Kaapa Ethanol, LLC v. Affiliated FM Ins. Co.

• Decision Date: 03 November 2011
• Docket Number: Nos. 10–1929,10–2071.,s. 10–1929
• Citation: 660 F.3d 299
• Parties: KAAPA ETHANOL, LLC, Plaintiff–Appellee/Cross Appellant, v. AFFILIATED FM INSURANCE COMPANY, Defendant–Appellant/Cross Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

660 F.3d 299

KAAPA ETHANOL, LLC, Plaintiff–Appellee/Cross Appellant,

v.AFFILIATED FM INSURANCE COMPANY, Defendant–Appellant/Cross Appellee.

Nos. 10–1929

10–2071.

United States Court of Appeals, Eighth Circuit.

Submitted: June 13, 2011.Filed: Nov. 3, 2011.

Andrew M. Low, argued, Denver, CO, for appellant/cross-appellee.

John N. Ellison, argued, Philadelphia, PA, Daniel L. Lindstrom, on the brief, Kearney, NE, for appellee/cross-appellant.

Before LOKEN, BEAM, and GRUENDER, Circuit Judges.

LOKEN, Circuit Judge.

KAAPA Ethanol (“KAAPA”) manages a facility in Kearney County, Nebraska that distills corn into ethanol, a biofuel additive for gasoline. The plant was insured against property damage by an “all-risk” insurance policy issued by Affiliated FM Insurance Company (“Affiliated”). Soon after KAAPA began production, the plant's ethanol production and storage tanks began to lean, their foundations began showing visible signs of distress, and their supporting concrete walls sunk into the ground. KAAPA commenced this diversity action after Affiliated denied KAAPA's claim to recover the cost of extensive repairs and business interruption losses. After a lengthy trial, the jury found that some losses were caused by “collapse” of the tanks, awarded KAAPA property damages of nearly $4 million, but denied its claim for business interruption losses. Both sides appeal raising various issues. Applying Nebraska law, we affirm the district court's denial of Affiliated's motion for judgment as a matter of law. But we conclude the court committed reversible error in instructing the jury on the meaning of the term “collapse” and remand for a new trial. We do not decide the loss-mitigation and other post-trial issues raised in KAAPA's cross-appeal.

I. Background

A. KAAPA's Losses. The KAAPA plant consisted of nine large, cylindrical, stainless steel tanks fabricated onsite: one 980,000–gallon “beerwell” tank, three 730,000–gallon “fermenter” tanks, and five “process-liquid” tanks. The base of each tank was bolted to a circular concrete “ring-wall” foundation. The tank floors rested directly on material that filled the ring walls' interior (the “infill”), which was graded to match the downward slope of the conical-shaped tank bottoms. The following diagram is a cross-section of a fermenter tank and its foundation:

Image 1 (3.79" X 5.03") Available for Offline Print At trial, several witnesses testified to extensive damage to the tanks that commenced soon after the plant began operations in late 2003. The beerwell and fermenter tanks experienced unusual movement and the structures began to shift in a way that “put them in jeopardy.” The plant manager noticed anchor bolts being “bent inward” and “pulled in,” which caused cracking and spalling of the concrete ring walls. Part of one tank slipped off its concrete base into the interior of the ring wall. A site survey reported that all four of the larger tanks were “out of plumb,” meaning they were no longer precisely vertical, and that the ring walls of each had sunk downward between 3.4 and 10.8 inches. By November 2004, KAAPA was notified that its beerwell tank was out of “API 650” tolerances and should be taken out of service immediately.

KAAPA retained a geotechnical engineer to investigate. He reported that an onsite “silty clay” had been used for the infill, instead of the “compacted granular fill” called for in engineering drawings. This onsite material was “inherently weak,” not a proper material for the contact pressures exerted by the tanks. In late 2004 and early 2005, KAAPA stabilized the sinking ring-wall foundations by injecting columns of grout around each tank's perimeter. This halted the sinking, but the “soils within the region of the ring wall were still undergoing distress.” Less than a year later, the plant manager noticed additional chipping and spalling of the ring walls supporting the beerwell and fermenter tanks, and a site survey reported one fermenter tank out of plumb. By late 2005, the five smaller process-liquid tanks were experiencing similar problems—bent anchor bolts and pulling off of the ring-wall foundations. The plant manager and KAAPA engineers were concerned that the tanks were no longer sitting on their ring walls and might tip over.

