Arkwright-Boston Mfrs. Mut. Ins. Co. v. Wausau Paper Mills Co.

• Decision Date: 05 May 1987
• Docket Number: 86-1822,Nos. 86-1747,ARKWRIGHT-BOSTON,s. 86-1747
• Citation: 818 F.2d 591
• Parties: MANUFACTURERS MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, Cross-Appellant, v. WAUSAU PAPER MILLS COMPANY, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 591

818 F.2d 591

ARKWRIGHT-BOSTON MANUFACTURERS MUTUAL INSURANCE COMPANY, Plaintiff-Appellee, Cross-Appellant, v. WAUSAU PAPER MILLS COMPANY, Defendant-Appellant, Cross-Appellee.

Nos. 86-1747, 86-1822.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 9, 1986.

Decided May 5, 1987.

Carl L. Ricciardi, Samster, Aiken & Mawicke, S.C., Wausau, Wis., for defendant-appellant, cross-appellee.

Stephen A. Krupp, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., for plaintiff-appellee, cross-appellant.

Before CUDAHY and RIPPLE, Circuit Judges, and WILL, Senior District Judge. ^*

CUDAHY, Circuit Judge.

The defendant, Wausau Paper Mills Company ("Wausau Mills"), purchased an all-risk property insurance policy from the plaintiff, Arkwright-Boston Manufacturers Mutual Insurance Company ("Arkwright"). Wausau Mills subsequently attempted to recover under that policy the costs of repairing damage to a reactor it owned and operated. Arkwright denied the claim, maintaining that the damage was not an insured risk under the terms of the policy. The district court entered summary judgment in favor of Arkwright.

I.

Wausau Mills manufactures and sells paper. It purchased an all-risk insurance policy from Arkwright covering the period from January 1, 1983 to January 1, 1986. The policy insured Wausau Mills "against all risks of direct physical loss or damage, except as hereinafter excluded, to the property described hereinafter...." Property Damage Policy, Plaintiff's Supplemental Brief in Support of Motion for Summary Judgment, Exhibit 5, at 5915. The policy also contained the following provision enumerating certain exclusions from coverage:

C. EXCLUSIONS

....

Group B This policy does not insure against:

....

4. Deterioration, depletion, inherent vice or latent defect, rust or corrosion, mold, wet or dry rot, erosion, or wear and tear unless physical damage not otherwise excluded by this Policy results, in which event, this Policy shall cover only such resulting damage[.]

Id. at 5919.

Among the property covered by the policy was the Copeland Recovery Reactor (the "reactor") located at Wausau Mills' paper mill in Brokaw, Wisconsin. The reactor is a three-story, thirty-eight-foot tall vessel in which certain by-products from the paper mill are burned in order to recover chemicals for reuse in the papermaking process. The walls of the reactor are composed of two layers of brick covered by an exterior steel shell whose thickness varies from 1/2 inch to 3/8 inch. The normal operation of the reactor produces several chemicals, including sulfur dioxide (SO2 ), sulfur trioxide (SO3 ) and water (H 2 O). If the temperature of the interior surface of the steel shell drops below the dew point of sulfuric acid, H2 O and SO3 condense on the steel shell as H2 SO 4 --sulfuric acid. Hot sulfuric acid is highly corrosive to steel; it can cause thinning and pitting (i.e., the creation of holes) in the steel.

The reactor was designed and installed in 1965 and 1966. Damage to the reactor due to the condensation of sulfuric acid first occurred in 1970. In that year, many holes, as well as general thinning, were discovered in the steel shell. As a result, the reactor was shut down and all but the foundation was replaced. A lining was placed between the brick and the steel shell, in part to protect the shell from corrosion.

Corrosion did not again interfere with the operation of the reactor until late 1978, when eight to ten holes were discovered in the steel shell. Again, corrosion due to the condensation of sulfuric acid was determined to be the cause of the damage. Representatives from the company that built the steel shell and the company that supplied the brick lining advised Wausau Mills that the reactor would have to be replaced "in the very near future." Wausau Mills decided not to replace the reactor or the steel shell at that time. Instead, it placed half-inch thick carbon-steel patches over existing holes and thin spots, installed thermocouples which monitored the shell temperature and insulated the exterior of the reactor.

