American Motorists Ins. Co. v. Trane Co.

• Decision Date: 04 August 1982
• Docket Number: No. 74-C-421.,74-C-421.
• Citation: 544 F. Supp. 669
• Parties: AMERICAN MOTORISTS INSURANCE COMPANY, an Illinois corporation, Plaintiff, v. The TRANE COMPANY, a Wisconsin corporation, Employers Mutual Liability Insurance Co. of Wisconsin, a Wisconsin corporation, St. Paul Fire and Marine Insurance Company, a Minnesota corporation, and American Home Assurance Company, a New York corporation, Defendants.
• Court: U.S. District Court — Western District of Wisconsin

544 F. Supp. 669

AMERICAN MOTORISTS INSURANCE COMPANY, an Illinois corporation, Plaintiff, v. The TRANE COMPANY, a Wisconsin corporation, Employers Mutual Liability Insurance Co. of Wisconsin, a Wisconsin corporation, St. Paul Fire and Marine Insurance Company, a Minnesota corporation, and American Home Assurance Company, a New York corporation, Defendants.

No. 74-C-421.

United States District Court, W. D. Wisconsin.

August 4, 1982.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

John F. Jenswold, Madison, Wis., for plaintiff.

Eugene O. Gehl, Madison, Wis., for Employers Mut. Liability Ins. Co. of Wisconsin.

Conrad H. Johnson, Madison, Wis., for American Home Assur. Co.

Thomas P. Kane, St. Paul, Minn., for St. Paul Fire and Marine Ins. Co.

Stuart S. Ball, Sidley & Austin, Chicago, Ill., for The Trane Co.

CRABB, Chief Judge.

This is a civil case in which the plaintiff insurer seeks a declaratory judgment concerning the coverage offered under one of its policies. Defendant Trane counterclaims and cross-claims for monetary damages and attorneys' fees based on breaches of the plaintiff and defendant insurers' duty to defend.

Jurisdiction is predicated upon diversity of citizenship. 28 U.S.C. § 1332.¹ The parties agree that Wisconsin substantive law governs the disposition of this action.

The insurance coverage questions in this case arise out of a dispute among Trane and J. F. Pritchard and Company, J. F. Pritchard & Company, and Pritchard-Rhodes, Ltd. (hereafter collectively referred to as Pritchard) about the quality of a component part supplied by Trane in four Pritchard liquid natural gas plants. When the partial failure of the component part caused Trane to become involved in litigation with Pritchard,² Trane tendered the defense of the cases to each of its four insurers: American Motorists Insurance Company, Employers Mutual Liability Insurance Company of Wisconsin, St. Paul Fire and Marine Insurance Company, and American Home Assurance Company. Apparently, St. Paul was willing to undertake part of the defense. Employers and American Home refused to defend Trane on the grounds that the Trane-Pritchard incident fell outside the coverage of their policies. American Motorists commenced this action for a declaratory judgment as to its and the other insurers' rights and duties under the policies each had issued to Trane.

Trane regarded the insurers' actions as refusals of their duty to defend and, through its own attorneys, entered into settlement discussions with Pritchard. Trane ultimately settled its dispute with Pritchard and amended its answer in this action to assert a counterclaim and cross-claims against the respective insurance companies. The counterclaim and cross-claims alleged four causes of action: (1) breach of contract to indemnify Trane for sums spent in settlement of Pritchard claims; (2) breach of contract to defend Trane in its actions against Pritchard; (3) intentional interference with Trane's defense of the Pritchard claims, amounting to willful and gross breach of the fiduciary duty owed by an insurer to the insured; and (4) conspiracy to refuse to defend Trane and to interfere with Trane's own defense against Pritchard. As damages, Trane claimed reimbursement for the settlement made with Pritchard, all attorneys' fees and other expenses involved in the present action, and an exemplary award.

This case is before the court on each of the insurers' motions for summary judgment on the issue of the coverage of their policies and on Trane's motion for partial summary judgment on the issue of the insurers' alleged breach of their duty to defend. From the uncontested allegations and the evidentiary materials submitted by the parties, I find no genuine issue as to the material facts summarized under the heading, FACTS. I find also that there is no genuine issue as to the fact that the insurance policies in question contain the language referred to in the separate discussions of the four policies.

