Honeycomb Systems, Inc. v. Admiral Ins. Co.

• Decision Date: 21 July 1983
• Docket Number: Civ. No. 80-0439 P.
• Citation: 567 F. Supp. 1400
• Parties: HONEYCOMB SYSTEMS, INC., Plaintiff, v. ADMIRAL INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — District of Maine

567 F. Supp. 1400

HONEYCOMB SYSTEMS, INC., Plaintiff, v. ADMIRAL INSURANCE COMPANY, Defendant.

Civ. No. 80-0439 P.

United States District Court, D. Maine.

July 21, 1983.

Harrison L. Richardson, John S. Whitman, Richardson, Tyler & Troubh, Portland, Me., for plaintiff.

Charles W. Craven, Marshall, Dennehey, Warner, Coleman & Goggin, Philadelphia, Pa., Gerald F. Petruccelli, Portland, Me., for defendant.

MEMORANDUM OF OPINION AND ORDER OF THE COURT

GIGNOUX, District Judge.

In this declaratory judgment action plaintiff Honeycomb Systems, Inc. "Honeycomb" seeks a judgment declaring that certain losses it sustained arising from the 1977 failure of a dryer built by it for Scott Paper Company "Scott" are covered by an umbrella liability insurance policy issued to it by defendant Admiral Insurance Company "Admiral". The case is submitted on stipulated facts and cross-motions for summary judgment. The issues have been thoroughly briefed and argued. For the reasons to be stated, Honeycomb's motion for summary judgment is granted and Admiral's motion for summary judgment is denied.

I. The Stipulated Facts

Honeycomb manufactures, among other products, large dryers that are widely used by paper manufacturers. In the early 1970s Scott, a major manufacturer of paper products, decided to build a new paper machine capable of producing a premium brand of toilet paper. In 1973 two of the senior members of Scott's engineering staff met with Honeycomb's chief engineers to discuss the feasibility of Honeycomb building a dryer with a diameter of 22 feet for incorporation into the new paper machine. Prior to that time the largest dryer ever manufactured by Honeycomb was 12 feet in diameter. Scott and Honeycomb agreed that Honeycomb would perform a feasibility study, the cost of which would be applied to the cost of the new dryer if Scott ordered it. Because proper performance and evaluation of the feasibility study required Scott and Honeycomb to disclose to each other confidential aspects of their respective businesses, they executed an agreement that prohibited disclosure to third parties of each others' trade secrets and that prohibited Honeycomb, for a fixed period of years, from selling to Scott's competitors dryers with diameters greater than 14 feet.

By late 1973 Scott and Honeycomb concluded that the project was feasible, and in November 1973 Scott directed Honeycomb to design and build a 22 foot dryer according to design and operating guidelines provided by Scott. Honeycomb itself designed the dryer and fabricated the "shell," the cylindrical portion of the dryer. It hired Hodge Boiler Works, Inc. "Hodge", a well-established firm with long experience in heavy welding and fabrication, to fabricate the "heads," the large circular plates that hold the cylindrical portion of the dryer at each end. In late 1974 the various parts of the dryer were shipped to Scott's plant in Chester, Pennsylvania, where they were assembled and incorporated in the new paper machine. The paper machine was put into operation in May 1975.

In September 1975 Scott inspected the dryer and found that most of the welds around the hub of the front dryer head had failed and that the welds on the back dryer head showed signs of inadequate weld size and quality. The cause of the problem was that Hodge had applied welds that were grossly undersized and of such poor quality that they did not even come close to minimum standards. The dryer was shut down for repair of the welds from September 6 to November 7, 1975. During that time Scott and Honeycomb discovered two other fabrication errors by Hodge affecting the hubs. In boring out the hubs Hodge had bored deeper than specified. In addition, Hodge had erroneously attached a ¾-inch plate closer to the outer end of the flanges on the head than the drawing called for. These two errors greatly increased the stress at the base of the hub flanges.

Scott and Honeycomb each had engineers study the boring and attachment errors to determine whether the errors would significantly impair the integrity of the hub. Each engineer independently concluded that the magnitude of the stress created by these errors was so low as to cause no concern. Honeycomb, however, suggested that Scott continue to monitor the problem using strain gauges.

