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.
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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
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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
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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
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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.
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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
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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.
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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.