Insurance Co. of North America, Inc. v. U.S. Gypsum Co., Inc.

• Decision Date: 11 April 1989
• Docket Number: No. 88-1110,88-1110
• Citation: 870 F.2d 148
• Parties: INSURANCE COMPANY OF NORTH AMERICA, INC., Plaintiff-Appellant, v. U.S. GYPSUM COMPANY, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 148

870 F.2d 148

INSURANCE COMPANY OF NORTH AMERICA, INC., Plaintiff-Appellant, v. U.S. GYPSUM COMPANY, INC., Defendant-Appellee.

No. 88-1110.

United States Court of Appeals Fourth Circuit.

Argued Jan. 11, 1989.

Decided March 13, 1989.

Rehearing and Rehearing In Banc Denied April 11, 1989.

James Thomas Ferrini (Richard R. Winter, Clausen, Miller, Gorman, Caffrey & Witous, P.C., Chicago, Ill., Wade Massie, Penn, Stuart, Eskridge & Jones, Abingdon, Va., Samuel P. Gerace, Jones, Gregg, Creehan & Gerace, Pittsburgh, Pa., on brief), for plaintiff-appellant.

Stephen Cassidy Neal (Kevin T. Van Wart, Lise T. Spacapan, Walter R. Lancaster, Kirkland & Ellis, Christopher J. McElroy, U.S. Gypsum Co., Chicago, Ill., R. Harvey Chappell, Jr., Mary Metil Grove, Orran Lee Brown, Christian, Barton, Epps, Brent & Chappell, Richmond, Va., Jackson S. White, Jr., White, Elliott & Bundy, Abingdon, Va., on brief), for defendant-appellee.

Before SPROUSE and CHAPMAN, Circuit Judges, and MOTZ, United States District Judge for the District of Maryland, sitting by designation.

MOTZ, District Judge.

Insurance Company of North America ("INA") appeals from a multi-million dollar jury verdict entered against it in favor of United States Gypsum Company ("USG"). The jury found INA liable under an "all risk" policy for damages sustained by USG as a result of a massive earth subsidence which occurred on November 4, 1984 beneath one of its plants located in Plasterco, Virginia.

Finding that no error was committed below, we affirm. ¹

I.

The period 1979 to 1983 was a time of soaring interest rates. During those years insurance companies engaged in what was known as "cash flow underwriting," vigorously competing with one another for premium revenues. In order to obtain those revenues for reinvestment, the companies lowered their underwriting criteria as well as reducing their prices.

USG had been insured by Protection Mutual for almost 35 years. In 1982 USG was approached by insurance brokers and asked to give them an opportunity to improve its insurance program. As a result, in March 1983, USG put its property insurance program up for competitive bidding. Much to its present regret, INA eventually won that bidding. On June 1, 1983, without requiring USG to submit an insurance application, it issued a policy providing complete property and casualty protection in an aggregate amount of over $1.2 billion at over 120 USG locations. The policy contained a higher-than-average deductible of $250,000, and it did not contain (as INA's underwriting manuals authorized it to do) any exclusion for subsidence losses. INA reinsured losses of over $5 million with Industrial Risk Insurers, an association of insurance companies partially owned by INA.

Plasterco was one of the USG locations insured under the policy. USG has been mining gypsum at that location since 1910, when it took over the mining operation from a smaller company which had been operating there since the late 1800's. There are several mines at the location, one of which (No. 6) is said to be unique in the world. Until it was closed and abandoned in 1979, No. 6 mine was mined on sixteen levels to a depth of 14,000 feet. It was approximately two and one half miles in length, and its width varied from 200 feet at the surface to 2,000 feet at a depth of 700 feet.

USG also conducts manufacturing operations at Plasterco. Prior to the November 4, 1984 subsidence event, there were 37 buildings at that location, many of which were on the surface above No. 6 mine. The major buildings were a gypsum board plant and a mill. When USG closed the No. 6 mine in 1979, it spent $12 million modernizing the Plasterco facility and doubling its production capacity.

Over the years there were incidents of subsidence at Plasterco. In the 1940's a large hole, known as the "grave hole," developed and thereafter three other holes developed around it. (None of these played any factor in the November 4, 1984 subsidence event). Four other holes likewise developed. All of these holes were vertical sinkholes or caveholes of limited scope, and none of them caused any damage to property other than a small piece of asphalt paving which had to be repaired for less than $700 in 1969. USG was concerned, however, about the stability of the area and, in addition to conducting its own monitoring over the years, periodically hired two professors expert in matters of geology and rock mechanics to provide consulting advice.

