fire Insurance Company, an Arizona corporation; Zurich American Insurance Company of Illinois, an Illinois corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1030

915 F.2d 1030

33 ERC 1218

WEST BAY EXPLORATION COMPANY, a Michigan corporation Plaintiff-Appellant, v. AIG SPECIALTY AGENCIES OF TEXAS, INC., a Texas Corporation formerly known as AIG Oil Rig of Texas, Inc., et al., Defendants International Surplus Lines Insurance Company, an Illinois corporation; Great Southern Fire Insurance Company, an Arizona corporation; Zurich American Insurance Company of Illinois, an Illinois corporation, Defendants-Appellees.

No. 89-2252.

United States Court of Appeals Sixth Circuit.

Argued July 30, 1990.

Decided Oct. 3, 1990.

Craig W. Elhart (argued), Elhart & Power, Traverse City, Mich., for West Bay Exploration Co.

Robert E. Sullivan, Jr., Ronald S. Lederman (argued), Sullivan, Ward, Bone, Tyler, Fiott & Asher, Southfield, Mich., for Intern. Surplus Lines Ins. Co.

Jon D. Vander Ploeg (argued), Brian J. Kilbane, Smith, Haughey, Rice & Roegge, Grand Rapids, Mich., for Great Southwest Fire Ins. Co.

Scott R. Melton, Gruel, Mills, Nims & Pylman, Grand Rapids, Mich., Robert J. Bates, Jr., Phelan, Peop & John, Chicago, Ill., Kirsten Kingdon, Peter B. Kupelian (argued), Tucker & Rolf, Southfield, Mich., for Zurich American Ins. Co. of Illinois.

Before MILBURN and GUY, Circuit Judges; and TIMBERS, Senior Circuit Judge. ^*

RALPH B. GUY, Jr., Circuit Judge.

The plaintiff, West Bay Exploration Company (West Bay), appeals entry of summary judgment in this diversity of citizenship contract action against three of its insurers: International Surplus Lines Insurance Company (International), Great Southwest Fire Insurance Company (Great Southwest), and Zurich American Insurance Company of Illinois (Zurich). West Bay argues that the district court erred in its interpretation of Michigan law and improperly resolved disputed issues of fact in holding that West Bay had failed to satisfy notice conditions contained in insurance policies written by the defendants. Upon de novo review of the record, we agree with the district court that the plaintiff has failed to raise a genuine issue of fact with regard to satisfaction of the notice requirements and, accordingly, affirm.

I.

West Bay is an independent oil and gas producer operating approximately 24 wells in northern lower Michigan. The defendants each issued general liability insurance policies covering the plaintiff's operations for the years 1982 through 1985. ¹ This case arose from the defendants' denial of coverage for cleanup costs that the plaintiff incurred as a result of the discharge of toxic chemicals at seven of its natural gas wells during the covered period.

The discharges were the product of a procedure West Bay employs to remove water vapor from natural gas so that the gas can be conveyed through pipelines without freezing. West Bay processes the gas from its wells through a device known as a glycol dehydrator. In the dehydrator, the gas is mixed with glycol, a dessicant or drying agent, which absorbs the water vapor. The dry gas is then sent out through a pipeline and the glycol is reclaimed. The reclamation process involves heating the glycol to a temperature below its boiling point but above the boiling point of water, thus causing the water to escape in the form of steam. The glycol is then returned to the gas stream to absorb more water vapor, while the steam is sent through a "downpipe" where it condenses and is collected in a "drum" or "drip barrel." The water is discharged into a drip barrel rather than into the air because of the danger that it will carry trace amounts of the potentially carcinogenic aromatic hydrocarbons benzene, ethylbenzene, toluene, and xylene (BTEX). These toxins may appear naturally in water vapor from the wells.

In August 1984, the Michigan Department of Natural Resources (MDNR) prepared a report which revealed the presence of BTEX in "oil field associated water (brines) from all Michigan oil producing formations." The MDNR found that acceptable benzene levels had been exceeded by a factor of 3,500, making the aquifer that was tested "totally unsafe for human consumption" or even bathing.

