Koch Engineering Co. v. Gibralter Casualty

No. 95-2060
Koch Engineering Company, *
Inc.; *
*
Plaintiff-Appellant; *
*
v. *
*
Gibralter Casualty Company, * Appeal from the United States
Inc.; International Insurance * District Court for the
Company; * Eastern District of Missouri.
*
Defendants-Appellees; *
*
Aetna Casualty and Surety *
Company; *
*
Defendant. *
Submitted: December 11, 1995
Filed: March 11, 1996
Before FAGG, HEANEY, and WOLLMAN, Circuit Judges.
HEANEY, Circuit Judge.
Appellant, the Koch Engineering Company, sued Gibralter Casualty
Company and International Insurance Company, pursuant to its umbrella
insurance policies, to recover a $7,059,476.60 judgment against Koch.
After a short bench trial, the United States District Court for the Eastern
District of Missouri found for the defendants and denied coverage. Koch
appeals that decision. We affirm.
BACKGROUND
In 1982, the Koch Engineering Company (Koch) contracted to design and
supply the Monsanto Corporation (Monsanto) with new equipment for an
existing ethylbenzene/styrene distillation tower. The tower, which is
located at the Monsanto Refinery in Texas City, Texas, is over 220 feet
high and 28.5 feet in diameter. The principal component of the new
equipment was a packing material (Flexipac) that increased surface area,
thereby facilitating the distillation function. The tower design consisted
of six layers of Flexipac with liquid distributors between each layer. The
distribution system initially employed by Koch was a tubular system
consisting of pipes with small holes (between 0.1065 and 0.136 inches) that
permitted liquid to pass through to the next layer of Flexipac. An
alternative distribution system, rejected by the Koch engineers, would have
employed troughs in lieu of pipes with holes. Although the trough
distribution system is less likely to plug with debris, Koch chose the more
efficient tubular system because it had determined that the distillation
process was a "clean service," i.e., free from debris which might plug the
distributor.
The equipment was installed in July 1983 by a construction company
hired by Monsanto. Although it did not install the new equipment, Koch was
contractually required to provide technical advice and oversee the
installation. Tower operation commenced on August 2, 1983. Once in
operation, the facility failed to produce the quantities of filtered liquid
that had been guaranteed by Koch. After opening the tower on August 7,
1983, it was discovered that the pipe distribution holes were plugged with
mill scale. Mill scale, a product of corrosion analogous to rust, only
forms on carbon steel, which is the primary component of the Flexipac, at
temperatures exceeding 1,100 degrees Fahrenheit; thus, there is little
doubt that the mill scale formed during the carbon steel's manufacture.
Although there is some dispute as to whether Koch should have noticed the
mill scale, it is undisputed that Koch took
2
no action to guard against the presence of mill scale. Ultimately, despite
an attempt to alleviate the plugging by cleaning the system, the tubular
distribution system was replaced with a trough distribution system.
Monsanto sued Koch for breach of warranty. The case was tried to a
jury in a federal court in the Eastern District of Missouri. The jury
returned a verdict for Monsanto, awarding $7,059,476.60 in damages. The
district court granted both parties' motions for a new trial on damages,
but the parties ultimately settled on the same amount provided in the
verdict. In 1989, Koch brought suit against its principal insurer, Aetna,
and its excess insurers, Gibralter Casualty Company and International
Insurance Company (Insurers), to recover the award. Aetna, whose coverage
of Koch projects was limited to $1 million annually, paid Koch the limit
in connection with a prior claim arising from a separate project and was
dropped from the suit. After a bench trial in the Eastern District of
Missouri, the district court found for the Insurers.
DISCUSSION
The district court, applying Missouri law, held for the Insurers on
two distinct bases: i) the plugging of the tubular distribution system was
directly attributable to Koch's reckless design, and was therefore not a
fortuitous occurrence triggering the policies' coverage; and ii) the damage
incurred as a result of the distribution system obstruction fell within the
policies' coverage exclusion provisions. We review each finding in turn.
