McDowell-Wellman Engineering Co. v. Hartford Acc. and Indem. Co.

• Decision Date: 30 June 1983
• Docket Number: No. 82-1630,DOWELL-WELLMAN,82-1630
• Citation: 711 F.2d 521
• Parties: McENGINEERING COMPANY, Appellant, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY and Lexington Insurance Company and Rollins, Burdick and Hunter of Pennsylvania, Inc., Appellees.
• Court: U.S. Court of Appeals — Third Circuit

Page 521

711 F.2d 521

McDOWELL-WELLMAN ENGINEERING COMPANY, Appellant, v. HARTFORD ACCIDENT AND INDEMNITY COMPANY and Lexington Insurance Company and Rollins, Burdick and Hunter of Pennsylvania, Inc., Appellees.

No. 82-1630.

United States Court of Appeals Third Circuit.

Argued April 14, 1983.

Decided June 30, 1983.

John C. McNamara (argued), German, Gallagher & Murtagh, Philadelphia, Pa., for appellant.

Charles W. Craven (argued), Marshall, Dennehey, Warner, Coleman & Goggin, Philadelphia, Pa., for Lexington Ins. Co.

Mark D. Alspach (argued), Krusen Evans & Byrne, Philadelphia, Pa., for Hartford Acc. and Indem. Co.

Before HUNTER and WEIS, Circuit Judges, and GERRY, ^* District Judge.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge:

In April of 1974, Alan Wood Steel Company ("Alan Wood") filed suit against McDowell-Wellman Engineering Company ("McDowell") ¹ for damages allegedly arising from the collapse of an ore bridge constructed by McDowell at Alan Wood's Conshohocken, Pennsylvania steel-producing facility. In October of 1975, McDowell instituted this action against Hartford Accident and Indemnity Company ("Hartford") and Lexington Insurance Company ("Lexington") seeking a declaratory adjudication of coverage for Alan Wood's claims under two insurance policies issued to McDowell by Hartford and Lexington respectively. McDowell settled its case with Alan Wood for $600,000 and amended its complaint against Hartford and Lexington to seek recovery in that amount from the two insurance companies. Following a bench trial the district court issued a Memorandum and Order holding Hartford, the primary insurance carrier, liable for $9,240. It held Lexington, the excess insurance carrier, relieved of all liability. McDowell appeals the district court's ruling. We will affirm.

I

On September 15, 1971, Hartford issued to McDowell a comprehensive general liability insurance policy (the "Hartford policy"). That policy provided that Hartford would pay for any damages that McDowell became legally obligated to pay because of bodily injury or property damage covered by the policy and caused by an "occurrence." ² Coverage under the Hartford policy was limited to $500,000. Lexington had earlier issued an umbrella liability insurance policy (the "Lexington policy") to McDowell. The Lexington policy indemnified McDowell for ultimate net loss in excess of any coverage provided by McDowell's primary liability insurance policy. Coverage under the Lexington policy was limited to $100,000. It is not disputed by the parties that both the Hartford and the Lexington policies were in force at all times relevant to this litigation. The parties have agreed that if the Hartford policy provides coverage for Alan Wood's claims the Lexington policy provides coverage as well. See app. at 352a.

The dispute in this case involves an ore bridge originally built in 1957 by McDowell at Alan Wood's steel manufacturing plant. The ore bridge extended over a large pit in which raw materials used in the manufacture of steel were stored. The bridge consisted of a steel superstructure supported by legs attached to railroad cars which ran along either side of the pit. The railroad cars allowed the bridge to be moved up and down the length of the pit. Attached to the bottom of bridge was a movable crane which was used to pick up raw materials stored in the pit. The entire bridge could then be moved to the end of the pit where two blast furnaces were located, and the raw materials carried by the crane could be dumped into railroad cars which would take them into the furnaces.

On November 20, 1971, the ore bridge collapsed. In April of 1974, Alan Wood brought suit against McDowell in federal district court claiming damages arising from that collapse and from the subsequent repair and replacement of the bridge. Alan Wood itemized its damages as follows:

                Repair and replacement of
                  ore bridge                                                         $1,342,798
                Repair and replacement of
                  hydraulic building and trestle 3                                   35,678
                