In October 1982, Wausau Mills installed a new sulfur scrubber system to remove sulfur dioxide (SO2 ) from the gases emitted from the reactor. The addition of the scrubber system lowered the operating temperature of the reactor and the reactor shell. The lower temperatures resulted in poor chemical recovery and also created the danger of future corrosion. The temperatures began to rise in December 1982 but remained below normal until May 1983. In July 1983, Wausau Mills discovered and patched two small holes in the steel shell. In September 1983, numerous additional holes were discovered. The parties agree that the holes were caused by sulfuric acid forming in the reactor and condensing on the steel shell.

Wausau Mills attempted to recover the cost of repairing the reactor from Arkwright under its all-risk policy. Arkwright denied the claim and filed suit requesting a declaratory judgment that the September 1983 loss was not covered by the insurance policy. Arkwright later moved for summary judgment on the grounds that the loss was not fortuitous and that the loss fell within the policy provision excluding damage due to "corrosion." The district court adopted the magistrate's report and recommendation that found that, although the loss was fortuitous, the loss came under the corrosion exclusion. Thus, the court granted summary judgment in favor of Arkwright. Wausau Mills appeals.

II.

Rule 56 of the Federal Rules of Civil Procedure provides that summary judgment is appropriate where "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The burden is on the moving party to establish the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, --- U.S. ----, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986). As the Supreme Court has recently stated, "there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).

We must determine whether an issue of fact remains as to whether the September 1983 loss fell within the corrosion exclusion. ¹ Under Wisconsin law, which governs in this diversity case, the construction of language in an insurance policy is generally a matter of law and is controlled by the same rules of construction applied to all contracts. Kremers-Urban Co. v. American Employers Ins. Co., 119 Wis.2d 722, 735, 351 N.W.2d 156, 163 (1984); Kraemer Bros., Inc. v. United States Fire Ins. Co., 89 Wis.2d 555, 562, 278 N.W.2d 857, 860 (1979). The objective in construing an insurance policy is to ascertain and carry out the true intention of the parties. Kremers-Urban, 119 Wis.2d at 735, 351 N.W.2d at 163. The language of the policy is construed according to "the common and ordinary meaning it would have in the mind of a lay person." Id. "[T]he test is not what the insurer intended the words to mean but what a reasonable person in the position of the insured would have understood the words to mean." Id. Words or phrases in an insurance policy that are reasonably or fairly susceptible to more than one construction are considered to be ambiguous and are construed strictly against the insurance company and in favor of coverage. Garriguenc v. Love, 67 Wis.2d 130, 135, 226 N.W.2d 414, 417 (1975). Where the terms of a policy are not ambiguous, the court will simply apply the policy according to its terms without engaging in construction; the court will not, for example, construe the policy strictly against the insurer in the absence of an ambiguity. Lawver v. Boling, 71 Wis.2d 408, 421-22, 238 N.W.2d 514, 521 (1976). "Moreover, an otherwise unambiguous provision is not rendered ambiguous simply because it is difficult to apply to the facts of a particular case." Id. at 422, 238 N.W.2d at 521.

The parties agree that the steel shell was damaged by the condensation of sulfuric acid which caused the formation of holes. Wausau Mills claims that "the acid attack which resulted in the September, 1983 damage to the Copeland Recovery Reactor was not 'corrosion' as that term is commonly used." Appellant's Brief at 10 (emphasis added). Wausau Mills argues that the ordinary meaning of corrosion is the "gradual wearing away or alteration of metal," id. at 11, that inevitably occurs in time to all metal, rather than the sudden "acid attack" that occurred here. Wausau Mills argues in the alternative that the word "corrosion" is ambiguous, and that its definition of corrosion is reasonable and must be applied because it is the most favorable to Wausau Mills, the insured.

In determining the common meaning of a word, a court may look to the...