Am. Home Assur. Co. v. Cat Tech, L.L.C.

• Decision Date: 09 June 2010
• Docket Number: Civil Action No. H-08-3692
• Citation: 717 F.Supp.2d 672
• Parties: AMERICAN HOME ASSURANCE COMPANY, et al., Plaintiffs, v. CAT TECH, L.L.C., et al., Defendants.
• Court: U.S. District Court — Southern District of Texas

717 F.Supp.2d 672

AMERICAN HOME ASSURANCE COMPANY, et al., Plaintiffs,

v.CAT TECH, L.L.C., et al., Defendants.

Civil Action No. H-08-3692.

United States District Court,

S.D. Texas,

Houston Division.

June 9, 2010.

Ellen Lewis Van Meir, Mariah Baker Quiroz, Thompson Coe et al., Dallas, TX, for Plaintiffs.

James L. Cornell, Jr., Cornell & Pardue, Houston, TX, for Defendants.

MEMORANDUM AND ORDER

LEE H. ROSENTHAL, District Judge.

This is an insurance coverage dispute between Cat Tech, LLC and its commercial general liability and umbrella insurers, American Home Assurance Company and National Union Fire Insurance Company of Pittsburgh, PA. The dispute is over the insurers' duty to indemnify Cat Tech for an arbitration award in favor of its client, Ergon Refining, Inc., arising from catalyst change-out services Cat Tech provided on a reactor at Ergon's refinery. The arbitrators found Cat Tech responsible for damage to the reactor that Cat Tech worked on twice, in January and in February 2005. American Home paid Cat Tech $1 million, the per occurrence policy limit, subject to a reservation of rights. In this suit, the insurers seek a declaratory judgment that they have no duty to indemnify Cat Tech for the over $1.9 million in damages awarded Ergon in the arbitration. Cat Tech has counterclaimed for a declaratory judgment that it is entitled to indemnity for the total arbitration award.

The following motions are pending:

• American Home and National Union have moved for summary judgment, arguing that exclusions in their policies apply to preclude any duty to indemnify Cat Tech for the arbitration award. (Docket Entry No. 57). Cat Tech has responded and cross-moved for summary judgment that the insurance policies cover the damages awarded in the arbitration. (Docket Entry No. 60). The plaintiffs have replied, (Docket Entry No. 62), and Cat Tech has replied in support of its cross-motion, (Docket Entry No. 63).

• Cat Tech has filed a motion for partial summary judgment, (Docket Entry No. 37), which it later amended, (Docket Entry No. 41), seeking a judgment that there were two covered "occurrences." The plaintiffs have responded, (Docket Entry No. 47), and Cat Tech has replied, (Docket Entry No. 53).

• Cat Tech has filed another motion for partial summary judgment that the arbitration award is for "property damage" covered under the American Home and National Union policies. (Docket EntryNos. 43-46). The plaintiffs have responded, (Docket Entry No. 47), and Cat Tech has replied, (Docket Entry No. 53).

• Cat Tech has moved to strike the testimony of Christopher Martin, a testifying expert retained by the plaintiffs on insurance coverage and claims handling issues. The plaintiffs have responded. (Docket Entry No. 42) Cat Tech has replied, (Docket Entry No. 48), the plaintiffs have filed a surreply, (Docket Entry No. 51), and Cat Tech has filed a second reply, (Docket Entry No. 52).

• Cat Tech has also moved to strike the expert testimony of Dr. Christopher Buehler, who testified about Cat Tech's work and the damage to the Ergon reactor. (Docket Entry Nos. 42, 50). The plaintiffs have responded. (Docket Entry No. 54).¹

Based on the motions, responses, and replies; the record; the pleadings; and the applicable law, this court rules as follows:

• The plaintiffs' motion for summary judgment is granted. The plaintiffs have no duty to indemnify Cat Tech for the arbitration award.

• Cat Tech's motions for partial summary judgment are denied as moot.

• Cat Tech's motion to exclude Martin's expert testimony is granted in part and denied in part and its motion to exclude Buehler's expert testimony is denied.

By June 25, 2010, the parties must submit a statement identifying any issues that remain to be decided and proposing a scheduling order for resolving them or proposing an order of final judgment.

The reasons for these rulings are explained below.

I. Background

A. The Arbitration

Ergon Refining, Inc. hired Cat Tech to service a reactor at Ergon's Vicksburg, Mississippi refinery. On October 8, 2004, Cat Tech and Ergon entered into a Master Service Contract. In January 2005, during a planned turn-around, Cat Tech performed catalyst change-out service work on the "D-651 hydrotreating reactor" at the Ergon refinery. (Docket Entry No. 57, Ex. 1 at 1). The work on the reactor led to Ergon's claim for breach of contract and negligence against Cat Tech. The arbitrators heard six days of evidence and arguments. In a "reasoned" award, the arbitrators found that Ergon was entitled to recover $1,973,180.00 for direct damages, interest, and attorney's fees and litigation expenses from Cat Tech. The arbitrators found that the contract precluded consequential damages. (Docket Entry No. 57, Ex. 1 at 1).

