Federal Ins. Co. v. Hartford Steam Boiler Inspec.

• Decision Date: 08 July 2005
• Docket Number: No. 03-2479.,03-2479.
• Citation: 415 F.3d 487
• Parties: FEDERAL INSURANCE COMPANY, AN INDIANA CORPORATION, as subrogee of Norvest, L.L.C., a Michigan limited liability company and Norquick Distributing Company, a Michigan corporation, Plaintiffs-Appellants, v. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY, a Connecticut corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 487

415 F.3d 487

FEDERAL INSURANCE COMPANY, AN INDIANA CORPORATION, as subrogee of Norvest, L.L.C., a Michigan limited liability company and Norquick Distributing Company, a Michigan corporation, Plaintiffs-Appellants, v. THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY, a Connecticut corporation, Defendant-Appellee.

No. 03-2479.

United States Court of Appeals, Sixth Circuit.

Argued: March 8, 2005.

Decided and Filed: July 8, 2005.

COPYRIGHT MATERIAL OMITTED

Alan G. Gregory, Gregory & Meyer, P.C., Troy, Michigan, for Appellants.

Thomas B. Keegan, Keegan, Laterza, Lofgren & Gleason, Chicago, Illinois, for Appellee.

Edward W. Gleason, Keegan, Laterza, Lofgren & Gleason, Chicago, Illinois, Michael T. Small, Betz & Bloss, Grand Rapids, Michigan, for Appellee.

Before: MOORE and SUTTON, Circuit Judges; CARMAN, Judge.^*

OPINION

CARMAN, District Judge.

Plaintiff-Appellant, Federal Insurance Company ("Federal"), appeals from the Memorandum Opinion and Order Granting Defendant's Motion for Summary Judgment and Denying Plaintiff's Motion for Summary Judgment entered by the United States District Court for the Eastern District of Michigan, Southern Division. Federal seeks equitable subrogation from Defendant-Appellee, The Hartford Steam Boiler Inspection and Insurance Company ("Hartford"), on an insurance settlement. The parties filed cross-motions for summary judgment. The District Court granted Hartford's motion and denied Federal's motion. For the reasons that follow, we REVERSE and REMAND to the District Court for specific findings as to damages.

BACKGROUND

Federal filed suit against Hartford seeking declaratory relief and equitable subrogation and claiming breach of contract. (J.A. at 16-24.) Federal claimed a loss compensable by Hartford in excess of $1 million. The facts that precipitated this case are not in dispute.

Federal is the subrogee of Norvest L.L.C. ("Norvest") and Norquick Distributing Company ("Norquick"). Norvest leased certain property to Norquick (J.A. at 266), on which Norquick operated a frozen food storage and distribution facility (J.A. at 266). Federal's policy provides coverage — with exceptions — for Norvest/Norquick's loss to "Building Or Personal Property." (J.A. at 666.) Federal also insured Norvest/Norquick against "Business Income And Extra Expense" loss. (J.A. at 501.)

Hartford provided Norvest/Norquick with "Equipment Breakdown" coverage. (J.A. at 463.) It is from the Hartford policy that Federal seeks indemnification for the monies paid to Norquick for stock loss that was not recovered through salvage.

On January 12, 2000, a Norquick manager attempted to drain oil from an ammonia refrigeration system oil separator tank at the distribution facility. (J.A. at 266.) During the process, the handle of a "spring-operated ball valve came off from the stem." (J.A. at 267.) The parties agree that a "mechanical breakdown" occurred.¹ (J.A. at 862.) The broken handle left the valve partially open. (J.A. at 267.)

Ammonia subsequently leaked from the open valve for approximately one hour. (J.A. at 267, 310, 734-35.) The ammonia leak led to an explosion and fire. (J.A. at 310, 734-35.) The pressure from the rising levels of ammonia caused at least two walls and part of a third wall in the compressor room to fail. (J.A. at 318, 323, 679.)

Approximately seven thousand (7000) pounds of ammonia were released during the incident. (J.A. at 321.) The leaking ammonia spread throughout the compressor room and to the entire facility, including to the warehouse loading dock, the freezer, and the office area. (J.A. at 318, 321.) Hartford's expert confirmed that the "release resulted in elevated levels of ammonia in the main engine room, the loading dock, and at least some dispersion of ammonia into the freezer compartments." (J.A. at 884 (emphasis added).)

Federal's expert stated that it was "unlikely that any ammonia vented into the loading dock let alone the freezers from the explosion." (J.A. at 323 (emphasis added).) In fact, he opined that the explosion actually consumed large quantities of the escaped ammonia and served to reduce ammonia accumulation in the loading dock and warehouse. (J.A. at 323.) In this regard, Federal's expert and Hartford's expert agree. (J.A. at 884-85, 887.)