I. Occurrence: Was the Insurance Coverage Triggered?
The insurance policies in dispute provided coverage upon an
"occurrence" resulting in personal injury or property damage. The policies
define occurrence as "an accident, a happening, an event, or a continuous
or repeated exposure to conditions which
3
results . . . in Property Damage neither expected nor intended from the
standpoint of the Insured . . . ." Missouri case law further provides that
an occurrence is "that which happens by chance or fortuitously, without
intention or design, and which is unexpected, unusual or unforeseen."
Terrazzo v. Iowa Nat'l Mutual Ins., 566 F. Supp. 546, 552 (E.D. Mo. 1983).
Thus, the first issue of coverage is whether the plugging of the
distribution system constitutes an occurrence as defined by the policies.
The district court found that Koch had been reckless with respect to
its design and supervision of the filtration system. As a consequence, the
court inferred that the plugging was not unexpected. The characterization
of Koch's conduct as reckless is a question for the trier of fact. First
Nat'l Bank of Fort Smith v. Kansas City S. Ry. Co., 865 S.W.2d 719, 729
(Mo. Ct. App. 1993). As such, we review this determination under a clearly
erroneous standard, taking all of the evidence in the light most favorable
to the appellees. Fed.R.Civ.P. 52(a). Given the evidence that i) the
Monsanto project was the largest filtration system ever attempted using
this technology, ii) the Flexipac's licensor's warnings that tubular
distribution systems tend to foul with debris, iii) prior difficulties with
tubular distribution systems, and iv) the presence of the mill scale after
its manufacture, the finding that Koch acted recklessly is not clearly
erroneous.
The ramifications of this finding under Missouri law, however, are
a matter of law. We review the district court's determination of state law
de novo. Salve Regina College v. Russell, 499 U.S. 225, 231 (1991).
Although Missouri case law clearly holds that accidents resulting from the
insured's negligent behavior fall within the definition of occurrence,
Terrazzo, 566 F. Supp at 546, it is less clear with respect to actions
characterized as reckless.
In 1987, the Missouri Court of Appeals explicitly held that reckless
conduct, by definition, means that the actor "realized or
4
should have realized there was a strong probability his conduct would cause
the injury." Farm Bureau Town & Country Ins. Co. v. Turnbo, 740 S.W.2d
232, 234 (Mo. Ct. App. 1987). From this starting point, the court reasoned
that this expectation excluded the reckless act from the definition of
occurrence and thus, the resulting injury was deemed not covered. Id. at
236. In 1991, however, the Missouri Supreme Court, without mentioning
Turnbo by name, rejected "the suggestion that a showing that the insured
acted recklessly compels a finding that injury was expected." American
Family Mut. Ins. Co. v. Pacchetti, 808 S.W.2d 369, 371 (Mo. 1991).
"Although recklessness is sometimes the legal equivalent of intention, .
. . [i]t remains for the insurer to show that this particular insured
expected or intended the result which occurred." Id.
Although the district court explicitly inferred intent from Koch's
conduct, this court has the power to correct mixed questions of law and
fact where the finding is predicated on a misunderstanding of the governing
state law. Bose Corp. v. Consumers Union of the United States, Inc., 466
U.S. 485, 501 (1984). The Missouri Supreme Court has held that regardless
of the reckless character of behavior, the insurer must show that Koch
intended the results of its actions. Pachetti, 808 S.W.2d at 371. The
project underlying this suit was a highly technical, complex enterprise.
The fact that venture was of an unusually large scale exacerbated the
number of variables being considered. While we do not hold the district
court's finding of recklessness clearly erroneous, there is simply no
evidence in the record that Koch intended for the holes to become plugged
with debris. As such, the district court's finding of recklessness alone
does not support the inference of intent. Thus, the controlling expression
of the applicable state law, Pacchetti, requires this court to hold for the
insured on this point: the plugging of the distribution system constituted
an occurrence and triggered the policies' coverage.