KAAPA retained Karges–Faulconbridge, Inc. (“KFI”) to address the problems. KFI implemented a comprehensive year-long plan to repair all nine tanks while the plant continued operations. Each tank being repaired was emptied and raised so that its weight was no longer bearing on the infill. The floor was then removed and a dirt ramp constructed to allow access to the surface of the infill. After the infill was removed and the underground drainage pipes and ring wall repaired, the infill was replaced with a “lean concrete mix.” The floor was replaced, the tank resealed, the stainless steel walls “pulled” into shape and replaced on the ring-wall foundation, and the anchor bolts straightened and reattached. The tank was then returned to service.

B. The Affiliated Policy. At all times in question, the KAAPA plant was covered by Affiliated's “all-risk” Standard Fire Insurance Policy. The policy covered “all risks of direct physical loss or damage to the insured property except as excluded under this policy.” The following exclusions are at issue in this case:

GROUP II. This policy does not insure against loss or damage caused by the following perils; however, if loss or damage not excluded results, then that resulting loss or damage is covered.

* * * * * *

2. Defects in materials, faulty workmanship, faulty construction or faulty design.

* * * * * *

7. Settling, cracking, shrinkage, bulging, or expansion of [foundations, walls, floors, roofs, or ceilings]. This exclusion will not apply to loss or damage resulting from collapse of: a building or structure; or material part of a building or structure.

We will refer to the “however” clause prefacing the Group II exclusions as the “ensuing-loss clause.” ¹ The second sentence of the settling exclusion is the only reference to “collapse” in the policy's coverage and exclusion provisions.

C. The Coverage Issues. After KAAPA notified Affiliated of ongoing losses in the fall of 2004, Affiliated concluded that “inappropriate materials (soil) were used in the foundation system” and denied coverage in January 2005, citing the faulty workmanship and settling exclusions. KAAPA submitted additional claims as more problems emerged and additional repairs were implemented in 2006–2007. When Affiliated again denied the claims, KAAPA filed this lawsuit, asserting claims for breach of the insurance contract and bad-faith. Prior to trial, the district court dismissed the bad faith claim. KAAPA does not appeal that ruling.

At the close of the evidence, the district court gave the following relevant final instructions to the jury:

14.... KAAPA has the burden of proving ... that its losses were the result of a fortuitous event or risk.

16. The insurance policy provides coverage for loss or damage caused by collapse. “Collapse” means substantial impairment of the structural integrity of a building or any part of a building. A structure or part of a structure does not need to fall down or be in imminent danger of falling down in order for it to have “collapsed,” nor do you need to find that the structure was either abandoned or taken out of use.

KAAPA has the burden of proving ... that some or all of its losses were caused by collapse.

If you find that some or all of KAAPA's losses were caused by ... collapse, you must return a verdict in favor of KAAPA....

17. [After quoting the faulty workmanship and settling exclusions], Affiliated has the burden of proving ... that some or all of KAAPA's losses were caused by one or more of these exclusions.

18. If you find that one or more of the exclusions relied upon by Affiliated FM apply to KAAPA's claim, you must then determine whether the insurance policy's “ensuing loss” provision applies to KAAPA's claim.

19. In determining whether an exclusion applies ... you must determine what was the efficient proximate cause of any loss or damage. The proximate cause to which the loss is to be attributed is the dominant cause, the efficient one that sets the other causes in operation....

If the efficient proximate cause is not covered ... there is no coverage unless an unexcluded loss results from damage caused by an excluded cause [an ensuing loss].

Affiliated objected only to the last sentence of the first paragraph of Instruction 16.

On the Verdict Form, the jury found that some of KAAPA's losses “were caused by an excluded peril,” that some of its losses “were caused by collapse,” and that no losses were covered under the ensuing-loss clause. The district court denied Affiliated's motion for judgment as a matter of law or a new trial, upheld the award of nearly $4 million damages for losses caused by collapse, substantially reduced the jury's award of mitigation expenses, awarded KAAPA reduced attorneys fees and expenses, and entered final judgment on the jury verdict as so modified.

II. Discussion

A. On appeal, Affiliated first argues that it is entitled to judgment as a matter of law because the efficient proximate cause of KAAPA's loss was an excluded peril, faulty workmanship. There was no evidence of additional damage “caused by” collapse, Affiliated asserts, and in any event the jury found no loss covered by the ensuing-loss clause. In other words, Affiliated argues that KAAPA's claim involved losses that were the effect of collapse caused by faulty workmanship, not losses caused by collapse. This argument requires analysis of the extent to which Affiliated's all-risk policy provided coverage for “collapse.”

Historically, fire insurance policies provided that coverage was extinguished by a building's collapse. With the advent of all-risk policies, insurers began adding specific provisions excluding collapse losses and then, in some...