Hartford Insurance v. Mississippi Valley Gas Co.

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
May 25, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 05-60299
HARTFORD INSURANCE COMPANY OF THE MIDWEST
Plaintiff - Counter Defendant - Appellant
TWIN CITY FIRE INSURANCE COMPANY; HARTFORD ACCIDENT &
INDEMNITY COMPANY
Plaintiffs - Appellants
v.
MISSISSIPPI VALLEY GAS COMPANY; ATMOS ENERGY CORPORATION,
Successor in Interest to and doing business as Mississippi
Valley Gas Company
Defendants - Counter Claimants - Appellees
_________________________________________________________________
Appeal from the United States District Court
for the Southern District of Mississippi
No. 3:03-CV-1139
_________________________________________________________________
Before KING, SMITH and BENAVIDES, Circuit Judges.
PER CURIAM:*
Plaintiff-appellant Hartford Insurance Company of the
Midwest appeals the district court’s grant of summary judgment in
favor of defendant-appellee Mississippi Valley Gas Company on its
*
Pursuant to 5TH CIR. R. 47.5, the court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
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coverage claim in the amount of $557,919 under property insurance
policies covering natural gas produced by certain designated
wells. Hartford Insurance Company of the Midwest also appeals
the district court’s denial of its motion for summary judgment as
well as its motion to strike portions of the affidavit of
Mississippi Valley Gas Company’s petroleum engineering expert,
Wayne Stafford. We agree fully with the district court that
resolution of this issue is “hardly apparent.” That said, we
REVERSE the district court’s grant of summary judgment in favor
of Mississippi Valley Gas Company and RENDER judgment for
Hartford Insurance Company of the Midwest.
I. FACTUAL AND PROCEDURAL BACKGROUND
This case concerns an insurance coverage dispute between
plaintiff-appellant Hartford Insurance Company of the Midwest
(“Hartford”) and defendants-appellees Mississippi Valley Gas
Company and its successor in interest Atmos Energy Corporation
(collectively “MVG”). The basic factual predicate underlying the
instant appeal is undisputed. In 1982, MVG began purchasing
natural gas produced by the Asa Watson Well in Monroe County,
Mississippi from the well’s owner and operator, Howard G. Nason.
In 1989, MVG entered a separate contract to purchase natural gas
from a different well in Monroe County known as the Catherine
Watson Well from Nason Production Company, Inc., Howard G. Nason,
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Howard F. Nason, and Anice H. Nason.2 The gas produced from each
well flowed through a separate line to a distinct sales meter,
where the volume of gas from the well was compressed, measured,
and ultimately delivered to MVG’s pipeline. Pursuant to the
contracts between MVG and the Nasons, legal title to the gas
transferred from the Nasons to MVG at the point of the sales
meter. After the gas was metered, it was transported to MVG’s
facilities and into high-pressure transmission lines for
distribution.
The district court’s opinion succinctly describes the facts
underlying the coverage claim:
When the Asa Watson Well stopped producing in March
or April 1999, the Nasons removed the meter from the Asa
Watson Well and diverted the gas production being sold to
MVG from the Catherine Watson Well through the sales
meter for the Asa Watson Well.
Thereafter, in September 2000, MVG discovered that
an underground “tap” had been placed on MVG’s line
downstream of the meter which diverted gas from MVG’s
line through an underground pipe back to a point upstream
of the meter, where the gas was reintroduced or
reinjected into the gas stream. As a result of this
recirculation, gas which had already been metered and
purchased by MVG was recirculated and hence remetered and
resold by the Nasons to MVG.
R. at 234-35. Based on reports from MVG’s petroleum engineering
expert Wayne Stafford’s investigation, the recirculation scheme
caused an estimated total monetary loss to MVG of $1,804,125
2
After Howard G. Nason died in 1995, his interest in the
wells passed to his wife, Anice.