According to Hartford's expert, at the time of the explosion, the average ammonia level in the freezer area was three hundred fifty (350) parts per million ("ppm"). (J.A. at 884.) However, the ammonia levels were not uniform throughout the freezer area. Near the doors, the ammonia level reached as high as eight thousand (8000) ppm before the explosion.² (Id.) The explosion may have contributed an additional two hundred (200) ppm of ammonia throughout the freezer and up to four thousand (4000) ppm of ammonia near the doors. (J.A. at 885.) Ammonia carried into the freezer by water from the facility's sprinkler system, which activated when fire erupted after the explosion (J.A. at 324, 694), added an estimated six (6) ppm of ammonia to the overall average ammonia level "with higher concentrations likely near the freezer doors" (J.A. at 885). Approximately eight hours after the explosion and fire, "vapor levels inside the freezers and the offices areas ... were too high for safe entry." (J.A. at 708.)

Due to the high levels of ammonia detected in the freezer (J.A. at 887), the U.S. Department of Agriculture ("USDA") quarantined the freezer's inventory on suspicion of ammonia contamination and temperature abuse (J.A. at 732). Although high concentrations of ammonia were found in and on some food packaging tested by the USDA, the food was found to be safe for human consumption.³ (J.A. at 765-66.) Based on this conclusion, on April 7, 2000, the USDA released the food for sale on the open market. (J.A. at 767-68.)

Before the USDA released the food for sale, Norquick reported a loss to both Federal and Hartford. Federal made two payments to Norquick. The first payment of $2 million was made on January 24, 2000, for loss to "owned stock." (J.A. at 350.) The payment, made under protest, was considered an advance "made to mitigate business income loss under" the Federal policy. (J.A. at 350; see also J.A. at 348.) Federal issued a second payment to Norquick on April 6, 2000, in the amount of $450,697 representing the "remainder of the stock loss." (J.A. at 351.)

On February 22, 2000, Norquick offered to repurchase the inventory from Federal for fifty cents on the dollar. (J.A. at 351.) Federal accepted this offer. (J.A. at 351.) After covering testing costs for the inventory, Federal received $1,218,349 from Norquick as salvage return. (J.A. at 351.)

Hartford agreed to cover the cost to replace the valve handle assembly and the cost to recharge the system with ammonia. (J.A. at 754.) However, Hartford took the position that it was not liable for the inventory losses because any ammonia contamination to the food in the storage freezer was caused by the explosion, fire, or firefighting efforts. (J.A. at 754-55.)

FEDERAL POLICY LANGUAGE

I. Business Income and Extra Expense

The Federal policy provided coverage for "Business Income And Extra Expense." (J.A. at 501.) Specifically, the policy insured against business income lost "due to the actual impairment of [Norvest/Norquick's] operations" and extra expenses incurred "due to the actual or potential impairment of [Norvest/Norquick's] operations." (J.A. at 501 (emphasis omitted).) Per the terms of the policy, the actual or potential impairment must be caused by or result from "direct physical loss or damage by a covered peril to property...." (J.A. at 501 (emphasis in original).) The policy defines a "covered peril" as "a peril covered by the Form(s) shown in the Property Insurance Schedule Of Forms, except Care, Custody Or Control Legal Liability, applicable for the lost or damaged property." (J.A. at 570 (emphasis in original).)

II. Property Insurance

Federal also provided Norvest/Norquick with property insurance subject to certain limitations and exclusions. (J.A. at 670-71, 674-76.) In that policy, only the "Mechanical Breakdown" and "Ammonia Contamination" exclusions are relevant to this case. The Mechanical Breakdown exclusion states

This insurance does not apply to loss or damage to property caused by or resulting from mechanical breakdown of that property.

This Mechanical Breakdown exclusion does not apply to:

• loss or damage that results to other insured building or personal property; or

• ensuing loss or damage caused by or resulting from a peril not otherwise excluded.

(J.A. at 670 (italized emphasis added; bold emphasis in original).)

The Ammonia Contamination exclusion states

This insurance does not apply to loss or damage caused by or resulting from the discharge, dispersal, seepage, migration, release or escape of ammonia from any processing equipment, plumbing system, refrigeration system, cooling system or heating system.

This Ammonia Contamination exclusion does not apply:

• if the discharge, dispersal, seepage, migration, release or escape of ammonia is caused by or results from any of the specified perils; or

• to ensuing loss or damage caused by or resulting from a specified peril.

(J.A. at 674 (italized emphasis added; bold emphasis in original).)

The Federal policy identifies the following as "specified perils":

• aircraft or self-propelled missiles;

• explosion;

• fire or lightning;

• leakage from fire protection equipment;

• mine subsidence;

• riot or civil commotion;

• sinkhole collapse;

• smoke;

• vandalism;

• vehicles;

• volcanic action; or

• windstorm or hail.

(J.A. at 581.)

HARTFORD POLICY LANGUAGE

The Hartford policy provides Norvest/Norquick coverage for "Equipment Breakdown." (J.A. at 448.) The insurance "applies to the direct result of an `accident' to `covered equipment.'" (J.A. at 448 (emphasis added).) Per the terms of the Hartford policy, an "accident" is "direct physical loss" from a "[...