The subsidence event which gave rise to this action occurred around noon on Sunday, November 4, 1984. Its effects were catastrophic. Three caveholes appeared, the largest of which was 300 feet in diameter and 100 feet deep, and an area of more than 21 acres collapsed, dropping as much as six feet. Power and water lines were severed, and the flume system at the confluence of two creeks was destroyed. Water flowed into the mine, and buildings began to sink. Extensive damage was caused to a public highway and to railroad tracks in the area. Although the board plant was saved, the structural integrity of the mill was destroyed and later, after it began to break apart, it had to be abandoned and a new mill built at another location. USG's total loss was estimated to exceed $34 million, $24.8 million of which it successfully sought to recover from INA in this suit.

II.

INA first argues that the November 4, 1984 event was not "fortuitous" and that the losses resulting from it were therefore not covered by the policy. A fortuitous event is one "which so far as the parties to the contract are aware, is dependent on chance." Restatement of Contracts, Section 291, comment A (1932); Compagnie des Bauxites de Guinee v. Insurance Company of North America, 724 F.2d 369 (3d Cir.1983); Intermetal Mexicana S.A. v. Insurance Company of North America, 866 F.2d 71 (3d Cir.1989). ²

The District Court, to whom the parties agreed to submit the fortuity issue, concluded that the November 4th event was fortuitous. The Court found as follows:

All of the witnesses who testified on behalf of USG stated that they did not expect the occurrence of a loss of this magnitude. The testimony of the witnesses showed that the losses which have occurred in the past at Plasterco or other USG locations were minor property losses. Furthermore, the sinkholes which had occurred prior to the accident were located at places beyond any areas where property was located. USG was monitoring and caring for the facility to prevent any catastrophic damage from occurring at any place where any plants were located. Certainly, a subsidence event was a risk at any USG location where mining had been ongoing. Indeed, subsidence is likely to occur on the earth above a mine but any resulting damage is at best a risk, not a certainty, especially where precautions are taken. Insurance companies do insure risks, and the subsidence damage in this case was just that--a risk.

There was no certainty that any subsidence was destined to occur or, in particular, that it was destined to occur within the time limits of the policy in issue. USG had adopted and implemented a rather costly program to reduce the risk of subsidence damage. All of the witnesses who testified in this case stated that the catastrophic subsidence which occurred on November 4, 1984 was unexpected. INA produced no witnesses who testified to the contrary. Until that day, no damage had ever occurred that would have given rise to a claim under INA's policy at Plasterco.

USG's conduct before the June 1, 1983 policy date is perhaps the strongest evidence that the firm did not expect a catastrophic subsidence of the earth at Plasterco. In 1978 and 1979, USG invested $12 million modernizing the plant, which tended to double production capacity. USG would not have invested such sums if it expected a major catastrophe. In the week prior to the subsidence, USG spent several thousands of dollars repairing a large portion of its parking lot, most of which was destroyed during the subsidence. November 1, 1984, two USG employees, including the mine superintendent, entered the mine to observe its condition. Certainly, they would not have risked their lives roaming around a mine that was expected to collapse. The event occurred on a Sunday with the plant in normal operation. Again, USG would not jeopardize the lives of a full shift of employees if it expected a catastrophe. USG did expect some movement in the limited area of the gravehold and cordoned off this area; yet, the earth actually subsided at the entire plant area, not just at the gravehold.

Insurance Company of North America v. U.S. Gypsum Co., 678 F.Supp. at 142-43.

The Court drew these conclusions after hearing and judging the credibility of USG witnesses who denied foreknowledge of the event, and the evidence fully supports the constituent factual findings underlying the Court's ultimate finding of fortuity. INA contends, however, that as a matter of law the November 4th event was not fortuitous because the evidence is undisputed that prior to November 4th USG was aware of the certainty that further subsidence would occur at Plasterco. ³ Cf. Intermetal Mexicana, supra.

As the District Court noted, the fact that it is known that subsidence will occur does not mean that it will occur during the policy period. Moreover, there is a fundamental distinction between the certainty of subsidence and the certainty of resulting loss. An INA expert admitted at trial that there is a certainty of subsidence from the moment that mining operations begin at any location. Thus, if, as INA contends, the certainty of subsidence precludes fortuity, there never could be coverage for subsidence damage. That proposition, however, is contradicted by INA's own underwriting manuals which list subsidence as one of "the other 'all risk' perils which may cause severe loss."

INA's related argument that the damage from the November 4th event was a "loss in progress" and was...