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between 1986 and September 2000.3
In January 2003, MVG submitted a proof of loss claim in the
amount of $557,919 to recoup a portion of this loss under the
Hartford policies covering the period between September 1, 1994
and January 31, 1999.4 More specifically, MVG’s “theft” claim
was for the value of 226,742 Mcf of recirculated natural gas,
which represented the difference between the volume of gas
actually produced by and delivered to MVG from the wells during
this period (17,285 Mcf) and that same volume of gas recirculated
through the meter more than fourteen times (244,027 Mcf). MVG
did not, however, include the small volume of gas consumed to
execute the recirculation scheme itself in its claim under the
Hartford policies.5
3
Immediately after discovering the recirculation scheme,
MVG began to withhold payments for natural gas purchases from
another well owned by Anice Nason called the Simmons Well,
claiming it was entitled to offset the unjust enrichment from the
overpayment with respect to the two Watson Wells. On or about
March 1, 2004, MVG reached a settlement with the Nasons and
repaid $100,000 of the $747,000 it had previously withheld.
4
MVG stipulated that it had withdrawn its claim on the
policies issued between July 14, 1988 and September 1, 1994, and
after January 31, 1999. We therefore limit our focus on this
appeal to the Hartford policies covering the period between
September 1, 1994 and January 31, 1999.
5
During oral argument, Hartford stated that the
recirculation scheme was basically equivalent to tampering with
the meter itself. For example, recirculating the same volume of
gas ten times through a properly calibrated meter would
overcharge by the same amount as manipulating the meter to price
at ten times the proper rate upon the first pass through the
meter.
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On September 30, 2003, Hartford filed a diversity action in
the Southern District of Mississippi seeking a declaratory
judgment that Hartford was not obligated to pay MVG’s claim for
loss of natural gas under the applicable property insurance
policies. MVG filed an answer and counterclaim for declaratory
relief on October 30, 2003, seeking an adjudication that the
Hartford policies did indeed provide coverage for the claim. The
parties submitted cross-motions for summary judgment on July 15,
2004.
The parties did not dispute before the district court that a
“theft” that results in a loss of or damage to the covered
property is covered under the relevant Hartford policies. They
differed, however, in their characterization of the scheme and
the precise nature of the alleged loss. MVG asserted that the
recirculation scheme amounted to repeatedly stealing and
reselling the same volume of gas and therefore constitutes a
covered “theft” under the policies. Hartford contended, however,
that the insurance policies at issue do not provide coverage to
MVG under these circumstances because: (1) the only property lost
was “money” from overpaying for the volume of gas actually
received, and purely monetary losses are expressly excluded from
the definition of covered property; and (2) any loss of covered
property was otherwise excluded from coverage under the
“voluntary parting” exclusion or “missing property” limitation in
the policies. On August 31, 2004, while the summary judgment
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motions were still pending, Hartford also moved to strike the
affidavit of Wayne Stafford because it allegedly failed to
comport with the formal requirements of FED. R. CIV. P. 56(e) and
because certain portions allegedly contained inadmissible legal
conclusions.
On January 18, 2005, the district court denied Hartford’s
motion for summary judgment and granted MVG’s motion for summary
judgment, “conclud[ing], albeit not with certainty, that MVG
sustained a loss that falls within the coverage of Hartford’s
policies.” R. at 233. With respect to the contested issue of
whether the recirculation scheme constituted a “direct physical
loss” of covered property under the Hartford policy, the court
acknowledged that “there are compelling arguments on both sides
of the issue.” Id. at 236. The court rejected Hartford’s
characterization of MVG’s claim as a “loss of money” from
overpayment and found that “the facts readily support[ed] the
conclusion that a theft occurred when the Nasons siphoned natural
gas from MVG’s pipeline.” Id. at 237.
In the court’s view, the fact that the Nasons resold the
natural gas they had stolen from MVG to MVG, so that MVG
thus ended up acquiring all the natural gas produced by
the wells because the gas was recirculated through the
meter rather than simply being siphoned off and sold to
another buyer, does not change the fact that there was a
dispossession, or “direct physical loss” of the natural
gas, for a period of time.
Id.
After rejecting Hartford’s contention that MVG suffered only
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a loss of money, the court summarily disposed of Hartford’s
alternative arguments that the policies’ “voluntary parting”
exclusion and “missing property” limitation applied to deny
coverage. More specifically, the court found that (1) MVG did
not “voluntarily part” with the gas that was siphoned off through
the underground tap to fall within that exclusion; and (2) the
“missing property” limitation did not apply given the physical
evidence showing how the gas was diverted and remetered.