3 The hydraulic building was a small building near the blast furnace that

                contained pumping equipment.  The trestle was the structure over which
                railroad cars were automatically fed into the blast furnace.  Both the
                hydraulic building and the trestle were physically damaged when the ore
                bridge collapsed
                Business interruption loss in
                  the nature of the incurrence
                  of additional costs to maintain
                  production and shipping levels
                  thereby detracting from taxable
                  income due to less product
                  contribution to profit 4                                          929,762
                4 Alan Wood broke down its claim for business interruption loss as follows
                1) the cost of renting front-end loaders and bulldozers to move the iron from
                ore stock piles to the blast furnaces, $840,720; 2) the cost of storing iron
                ore at rented facilities, $36,705; 3) the cost of screening iron ore before
                its introduction into the blast furnaces, $56,000; 4) the cost of replacing
                sinter with iron ore pellets, $24,460; 5) the cost of employing extra train
                crews, $40,819; 6) the cost of a study relating to the collapse of the
                bridge, $47,389; and 7) other miscellaneous costs, $23,261.  See app. at 125a,
                159a.  From those costs Alan Wood subtracted $139,992 in cost savings for
                non-operation of the ore bridge, leaving a net damage figure of $929,762.  See
                app. at 125a"26a.
                                                                -------------------------------
                                                                                     $2,308,238
                

³, ⁴

NOTE: OPINION CONTAINS TABLE OR OTHER DATA THAT IS NOT VIEWABLE

App. at 123a-24a. McDowell timely notified Hartford of the Alan Wood complaint, and Hartford agreed to defend the action while expressly reserving its right to assert certain policy exclusions. Hartford suggested that McDowell retain its own counsel to protect the uncovered aspects of Alan Wood's claims.

On October 7, 1975, McDowell filed this diversity action against Hartford seeking a declaratory judgment that the Hartford policy covered the damages claimed by Alan Wood in its suit against McDowell. On November 24, 1976, McDowell filed an amended complaint adding Lexington as a defendant seeking the same relief under the Lexington policy.

In October of 1977, Alan Wood indicated a willingness to settle its claims against McDowell. McDowell made demand upon both insurers to pay their policy limit toward the proposed settlement, but both companies refused. Alan Wood and McDowell then entered into a settlement agreement under which McDowell agreed to pay Alan Wood $600,000 in complete settlement of Alan Wood's claims. That agreement did not allocate monies to any specific damages claimed by Alan Wood. McDowell then filed a second amended complaint against Hartford and Lexington in which McDowell sought to recover the $600,000 it had paid to Alan Wood plus interest and attorneys' fees.

The parties agreed to submit the case to the district court on proposed findings of fact and conclusions of law with McDowell reserving the right to call one witness. In the stipulation of uncontested facts, ⁵ McDowell conceded that under exclusion (1) of the Hartford policy, there was no coverage for the costs of repair and replacement of the ore bridge. App. at 124a. For its part Hartford admitted coverage for the $35,768 claimed by Alan Wood for repair and replacement of the hydraulic building and the trestle. Id. Hartford claimed, however, and the district court agreed, that that amount should be prorated to $9,240 based upon the percentage of the entire claim actually covered by the policy. App. at 361a-62a. ⁶ As to the $929,726 claimed by Alan Wood as business interruption loss, the district court held that that claim actually represented lost profits and revenues arising from the loss of use of the ore bridge and thus was not covered by Hartford's policy. App. at 358a-61a. Accordingly the district court held that McDowell was entitled to recover a total of $9,240 from its primary insurance carrier Hartford. Because that amount was less than the policy limit of the Hartford policy, the district court held that Lexington, as the excess insurance carrier, was not liable for any damages.

II

Initially we note that as a federal court sitting in diversity we must apply state law to determine the scope of coverage under the Hartford policy. See Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Safeco Insurance Co. v. Wetherill, 622 F.2d 685, 687 (3d Cir.1980). Applying Pennsylvania choice of law rules, see Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), the district court held that Ohio law should be applied in this case. App. at 357a. Neither party disputes that determination. Under Ohio law "[a] contract of insurance prepared and phrased by the insurer is to be construed liberally in favor of the insured and strictly against the insurer, where the meaning of the language is doubtful, uncertain, or ambiguous." Moorman v. Prudential Insurance Co., 4 Ohio St.3d 20, 22, 445 N.E.2d 1122, 1124 (1983) (emphasis in original) (quoting Munchick v. Fidelity & Casualty Co., 2 Ohio St.2d 303, 305, 209 N.E.2d 167, 169 (1965)); accord Gomolka v. State Automobile Mutual Insurance Co., 70 Ohio St.2d 166, 168, 436 N.E.2d 1347, 1348 (1982). In addition, "[w]here exceptions, qualifications or exemptions are introduced into an insurance contract, a general presumption arises to the effect that that which is not clearly excluded from the operation of such contract is included in the operation thereof." Moorman, 4 Ohio St.2d at 22, 445 N.E.2d at 1124; Home Indemnity Co. v. Village of Plymouth, 146 Ohio St. 96, 101, 64 N.E.2d 248, 250 (1945). Determination of the proper coverage of an insurance contract when the facts are undisputed is a question of law. See Gomolka, 70 Ohio St.2d at 167,...