Whittier Properties (Whittier) appealed from the district court's grant of summary judgment in favor of Zurich American Insurance Company (Zurich). The district court held that Whittier materially misrepresented information when applying to Zurich for insurance coverage of underground storage tanks (USTs). As a result, the district court held that Zurich could rescind the insurance policy, thereby freeing itself from any liability incurred as a result of that policy. The Ninth Circuit reversed and remanded, holding that regulations promulgated by the United States Environmental Protection Agency (EPA) precluded rescission of an insurance policy that covered USTs.
Whittier owned and operated a gas station near Sterling, Alaska. Originally, the station was served by two 10,000 gallon USTs. In 1993, a contractor working on these tanks discovered evidence of contamination around the tank fill pipes and dispenser locations. In August 1995, when Whittier replaced its existing system with a single 20,000 gallon tank, a contractor on the replacement project also encountered petroleum contamination. Whittier chose to proceed with the tank replacement without removing the contaminated soils. In October 1995, New Horizons, an environmental contractor, prepared a site assessment of the gas station's premises, including the UST system. Finding contamination, New Horizons notified the Alaska Department of Environmental Conservation (ADEC). Though both New Horizons and the ADEC advocated cleanup of the contamination, Whittier took no action.
In November 1999, Whittier applied for a "Storage Tank System Third-Party Liability and Corrective Action Policy" from Zurich. On the application, Whittier's owner Yovonne Baker indicated she was unaware of any prior contamination. Zurich issued the policy, incurring a coverage obligation for any contamination from the 20,000 gallon tank after December 1997. In 2000, Whittier closed the gas station; one year later, Gilfilliam Engineering and Environmental Testing (Gilfilliam) investigated the site for environmental contamination. Gilfilliam found serious contamination of the soil and nearly a foot of petroleum products floating on top of the site's groundwater which had also spread to adjacent properties. When informed of the potential claims resulting from this contamination, Zurich filed suit in district court. Zurich demanded rescission of the policy on the grounds that Whittier had misrepresented information regarding prior contamination of the site. The district court granted Zurich's motion for summary judgment, allowing rescission of the policy on the grounds of Whittier's misrepresentation pursuant to a state statute. The district court held that rescission was permissible under state law because EPA's UST regulations limited only prospective cancellation, not rescission. Whittier appealed.
The Ninth Circuit reviewed the grant of summary judgment de novo, viewing the facts in the light most favorable to Zurich and assuming for review that Whittier had materially misrepresented information on its policy application. Thus, the court proceeded to address the question as to whether the EPA's UST regulations precluded rescission of the insurance policy.
Under Alaska Statutes section 21.42.110, a policy may be rescinded for misrepresentation when that omission or incorrect statement was fraudulent, material to the risk assumed by the insurer, or if the insurer would not have issued the same policy if that information had been known. However, federal regulations promulgated by EPA place limits on the cancellation of policies for USTs, requiring notification of cancellation before that cancellation is effective. The Ninth Circuit examined the state and federal regulations and noted that while the federal regulations allow for the implementation of an approved state program, Alaska has not submitted such a program, and the federal regulations remained in full effect. Moreover, Alaska had passed its own regulations concerning the operation of USTs and insurance policy terminations that were very similar to and referenced the federal regulations.
The EPA's regulations also include provisions governing the cancellation of a UST insurance policy upon the insured's misconduct. Specifically, the regulations provide that "[c]ancellation or any other termination . . . for . . . misrepresentation" will not be effective unless preceded by written notice and a minimum of a ten-day period after the receipt of that notice. Zurich argued, and the district court held, that this regulation related only to prospective cancellation and was not applicable to rescission of policies. Thus the district court applied the state law requiring rescission of policies based on misrepresentation. The Ninth Circuit disagreed, holding that EPA regulations, which Alaska specifically incorporated into its own law, included rescission in the definition of cancellation. Furthermore, the court found that prospective cancellation of a UST policy was exclusively governed by the EPA regulations. In both instances the court deferred to EPA's interpretation, expounded in its amicus brief, that the regulations precluded rescission and were intended to be the sole remedy for a UST policy provider. As a result, the Ninth Circuit vacated the district court's grant of summary judgment and remanded the case for consideration of Zurich's remaining arguments for summary judgment as well as policy interpretation.