Acting upon the information discovered in the August report, the MDNR obtained a warrant to search seven of West Bay's gas wells. The warrant was posted on October 31, 1985, and on that same date the MDNR sent West Bay a "Letter of Noncompliance" stating that the department had reason to believe that West Bay had improperly disposed of glycol condensate and thereby unlawfully "committed waste in the development of oil," in violation of Michigan's Supervisor of Wells Act, 1939 P.A. 61, Mich.Comp.Laws Sec. 319.4. The MDNR ordered West Bay to either replace a leaking drip barrel by November 11 or shut down the wells, and to take samples of the groundwater beneath the unsound barrel. The MDNR report indicates that at least one of West Bay's drip barrels had been intentionally perforated so as to allow collected water to seep into the ground.

On February 19, 1986, the MDNR wrote West Bay to inform the company that, due to the amount of BTEX that had seeped into the ground, corrective action would be required. The MDNR ordered West Bay to "remove contaminated soils in the vicinity of the dehydrator discharge point" and place them in a licensed landfill, replace the soils with clean backfill, install groundwater monitor wells, submit groundwater samples to an EPA approved laboratory, and regularly inspect the dehydrator collection vessel. The letter specified that these actions were to be coordinated with the MDNR and performed within 40 days.

West Bay called in specialists to determine the extent of the groundwater contamination and began corrective action in accordance with the MDNR requests. On June 19, 1986, approximately seven months after the MDNR had posted search warrants on its wells, the plaintiff's attorney, Craig Elhart, mailed a letter to West Bay's insurance agent, James Patrick Quirk, in which he explained that West Bay's dehydrators had released toxic chemicals into the ground and that the company had already incurred and would continue to incur a great deal of expense in cleaning up the seepage. Elhart wrote that West Bay "hereby make(s) claim for cleanup" and suggested that Quirk contact West Bay's president and majority shareholder, Robert Tucker.

Immediately upon receipt of the letter, Quirk telephoned Tucker. According to his deposition testimony, Quirk explained that he "didn't think that the policies [were] intended to cover this type of problem, because my understanding of the definition of the pollution coverage had the term 'sudden and accidental' as a limitation." Quirk also advised Tucker that "it was my opinion that all he would do by turning in a possible claim would be to, in effect, make my securing renewal insurance premiums much more difficult and much more expensive." Quirk stated that Tucker agreed with this assessment, did not think that the pollution would present a major problem, and agreed that West Bay should not pursue a claim. After this conversation, Quirk sent Elhart a letter dated June 24, stating, in pertinent part, as follows:

It is my opinion that both policies definitely deny coverage to pollution and contamination and clean up from other than a sudden accidental and unintended occurrence.

Robert Tucker stated that he did not think the problem was going to be of great magnitude, and does not want to try to turn in a claim at this time.

Neither West Bay nor Quirk ever submitted a claim to any of the defendants. After Tucker's consultation with Quirk, West Bay continued to expend considerable sums in its effort to clean up the well site in compliance with MDNR orders, paying consultants, removing contaminated soil from the vicinity of the dehydrator discharge, disposing of contaminated groundwater, backfilling the contaminated area with clean soil, and installing groundwater monitor wells. West Bay also removed the barrels from which the discharge had apparently leaked and replaced them with a new collection system.

On October 27, 1987, approximately two years after receiving the letter of noncompliance from the MDNR, West Bay commenced this action in the United States District Court for the Western District of Michigan seeking a declaratory judgment of liability against International and various other insurance companies no longer parties to this action. ² West Bay sought to have the defendants declared jointly and severally liable for costs West Bay had incurred as a result of the BTEX discharge. On July 7, 1988, West Bay amended its complaint to add Southwest and Zurich as defendants. In addition to the claims for declaratory judgment, the plaintiff's amended complaint requested damages alleging breach of contract by each defendant and negligence for failure to provide an insurance contract free from ambiguity.

In June 1989, the three defendants each filed motions for summary judgment, arguing that the plaintiff had failed to satisfy a condition precedent to their duty under the insurance contracts by not notifying them of the facts underlying the claim "as soon as practicable," and that, in any event, various provisions within the policies excluded coverage for costs associated with the clean up. ³ West Bay argued in response that it had satisfied the notice conditions in June of 1986 by filing a claim with Quirk. West Bay further contended that even if it had failed to provide notice until it filed the complaint in the instant action, the defendants had not been prejudiced thereby, so that the failure could not stand as a bar to recovery.

The district court granted summary judgment in favor of all three defendants. After determining that Quirk was an agent of West Bay rather than of its insurers, the court held that notice to Quirk could not substitute for notice to the defendants. The court then explained that the plaintiff's two-year delay in notifying International and its nearly three-year delay in notifying Southwest and Zurich...