For two years Scott regularly inspected the welds and monitored the performance of the heads without discovering any problem of significance. The monitoring took the form of visual inspection and, on occasion, the use of x-rays and liquid dye penetrant to detect cracks. It is unclear whether Scott followed Honeycomb's suggestion to use strain gauges. On September 3, 1977, during the routine Labor Day shutdown, Scott discovered a substantial crack in the hub of the back head. The cause of the hub crack was Hodge's boring and attachment errors; it had nothing to do with welding, which had been the cause of the 1975 failure. The crack was a very serious flaw, extending about 35 inches, or through 40% of the hub's circumference. If left unrepaired, the crack would have worsened and caused a severe failure of the dryer. Consequently, Scott shut the machine down until repairs were made, a period of 40 days.

Throughout the period from 1975 through 1978 Honeycomb's primary liability insurer was The Hartford Insurance Co. "Hartford". The Hartford policy afforded property damage liability coverage of $100,000 for each occurrence. At the time of the 1975 failure of the welds, Honeycomb also had an excess ("umbrella") liability policy issued by Aetna Insurance Company "Aetna", effective from September 21, 1972 to September 21, 1975. The Aetna policy afforded property damage liability coverage of $2,000,000 for each occurrence, in excess of the Hartford coverage. From September 21, 1975 through July 1, 1977, Federal Insurance Company was the excess liability insurer, providing the same coverage. That policy was succeeded by Admiral's umbrella liability policy, effective from July 1, 1977 to July 1, 1978. Admiral's policy provided $1,000,000 property damage liability coverage for each occurrence, in excess of $100,000.

On September 1, 1978, Scott sued Honeycomb and Hodge in this Court. See Scott Paper Company v. Honeycomb Systems, Inc., Civ. No. 78-177 P (D.Me. filed Sept. 1, 1978). The suit sought recovery of three major elements of damages: the "direct cost" of repairing the 22 foot heads in 1975 and 1977, the lost profits attributable to the interruption of production during each repair period, and the costs of constructing replacement heads. The total claim for damages exceeded $28,000,000.

On September 18, 1981 the Scott suit was settled when Hartford and Aetna between them paid Scott $1,000,000, Honeycomb paid Scott the equivalent of $741,000 in cash by forgiving two Scott debts to Honeycomb, and Honeycomb gave Scott a promissory note for $250,000, payable in three annual installments beginning September 18, 1982, with interest at 8% per year. The parties have stipulated that the $250,000 promissory note represents the amount of the settlement for which Admiral will be liable in this action if Honeycomb establishes that Honeycomb's policy with Admiral covers any one of the three categories of damages sued for by Scott. The parties have also stipulated that the Court is to add to any award interest on the $250,000 from September 18, 1981, to be computed at a rate of 8% per year, without compounding. Honeycomb also seeks to recover the attorney's fees incurred in bringing this action.

II. Discussion

The parties agree that the present lawsuit is governed by the terms of the umbrella liability policy issued to Honeycomb by Admiral, effective from July 1, 1977 to July 1, 1978. The policy is a standard form comprehensive general liability (CGL) policy.¹ The policy provides that Admiral will indemnify Honeycomb for losses sustained by Honeycomb in excess of $100,000 that Honeycomb is

legally obligated to pay as damages because of ... property damage ... to which this insurance applies, caused by an occurrence anywhere during the policy period.

Admiral disclaims coverage of the 1977 failure on four grounds. Admiral contends (1) that the 1977 hub crack in the dryer did not constitute an "occurrence" within the meaning of the policy, (2) that any "occurrence" that did take place "occurred" before July 1, 1977, (3) that the damages suffered by Honeycomb as a result of the crack do not constitute "damages because of property damage to which this insurance applies," and (4) that the damages suffered by Honeycomb fall within several of the exclusions specified in the policy. The Court finds none of these arguments persuasive.²

A. "Occurrence"

The Admiral insurance policy defines an "occurrence" as

an accident, including continuous or repeated exposure to conditions, which results in ... property damage ... neither expected nor intended from the standpoint of the insured.

Admiral does not argue that the crack was other than an unintended accident that resulted in property damage.³ Admiral contends, however, that the 1977 hub crack was "expected from the standpoint of the insured."

Admiral argues that the Court must employ an objective test in determining whether something is "expected." The Supreme Judicial Court of Maine, however, has recently considered and explicitly rejected the contention that application of an objective test is required by the phrase "expected ... from the standpoint of the insured." In Patrons-Oxford Mutual Insurance Co. v. Dodge, 426 A.2d 888, 892 (Me. 1981), the court interpreted the phrase as referring only to injury that the insured "in fact subjectively foresaw as practically certain." (emphasis in original). Accord City of Virginia Beach v. Aetna Casualty & Surety Co., 426 F.Supp. 821, 824-25 (E.D. Va.1976). The record offers no support for the contention that Honeycomb actually foresaw a great likelihood of the crack, and, indeed, Admiral makes no such...