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.

Ap pellant, the Koch Engineering Company, sued Gibralter Casualt y Company and International Insurance Company, pursuant to its umbrell a insuran ce policies, to recover a $7,059,476.60 judgment against Koch

. After a short bench trial, the United States District Court for the Easter n District of Missouri found for the defendants and denied coverage. Koch appeals that decision. We affirm.

### 2 BACKGROUND
In 1982, the Koch Engineering Company (Koch) contracted to desi gn and supply the Monsanto Corporation (Monsanto) with new equipment for a n exis ting ethylbenzene/styrene distillation tower. The tower, which i s located a t the Monsanto Refinery in Texas City, Texas, is over 220 fee t high and 28.5 feet in diameter. The principal component of the ne w equipment was a packing material (Flexipac) that increased surface area, thereby facilitating the distillation function. The tower design consiste d of six layers of Flexipac with liquid distributors between each layer. Th e distri bution system initially employed by Koch was a tubular syste m consisting of pipes with small holes (between 0.1065 and 0.136 inches) tha t permitted liquid to pass through to the next layer of Flexipac. A n alternative distribution system, rejected by the Koch engineers, would hav e emp loyed troughs in lieu of pipes with holes. Although the troug h distribution system is less likely to plug with debris, Koch chose the mor e efficient tubular system because it had determined that the distillation process was a "clean service," i.e., free from d ebris which might plug the distributor.

The equi pment was installed in July 1983 by a construction compan y hired by Monsanto. Although it did not install the new equipment, Koch wa s contractually required to provide technical advice and oversee th e inst allation. Tower operation commenced on August 2, 1983. Once i n operation, the facility failed to produce the quantities of filtered liqui d that ha d been guaranteed by Koch. After opening the tower on August 7 , 1983, it was discovered that the pipe distributi on holes were plugged with mill scal e. Mill scale, a product of corrosion analogous to rust, onl y forms on carbon steel , which is the primary component of the Flexipac, at temp eratures exceeding 1,100 degrees Fahrenheit; thus, there is littl e dou bt that the mill scale formed during the carbon steel's manufacture

. Although there is som e 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, despit e
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 jur y 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 pa rties ultimately settled on the same amount provided in th e verdict. In 1989, Koch brought suit against its principal insurer, Aetna, and its excess insurers, Gibralter Casualty Company and Internationa l Insurance Company (Insurers), to recover the awa rd. 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 o f Missouri, the district court found for the Insurers.

DISCUSSION

The distr ict court, applying Missouri law, held for the Insurers on two distinct bases: i) the plugging of the tubular distribution system wa s directly attributable to Koch's reckless design, and was therefore not a fortuitous occurrence triggering the policies' coverage; and ii) the damag e incurred as a result of the distribution system obstruction fell within th e policies' coverage ex clusion provisions. We review each finding in turn.

I. Occurrence: Was the Insurance Coverage Triggered?

The ins urance policies in dispute provided coverage upon a n "occurrence" resulting in personal injury or property damage. The policie s 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 th e standpoint of the Insured . . . ." Missouri case law further provides tha t
an occurrence is "that which happens by chance or fortuitously, withou t intent ion 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). Th us, the first issue of coverage is whether the plugging of th e distribution system c onstitutes an occurrence as defined by the policies.

The district court found that Koch h ad been reckless with respect to its design and supervision of the filtration system. As a consequence, th e court inferred that the plugging was not unexpec ted. 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, 72 9 (Mo. Ct. App. 1993). As such, we review this determination under a clearl y erroneous standard, taking all of the evidence i n the light most favorable to the appellees. Fed.R.Civ.P. 52(a). Given the evidence that i) th e Monsan to project was the largest filtration system ever attempted usin g th is technology, ii) the Flexipac's licensor's warnings that tubula r distribution systems tend to foul with debris, iii) prior difficulties wit h tubular distribution systems, and iv) the presen ce of the mill scale after its manufacture, the finding that Koch acted recklessly is not clearl y
erroneous.

The ramifications of this finding under Missouri law, however, ar e
a matter of law. We review the district court's determination of state la w de nov o. Salve Regina College v. Russell , 499 U.S. 225, 231 (1991)

. Although Missouri case law clearly holds that ac cidents resulting from the insu red's negligent behavior fall within the definition of occurrence , Terrazzo , 566 F. Supp at 546, it is less clear with respect to action s characterized as reckless.
In 1987, the Missouri Court of Appea ls 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 caus e the inj ury." Farm Bureau Town & Country Ins. Co. v. Turnbo , 740 S.W.2 d 232, 234 (Mo. Ct. App. 1987). From this starting point, the court reasone d that this expectation excluded the reckless act from the definition o f occurrence and thus, the resulting injury was deemed not covered. Id. at 236. In 1991, however, the Missouri Supreme Court, without mentionin g Turnbo by name, rejected "the suggestion that a showing that the insured act ed recklessly compels a finding that injury was expected." America n Fam ily 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 insure d expected or intended the result which occurred." Id.

