Markwest Hydrocarbon, Inc. v. Liberty Mut. Ins.

• Decision Date: 09 March 2009
• Docket Number: No. 08-1186.,08-1186.
• Citation: 558 F.3d 1184
• Parties: MARKWEST HYDROCARBON, INC.; MarkWest Energy Partners, L.P.; MarkWest Energy Appalachia, L.L.C., Plaintiffs-Appellants, v. LIBERTY MUTUAL INSURANCE COMPANY; Birmingham Fire Insurance Company Of Pennsylvania; Ace American Insurance Company; Arch Insurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

558 F.3d 1184

MARKWEST HYDROCARBON, INC.; MarkWest Energy Partners, L.P.; MarkWest Energy Appalachia, L.L.C., Plaintiffs-Appellants, v. LIBERTY MUTUAL INSURANCE COMPANY; Birmingham Fire Insurance Company Of Pennsylvania; Ace American Insurance Company; Arch Insurance Company, Defendants-Appellees.

No. 08-1186.

United States Court of Appeals, Tenth Circuit.

March 9, 2009.

Thomas D. Leland, Messner & Reeves, L.L.C., Denver, CO (Leah E. Capritta, Messner & Reeves, L.L.C., Denver, CO, and Edward M. Joyce, Heller Ehrman, L.L.P., New York, NY, with him on the briefs) for Plaintiffs-Appellants.

William A. Webster (David S. Evinger and Elizabeth D. Le, with him on the brief) Robins, Kaplan, Miller & Ciresi, L.L.P., Los Angeles, CA, for Defendants-Appellees.

Before KELLY, EBEL, and GORSUCH, Circuit Judges.

GORSUCH, Circuit Judge.

An explosion in a natural liquid gas pipeline operated by MarkWest caught the attention of the U.S. Office of Pipeline Safety. That office ordered MarkWest to conduct a series of tests on its pipeline, and to repair "integrity threatening conditions" discovered in the course of those tests. MarkWest filed a claim with its insurance carriers seeking to recoup certain loses it incurred as a result of the explosion and its compliance with the government's mandated tests and repairs. The insurers denied coverage, and MarkWest filed this suit, seeking declaratory relief and damages for breach of contract and bad faith breach of insurance contract. The district court eventually granted summary judgment to the insurers, and MarkWest now appeals. We affirm the district court's decision because the insurance policy in dispute does not cover costs incurred to maintain the pipeline.

MarkWest leases and operates a 65-mile stretch of natural gas liquids ("NGL") pipeline running between Maytown, Kentucky, and Ranger, West Virginia.¹ The pipeline, which is one segment of a larger system of pipelines operated by MarkWest and known as the Appalachian Liquids Pipeline System, was originally built in 1957. It is constructed of four-inch and five-inch diameter steel pipe, and is separated by flow stations containing a bypass pipe and valve and four-inch raised stem inlet and outlet valves.

On the morning of November 8, 2004, a bypass valve failed at Flow Station Four, located near the Rolling Acres subdivision in Ivel, Kentucky. The failure meant that the valve remained closed, despite its hand wheel showing it to be open, and pressure built up inside the pipeline behind the valve. Eventually, this increased pressure caused a release of NGL through a small hole in the pipeline where the wall had been thinned by corrosion. The escaped NGL caught fire, resulting in explosions, the destruction of five homes in the subdivision, and a number of injuries (but no fatalities).

The Office of Pipeline Safety ("OPS"), a division of the U.S. Department of Transportation charged with ensuring the safe and reliable operation of pipelines, launched an investigation. Ten days after the accident, on November 18, 2004, the OPS issued an initial Corrective Action Order ("CAO"), requiring MarkWest "to take the necessary corrective action to protect the public, property, and the environment from potential hazards associated with a failure involving the four- and five-inch Maytown Station to Ranger Junction segment (`the affected segment') of [MarkWest's] Appalachian Liquid Pipeline System running from near Langley, Kentucky to near South Shore, Kentucky." App. at 491. The CAO stated that "[t]he cause of the failure has not yet been determined," but went on to list several preliminary findings, including these:

Preliminary visual inspection indicated the presence of localized external corrosion around the failure site. Inspectors identified a small hole in the pipeline at the 6 o'clock position when examining the failure site.

The affected segment was hydrostatically tested in 1957 to a pressure of 2925 psig, according to [MarkWest]. Records supporting the 1957 test could not be located.

The pipeline has not been subject to internal inspection. However, [MarkWest] has indicated its intent to perform internal inspection on the pipeline.

Id. at 492.