Because the district court’s summary judgment order decided
only the issue of coverage under the policies and not the precise
extent of liability, Hartford submitted a motion for
clarification accompanied by a request for certification of the
coverage question for interlocutory appeal pursuant to 28 U.S.C.
§ 1292(b). In essence, Hartford contended that if coverage
exists at all under the policies, it extended only to a single
instance of recirculation. Consistent with its previous order,
the court concluded that “the property at issue was repeatedly
lost” and accordingly granted summary judgment in favor of MVG on
the liability issue in the amount of $557,919. R. at 259.
Having granted MVG’s motion for summary judgment as to both the
coverage and liability issues, the court found the request for
discretionary interlocutory appeal pursuant to § 1292(b) to be
moot and entered a final judgment in favor of MVG on March 3,
2005. Hartford timely filed its notice of appeal on March 29,
2005.
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II. STANDARD OF REVIEW
We review a grant of summary judgment de novo, applying the
same standards as the district court. Fed. Ins. Co. v. Ace Prop.
& Cas. Co., 429 F.3d 120, 122 (5th Cir. 2005). Summary judgment
is appropriate when “the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to judgment
as a matter of law.” FED. R. CIV. P. 56(c); see also Celotex
Corp. v. Catrett, 477 U.S. 317, 327 (1986). “An issue is
‘genuine’ if the evidence is sufficient for a reasonable jury to
return a verdict for the nonmoving party.” Hamilton v. Segue
Software Inc., 232 F.3d 473, 477 (5th Cir. 2000) (citation
omitted). A fact is “material” if “its resolution could affect
the action’s outcome.” Minter v. Great Am. Ins. Co. of N.Y., 423
F.3d 460, 465 (5th Cir. 2005). The evidence and inferences from
the summary judgment record must be viewed in the light most
favorable to the nonmovant. Id.
III. DISCUSSION
In resolving this coverage dispute, we must first examine
the relevant provisions in the property insurance policies at
issue. Interpretation of an unambiguous insurance contract is a
question of law, which this court reviews de novo. Am. States
Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir. 1998). The
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parties further agree that Mississippi law governs this diversity
action. “Under Mississippi law, an insurance policy is a
contract subject to the general rules of contract
interpretation.” ACS Constr. Co. of Miss. v. CGU, 332 F.3d 885,
888 (5th Cir. 2003) (citing Clark v. State Farm Mut. Auto. Ins.
Co., 725 So. 2d 779, 781 (Miss. 1998)). “Although ambiguities in
an insurance policy are construed against the insurer, a court
must refrain from altering or changing a policy where terms are
unambiguous, despite resulting hardship on the insured.” Titan
Indem. Co. v. Estes, 825 So. 2d 651, 656 (Miss. 2002).
The Special Property Coverage Form provides coverage for
“direct physical loss of or damage to Covered Property caused by
or resulting from any Covered Cause of Loss.” The parties agree
that the “Covered Property” at issue under the policies is the
natural gas produced by the designated Watson Wells. Under the
policies, “Covered Causes of Loss means RISKS OF DIRECT PHYSICAL
LOSS unless the loss is” otherwise excluded or limited by the
operation of certain enumerated conditions in the policy,
including the “voluntary parting” exclusion and “missing
property” limitation.6 The policies also provide that “theft”
6
The “voluntary parting” exclusion expressly denies
coverage for any loss or damage caused directly or indirectly by:
i. Voluntary parting with any property whether or not
induced to do so by any fraudulent scheme, trick,
device or false pretense.