5
II. Exclusion: Was the Coverage Excluded?
Although we hold that the plugging of the distribution system
constituted an occurrence, triggering policy coverage, the policies contain
a number of provisions that carve out areas of non-coverage. The district
court held that these exclusions were applicable. The interpretation of
the contractual provisions of an insurance policy is a matter of law
reviewed by this court de novo. Delmar Bank v. Fidelity & Deposit Co. of
Maryland, 428 F.2d 32, 35 (8th Cir. 1970).
Insurers rely on two separate exclusion provisions as the basis for
denying coverage. The first exclusion, Section VI.B.2, provides as
follows:
[The policy does not apply to property damage] to the
Insured's products arising out of such products or any
part of such products, but this exclusion shall apply
only to the particular individual product or part
thereof, out of which the occurrence arises and not to
the other products or part thereof which may be damaged
thereby . . . .
This provision is followed by a mirror carve out, Section VI.B.3,
that pertains to property damage arising out of work performed by the
insured:
[This policy shall not apply to property damage] to work
performed by or on behalf of the Insured arising out of
the work or any portion thereof, or out of materials,
parts, or equipment furnished in connection therewith,
but this exception shall apply only to that portion or
component of the work out of which the occurrence arises
and not to the work as a whole or to other work of the
Insured which may be damaged thereby.
Koch concedes that but for the exclusion's exception, Section VI.B.2
would exclude coverage. Appellant's Br. at 24. Koch asserts, however,
that the exclusion's exception applies because "[t]he unexpected presence
and release of mill scale from the
6
packaging damaged another part of Koch's product, by plugging the tubular
distributors." Appellant's Br. at 25. This characterization of where the
damage occurred is contradicted by the appellant's own later assertion that
"focus must be placed on the language of the policy, and when this is done,
it is clear that an insurable event occurred when the mill scale was
released from the packaging and plugged the distributors." Reply Br. at
3-4 (emphasis added). Neither party alleges that any damage occurred upon
the formation of the mill scale: Had the mill scale flushed through the
distribution system without obstructing the holes, there would not have
been any damage. The damage occurred when the mill scale plugged the small
holes of the tubular distribution system. Thus, the "occurrence" took
place within the distribution system. The exception to the exclusion
provides coverage for parts other than that in which the occurrence took
place, and given that the occurrence took place within the distribution
system, the damage related to the replacement of the distribution system
is excluded by these provisions.
The damages assessed by the jury in the original trial were
$7,059,476.60. Of this amount, approximately $5,317,903.00 constituted the
award for the clean up and distribution system replacement. The other
$1,741,573.60 represented lost profits. The entire damage claim assessed
against Koch arises from the clogging of the distribution system. As such,
the whole amount fits within the exclusions.
III. The Aetna Policy: The "No Less Broad" Provision.
Finally, Koch argues that despite any exclusion provisions contained
in the policies, the excess policies provided that their coverage,
notwithstanding their own contractual terms, would be "no less broad" than
the principal Aetna policy.
7
The Aetna policy also contained exclusion provisions, one of which
provided:
[This policy does not apply to property damage:] (2) with
respect to the completed operations hazard, work
performed by the named insured arising out of the work or
any portion thereof, or out of materials, parts or
equipment furnished in connection therewith . . . .
The policy defines "completed operations hazard" as follows:
[C]ompleted operations hazard includes-- property damage
arising out of operations or reliance upon a
representation or warranty made at any time with respect
thereto, but only if the . . . property damage occurs
after operations have been completed or abandoned and
occurs away from premises owned by or rented to the named
insured.
The district court held that this Aetna exclusion, which contains
similar, but not identical, language to the Insurers' policies, would
similarly exclude coverage in this instance. Again, we review this
interpretation of the policy de novo. Delmar Bank, 428 F.2d at 35. The
main difference between the two provisions is the limitation of the
exclusion in the Aetna provision to completed operations hazards. Given,
however, that the plugging occurred in August 1983 and Koch personnel left
the premises on July 29, 1983, the property damage occurred "after
operations [had] been completed" and thus within the exclusion's limitation
to completed operations hazards. Therefore, we concur with the district
court's analysis on this issue.
For the above-stated reasons, we affirm.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
8