The CAO continued with a section entitled "Determination of Necessity for Corrective Action Order and Right to Hearing." In it, the OPS described its reason for issuing the CAO:

After evaluating the foregoing preliminary findings of fact, I find that the continued operation of the affected segment without corrective measures would be hazardous to life, property and the environment. Additionally, after considering the age of the pipe, the proximity of the pipeline to highways, drinking water sources, and populated areas, the combustible nature of the products the pipeline transports, the pressure required for transporting the material, the history of leaks attributed to corrosion on the pipeline, and the ongoing investigation to determine the cause of the failure, I find that a failure to expeditiously issue this Order requiring immediate corrective action would likely result in serious harm to life, property, or the environment.

. . .

After receiving and analyzing additional data in the course of this investigation, OPS may identify other corrective measures that need to be taken. In that event, [MarkWest] will be notified of any additional measures required and amendment of this Order will be considered.

Id. at 493.

The CAO then detailed various corrective actions MarkWest had to take. These included hydrostatic pressure testing of the affected pipeline segment to 125% of the existing maximum operating pressure.² Id. at 494. In addition, MarkWest had to prepare a plan to address "all known or suspected factors that caused or contributed to" the accident. Id. at 495. The plan had to include "[t]he performance of appropriate field testing, inspections, and evaluations to determine whether and to what extent the condition(s) associated with the failure, or other integrity threatening trends, are present along the remainder of the affected segment or elsewhere on any portion of the Appalachian Liquid Pipeline System constructed with similar methods and material as the affected segment." Id. MarkWest was also required to perform "appropriate repairs, pipe replacement, or other corrective measures fully remediating the integrity threatening condition(s) associated with the failure everywhere along the pipeline where such conditions are identified by the evaluation process." Id.

The OPS issued an amendment to the CAO one day later, in which it made supplemental comments. An additional finding of fact noted that "[t]he ongoing investigation of the November 8, 2004 failure ... has identified a 4-inch raised stem valve that may have played a role in the pipeline's failure." Id. at 499. In a paragraph entitled "Determination of Necessity for Corrective Action Order and Right to Hearing," the OPS added a phrase observing that "the circumstances surrounding ... the way the valve functioned at the time of the failure" was a factor that led the OPS to "expeditiously issue" the CAO and amendment. Id. at 500. A "Discussion of Amendment" section described in detail preliminary findings related to the valve failure, and discussed the need for an independent investigation of the valve "to determine if the valve may not have functioned as specified and [may] have been a contributing factor in the failure that resulted in fires, explosions, nine injuries and the destruction of five homes." Id. at 501. A later section of the amendment ordered MarkWest to arrange for such an investigation. Id.

After the OPS issued its CAO and amendment, MarkWest sought a hearing "in order to clarify and discuss the requirements for a return to operation." Id. at 505. At the hearing, MarkWest proposed—and was granted—a further amendment to the CAO that allowed for "alternative equivalent methods of pipeline integrity testing other than hydrostatic pressure testing." Id. at 508. In addition, MarkWest asked for clarification about the meaning of the phrase "integrity threatening condition." Id. OPS responded that MarkWest "should not view `integrity threatening condition' in an overbroad manner. For instance, corrosion on the pipeline would be an integrity threatening condition ..., but the consideration of this condition need not extend to soil conditions which might be conducive to corrosion." Id.

At the time of the accident, MarkWest carried an "all-risk" property insurance policy with four insurance companies. The policy indemnified MarkWest against "all risks of direct physical loss or damage occurring during the period of this policy from any external cause, except as hereinafter excluded." App. at 512. Relevant to this lawsuit, the policy explicitly stated that it "does not insure ... corrosion." Id. at 516-17. It further provided that the insurance companies "shall not be liable for any increase in loss resulting from [e]nforcement of any ordinance or law regulating the use, construction, repair or demolition of any property." Id. at 522. It did, however, have a provision, the Demolition and Cost of Construction Endorsement ("DICC Endorsement"), providing up to $5 million in coverage for specific losses resulting from the enforcement of laws and ordinances regulating the "construction or repair" of damaged property:

Demolition and Increased Cost of Construction Endorsement

Liability for loss under this Endorsement arising out of one occurrence shall not exceed $5,000,000.

In the event of loss or damage by an insured peril under this policy that causes the enforcement of any law or ordinance regulating the construction or repair [of] damaged facilities, underwriters shall be liable for:

* * *

C. Increased cost of repair or reconstruction of the damaged and undamaged facility on the same or another site and limited to the minimum requirements of such law or ordinance regulating the repair...