Al though the district court explicitly inferred intent from Koch' s conduct, this court has the power to correct mixed questions of law an d fact where the finding is predicated on a misunderstanding of the governin g state law. Bose Corp . v. Consumers Union of the United States, Inc. , 466 U.S. 485, 501 (1984). The Missouri Supreme Cour t has held that regardless of th e reckless character of behavior, the insurer must show that Koc h intende d the results of its actions. Pachetti , 808 S.W.2d at 371. Th e project underlying this suit was a highly technical, complex enterprise. The fact t hat venture was of an unusually large scale exacerbated th e number of variables being considered. While we do not hold the district court' s finding of recklessness clearly erroneous, there is simply n o evidence in the recor d 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 expressio n of the applicable state law, Pacchetti , requires this court to hold for th e insured on this point: the plugging of the distribution system constitute d 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 syste m constituted an occurrence, triggering policy coverage, the policies contai n a number of provisions that carve out areas of n on-coverage. The district court held that these exclusions were applicable. The interpretation of the contractual provisions of an insurance policy is a matter of la w reviewed by this cour t 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 denyin g coverage. The first exclusion, Section VI.B.2, provides a s follows:
[The p olicy does not apply to property damage] to th e In sured's products arising out of such products or an y part of such products, but this exclusion shall appl y on ly to the particular individual product or par t thereo f, out of which the occurrence arises and not t o the ot her products or part thereof which may be damage d thereby . . . .
This provision is followed by a mirror carve out, Section VI.B.3 , that perta ins to property damage arising out of work performed by th e insured:
[This policy

shall not apply to property damage] to work perfo rmed by or on behalf of the Insured arising out o f the wo rk or any portion thereof, or out of materials , parts, or equipment furnished in connection therewith , but th is exception shall apply only to that portion o r component of the work out of which the occurrence arises and not to the work as a whole or to other work of th e Insured which may be damaged thereby.

Koch concedes that but for the exclu sion'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 ano ther part of Koch's product, by plugging the tubular distributors." Appellant's Br. at 25. This cha racterization of where the damage occurred is contradicted by the appellant's own later assertion tha t "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 wa s released from the packaging and plugged the distributors ." Reply Br. at 3-4 (emphasis added). Neither party alleges tha t any damage occurred upon the formation of the mill scale: Had the mill scale flushed through the distri bution system without obstructing the holes, there would not hav e been any damage. The damage occurred when the mill scale plugged the smal l holes of the tubular distribution system. Thus, the "occurrence" too k place w ithin the distribution system. The exception to the exclusio n provides coverage for parts other than that in which the occurrence took pla ce, and given that the occurrence took place within the distributio n system, the damage related to the replacement of the distribution system is excluded by these provisions.

The dam ages assessed by the jury in the original trial wer e $7,059,476.60. Of this amount, approximately $5,317,903.00 constituted th e award for the clean up and distribution system replacement. The othe r $1,741,573.60 represe nted 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 an y exclusion provisions contained in the policies, the excess policies provided that their coverage , notwithstanding their own contractual terms, wou ld be "no less broad" than the principal Aetna policy.

### 8 The Aetna policy also contained exclusion provisions, one of whic h provided:
[This policy does not apply to property damage:] (2) with respect to the completed operations hazard, wor k performed by the named insured arising out of the work or any po rtion thereof, or out of materials, parts o r equipment furnished in connection therewith . . . .
The policy defines "completed operations hazard" as follows:
[C]ompleted operations hazard includes-- property damage aris ing out of operations or reliance upon a representati on or warranty made at any time with respect thereto, but only if the . . . property damage occur s after operations have been completed or abandoned an d occurs away from premises owned by or r ented to the named insured.

The district court held that this Aetna exclusion, which contain s simila r, but not identical, language to the Insurers' policies, woul d similarly exclude coverage in this instance. Again, we review thi s interpretation of the policy de novo. Delmar Bank , 428 F.2d at 35. The main difference between the two provisions is the limitation of th e exclusion in the Aetn a provision to completed operations hazards. Given, however, that the plugging occurred in August 19 83 and Koch personnel left the prem ises on July 29, 1983, the property damage occurred "afte r operations [had] been completed" and thus within the exclusion's limitatio n 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.