FACTS

Background

Natural gas is distributed through pipelines by suppliers to local utilities who in turn distribute the gas to their residential and commercial customers. Since most natural gas is used by consumers for heating, demand for gas increases in cold weather. On the coldest or "peak" days, when demand is highest, the ability of a local utility to supply all the gas needed by its customers may be limited by the pipeline capacity of its suppliers. Moreover, even if a local utility can supply all of its customers' needs during a peak period, this service will be expensive because the cost of gas is determined in large measure by a "demand charge"—a charge for the pipeline deliverability capacity based upon the peak day usage but applied on an annual basis. Thus, the more a utility must rely on obtaining gas from its supplier during peak periods, the greater is its risk of not meeting demand and incurring increased costs.

A local utility can insure deliverability to its customers and reduce its costs by buying and storing gas during non-peak periods for use during peak periods. Utilities which choose to store gas for use during peak periods often build gas liquefaction plants to convert the natural gas from a gaseous to a liquid state. As a liquid, natural gas occupies only a small fraction of the space it occupies in its gaseous state; consequently, the liquefaction of natural gas permits larger quantities of gas to be stored by local utilities than would be possible if the utility attempted to store natural gas in its gaseous state. Because the utility is able to store more natural gas, it is less dependent on its supplier during peak periods and reaps the corresponding benefits of reduced costs and increased reliability. Liquefaction also permits the economical transportation of gas in ships from foreign countries.

Liquefaction of natural gas is accomplished through a cooling process. In the late 1960's and early 1970's, the Pritchard companies developed a design for natural gas liquefaction plants called the "PRICO process." This process was unique in that it combined three refrigerants into a single gaseous stream to cool natural gas into a liquid state. Prior to this time, a three-step process has been used, utilizing a single refrigerant in each step. As part of the development of the PRICO process, Pritchard contacted Trane to see whether Trane could manufacture a heat exchanger for the new process. A heat exchanger is that part of the plant in which the natural gas is cooled to a liquid state by the refrigerant.

Pritchard and Trane reached an agreement regarding the production of heat exchangers and the Trane heat exchanger became a fundamental component in the natural gas liquefaction plants which Pritchard hoped to construct for the Chattanooga Gas Company (Chattanooga), Northern Indiana Public Service Company (NIPSCO), Springfield Gas Company (Springfield), and for the Algerian government (Skikda). When Pritchard was awarded the contracts for these plants, Trane constructed and sold the heat exchangers which were used in them. The exchangers built for Chattanooga, Springfield, and Skikda were sold to Pritchard, while the heat exchanger for NIPSCO was sold directly to NIPSCO.

The plants at Chattanooga, Springfield, and NIPSCO were "peak shaving plants" or plants designed to make and store liquid natural gas in periods of low use for distribution in periods of high use. The plant at Skikda was a "base load plant," which was a plant designed to make and store huge quantities of liquid natural gas for export. The Skikda plant was much larger than the other three plants.

Each of the four heat exchangers used the same general design, although some differences were required by the unique qualities of each plant. Each heat exchanger had cores through which natural gas and liquid refrigerants passed as part of the cooling process. Inside the cores were "fins" to affect the mixed refrigerant stream. In the Chattanooga, Springfield and NIPSCO plants, each of the heat exchangers contained three cores in a horizontal position with serrated fins. In the Skikda plant, the heat exchanger was to have approximately 40 cores in the horizontal position with serrated fins.

Failure of the Heat Exchangers

The Chattanooga plant was the first plant to begin production after it was completed in the fall of 1972. Once the initial starting procedures had been completed, it was evident to all parties that the plant could not operate at the predicted capacity set forth in the contract between Pritchard and Chattanooga. On an average, the plant was experiencing a 20-25% shortfall in production. Testing was immediately begun by Pritchard, Trane and outside consultants to determine the cause of the shortfall. As a result of this testing, modifications were made to both the plant and the heat exchangers, but the shortfall was not corrected. Ultimately, in 1975, the Trane exchangers in the Chattanooga plant were replaced with exchangers built by the Kobe Corporation. The Kobe heat exchangers contained cores in the vertical position with perforated fins. With the Kobe heat exchangers, the Chattanooga plant was able to operate above its predicted capacity.

The Springfield plant began production in the fall of 1973 and also experienced a shortfall, but to a lesser extent than Chattanooga. Prior to start-up, certain changes had been made in the plant and in the Trane heat exchangers to try to head off the expected shortfall. The shortfall at Springfield was 5% or less of predicted capacity. The Trane heat exchangers were not replaced at Springfield and the plant was accepted ultimately by the purchaser.

The NIPSCO plant began production in 1975 with a Trane heat exchanger modified by the addition of a fourth core. This plant experienced a shortfall in the range of 5-10%. Ultimately, this plant was accepted by NIPSCO with the Trane heat exchangers.

Prior to 1978, the Skikda plant had not...