The “missing property” limitation denies coverage for loss or
damage to:
c. Missing Property
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and “attempted theft” that result in loss of or damage to covered
property constitute “specified causes of loss” under the
policies. The policies, however, expressly exclude mere monetary
losses from the definition of “covered property.”7
Given the unambiguous language in the relevant insurance
policies, the primary source of disagreement between the parties
is how the loss suffered by MVG from the recirculation scheme
should be characterized. Hartford contends that there was no
actual deprivation of the covered property that would constitute
a “theft” because MVG eventually received all of the natural gas
produced from both Watson Wells pursuant to its contracts with
the Nasons. In essence, Hartford contends that the only result
of the recirculation scheme was to cause MVG to unwittingly
overpay for the gas--i.e., MVG experienced only a loss of “money”
that would not be covered under the clear terms of the relevant
policies. On the other hand, MVG maintains that the district
court correctly characterized the recirculation scheme as
multiple, albeit temporary, “thefts” of the natural gas from the
Catherine Watson Well that are covered under the policies.
Property that is missing, if there is no physical
evidence to show what happened to it. An example
is a shortage disclosed on taking inventory.
7
Specifically, the policy excludes:
2. Property Not Covered
Covered Property does not include:
a. Accounts, bills, currency, deeds, evidences of
debt, money, notes or securities.
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As a general matter, property insurance coverage is
triggered by some threshold concept of physical loss or damage to
the covered property. See 10A COUCH ON INS. § 148:46 (3d ed.
2005).
The requirement that the loss be “physical,” given the
ordinary definition of that term is widely held to
exclude alleged losses that are intangible or
incorporeal, and, thereby, to preclude any claim against
the property insurer when the insured merely suffers a
detrimental economic impact unaccompanied by a distinct,
demonstrable, physical alteration of the property.
Id. We have previously stated that “[t]he language ‘physical
loss or damage’ strongly implies that there was an initial
satisfactory state that was changed by some external event into
an unsatisfactory state--for example, the car was undamaged
before the collision dented the bumper.” Trinity Indus., Inc. v.
Ins. Co. of N. Am., 916 F.2d 267, 270-71 (5th Cir. 1990).
Consistent with these general principles, absent some physical
manifestation of loss or damage to the gas itself, the property
insurance policies issued by Hartford in this case expressly
exclude mere monetary losses from coverage.
The fundamental difficulty with MVG’s position is that,
except for the unclaimed de minimis portion of gas consumed to
carry out the recirculation scheme, MVG actually received all of
the available gas produced by the two Watson Wells. MVG cites
National Fire Insurance Co. of Hartford v. Slayden, 85 So. 2d
916, 917 (Miss. 1956), for the proposition that even a temporary
deprivation of property would be covered under an insurance
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policy that covered against “theft” losses. The holding in
Slayden was actually considerably narrower than this and
consistent with our disposition of the instant case. In Slayden,
the Supreme Court of Mississippi affirmed in part a jury verdict
assessing liability under an insurance policy where a third party
had damaged the engine of a “bulldozer equipped tractor”--the
covered property under the insurance policy--by improperly
operating it without water. Id. Even though the damaged tractor
itself was returned to the insured party, the court concluded
that the damage resulting from temporary “theft” of the property
was covered under the insurance policy.
To the contrary, here the gas from the Watson Wells was not
physically lost or damaged in any way before it was eventually
returned to MVG after multiple passes through the meter. In this
sense, unlike the situation in Slayden, the covered property was
not returned to the insured party in a damaged state. Therefore,
MVG’s proof of loss claim lacked the requisite “direct physical
loss of or damage to” the covered property under the insurance
policies.
After careful examination of the relevant provisions in the
Hartford policies, we conclude that MVG’s overpayment for the
recirculated gas from the Watson Wells is more accurately
described as a loss of “money,” rather than covered property.
Accordingly, the district court erred in finding a covered loss
under the insurance policies issued by Hartford. Because we
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reverse and render judgment in favor of Hartford based solely on
our conclusion that the recirculation scheme merely resulted in
an uncovered loss of money, we expressly decline to reach the
portions of the district court’s decision concerning the
application of the “voluntary parting” exclusion and “missing
property” limitation under the policies. We also need not reach
the issue of whether the district court erred in denying
Hartford’s motion to strike Wayne Stafford’s affidavit.
IV. CONCLUSION
For the foregoing reasons, we REVERSE the district court’s
grant of summary judgment in favor of Mississippi Valley Gas
Company on both the coverage and liability issues and RENDER
judgment for Hartford Insurance Company of the Midwest. Costs
shall be borne by Mississippi Valley Gas Company.
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