In the award, the arbitrators found that "Cat Tech's scope of work ... consisted of unloading all catalyst from Beds 1 through 4, removal of existing reactor internals, installation of new reactor internals, and the loading of new catalyst in each of the Beds." (Docket Entry No. 57, Ex. 1 at 2). The arbitrators entered the following findings:

II. Event 1-January 2005

... After the completion of Cat Tech's work, Ergon began the startup process of the reactor. During the start-up process, a high pressure drop in the lower section of the reactor became manifest, and the reactor was subsequently shut down. Upon entry of the reactor inFebruary 2005, among other things, significant damage was discovered to the Bed 3 reactor internals.

At the hearing, extensive evidence was presented on this issue, particularly with respect to the rope packing around the Bed 3 Johnson screens. The parties' witnesses, including experts, presented different theories of how the reactor internals may have been damaged. There were conflicting opinions regarding whether the rope packing was properly installed by Cat Tech or whether the start-up process somehow dislodged the rope packing. There were also disputed positions regarding the level of inspection or oversight of Cat Tech's work which Ergon should have provided.

Based upon the evidence and arguments of the parties, the arbitrators find Cat Tech failed to properly place the rope packing around the Bed 3 Johnson screens which, among other things, caused the damage to the Bed 3 reactor internals, migration of catalyst from Bed 3 into Bed 4, and damage to some of the catalyst. The arbitrators further find that Ergon is not contractually liable for failing to catch Cat Tech's errors; however, the arbitrators note that Ergon's approach to this work is not without criticism for failing to recognize that more proactive quality control was necessary for this critical work. The damages recoverable for this event are addressed below.

III. Event 2-February 2005

As mentioned above, the reactor was shut down in February 2005 to address Event 1. For this shutdown, Cat Tech unloaded catalyst from Beds 1, 2, 3 and part of Bed 4; Cat Tech screened the removed catalyst; Cat Tech removed the damaged reactor internals and reinstalled the repaired internals; and Cat Tech loaded the screened catalyst along with a limited amount of new catalyst to make up for [ ] the amounts lost in the screening process. After this work was completed, a large pressure drop developed in Bed 3 during the start-up process. However, the reactor was not shutdown to address the pressure drop issue until October 2005. Ergon also did not request Cat Tech to perform the October 2005 work and, instead, employed a different contractor.

At the hearing, the parties' witnesses, including experts, presented different theories of the cause of the Bed 3 pressure drop, particularly with respect to the Bed 3 catalyst loaded by Cat Tech. There were conflicting opinions regarding whether the pressure drop may have been caused by a thin layer of dust/fines in Bed 3, whether the pressure drop may have been caused by an interface between screened and new catalyst, or whether the pressure drop may have been caused by some other unknown occurrence. While there was considerable evidence presented by both parties on this issue, much of the evidence was circumstantial. Due to various circumstances, there was limited evidence by either party of any physical testing or analysis of the material allegedly comprising the thin layer of fines. Also, there was no definitive evidence of how those fines may have found its [sic] way into the reactor.

Nevertheless, based upon a preponderance of the evidence, the arbitrators find Cat Tech is responsible for the excessive pressure drop in Bed 3. The evidence shows that the excessive pressure drop in Bed 3 was evident at the beginning of start-up for this event. Cat Tech was solely in control of the screening of the catalyst and the loading of the catalyst in the reactor. The damages recoverable for this event are addressed below.

( Id. at 2-3). The arbitrators awarded $750,000 in damages for "event 1" and $1 million in damages for "event 2." ( Id., Ex. 1 at 5).

Dr. Christopher Buehler, a chemical engineer retained by the plaintiffs as an expert witness in this coverage dispute, described the part of the reactor that Cat Tech was working on.² The reactor contained four "beds," with Bed 1 on the top and Bed 4 on the bottom. Each bed was loaded with catalyst. On top of the catalyst in each bed was a distribution tray and a quench assembly. Below Bed 4 was the reactor vessel and "support grid." (Docket Entry No. 59, Ex. 1 at 4). Cat Tech removed the distribution trays and quench assemblies and unloaded the catalyst. As this work proceeded, the support grid was exposed and was inspected. The outlet screen at the bottom of the reactor vessel was removed and replaced, followed by the replacement of the "support spheres." Next, Cat Tech began loading new catalyst into the beds. "Once the bed height reached a few feet below the location of a given distribution tray, catalyst loading was stopped. Fire blankets and plywood were then laid on top of the catalyst to create a...