Metric/Kvaerner Fayetteville v. Federal Ins.

• Decision Date: 11 April 2005
• Docket Number: No. 04-1101.,04-1101.
• Citation: 403 F.3d 188
• Parties: METRIC/KVAERNER FAYETTEVILLE, a joint venture of Metric Constructors, Inc. and Kvaerner EnviroPower, Inc., Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

403 F.3d 188

METRIC/KVAERNER FAYETTEVILLE, a joint venture of Metric Constructors, Inc. and Kvaerner EnviroPower, Inc., Plaintiff-Appellant, v. FEDERAL INSURANCE COMPANY, Defendant-Appellee.

No. 04-1101.

United States Court of Appeals, Fourth Circuit.

Argued: October 27, 2004.

Decided: April 11, 2005.

ARGUED: David Glenn Hymer, Bradley, Arant, Rose & White, L.L.P., Birmingham, Alabama, for Appellant. Thomas McKay, Cozen O'Connor, Cherry Hill, New Jersey, for Appellee. ON BRIEF: Scott B. Smith, Bradley, Arant, Rose & White, L.L.P., Birmingham, Alabama; H Gerald Beaver, Beaver, Holt, Richardson, Sternlicht, Burge & Glazier, Fayetteville, North Carolina, for Appellant. Elizabeth Chambers Bailey, Cozen O'Connor, Cherry Hill, New Jersey; Anna Daly, Cozen O'Connor, Charlotte, North Carolina, for Appellee.

Before LUTTIG, KING, and SHEDD, Circuit Judges.

Vacated and remanded by published opinion. Judge KING wrote the majority opinion. Judge SHEDD wrote a concurring opinion. Judge LUTTIG wrote a dissenting opinion.

KING, Circuit Judge:

Metric/Kvaerner Fayetteville ("M/K") appeals the district court's awards of summary judgment to Federal Insurance Company ("Federal") in this insurance dispute. In June 1999, M/K initiated this proceeding against Federal in the Superior Court of Cumberland County, North Carolina, seeking to recover on two claims it had made under insurance policies issued by Federal. Federal removed the case to the Eastern District of North Carolina on the basis of diversity of citizenship, and the district court granted summary judgment in its favor, ruling that M/K's claims were barred because it had failed to comply with policy conditions requiring timely notice of loss. Metric/Kvaerner Fayetteville v. Fed. Ins. Co., No. 5:99-CV-448-BR(3) (E.D.N.C. Dec. 11, 2003) (the "Opinion"). On appeal, M/K contends that summary judgment was inappropriate and that genuine issues of material fact are presented. As explained below, we agree with M/K, and we vacate and remand.

I.

A.

In April 1992, BCH Energy Limited Partnership ("BCH") entered into a contract with the contiguous North Carolina counties of Bladen, Cumberland, and Hoke, for the design, construction, and operation of a waste-to-energy project that would generate electricity by processing municipal waste into fuel (the "Project").¹ M/K, a joint venture composed of Metric Constructors, Inc., and Kvaerner Environmental Technologies, Inc., submitted a proposal to BCH for the design and construction of the Project.

In April 1993, M/K entered into a "Turnkey Design and Construction Agreement" with BCH, under which M/K agreed to be the construction contractor on the Project in exchange for a fee of at least $58 million (the "Project Agreement"). The Project Agreement provided, inter alia, that M/K would design and build two separate facilities for the Project, pursuant to BCH's overall design specifications: a municipal refuse recycling facility near Fayetteville in Cumberland County (the "Recycling Facility"), and an energy generating facility approximately eighteen miles away in Bladen County (the "Energy Facility") (collectively, the "Facilities"). The concept underlying the Project was that raw municipal waste collected in the three counties would be processed at the Recycling Facility and then compacted, baled, and transferred to the Energy Facility. At the Energy Facility, the baled municipal waste would be processed further and then used to fuel boilers that would in turn power turbine generators. The goal of the Project was to sell electricity generated at the Energy Facility to the Carolina Power & Light utility company, and to sell steam produced by that Facility's boilers to a nearby DuPont chemical plant.

Federal, an affiliate of the Chubb Group of Insurance Companies, issued the insurance policies underlying this dispute. First, Federal issued a policy entitled "Energy Industries Project Under Construction Insurance," providing up to $59 million in coverage to its insureds against physical "loss or damage," caused by a "Covered Cause of Loss" during the construction of the Facilities (the "Builder's Risk Policy"). The Builder's Risk Policy was initially effective from November 17, 1993, to December 17, 1995, and it was renewed through at least July 17, 1996.

Second, Federal issued a policy entitled "Energy Industries Property Insurance and Property Business Income Insurance," providing up to $21.3 million in coverage to its insureds for losses suffered to buildings, personal property, and business income during suspensions of the Recycling Facility's operations caused by "direct physical loss or damage" to the facilities by a "Covered Cause of Loss" (the "Operations Policy").² The Operations Policy was initially effective from June 23, 1995, to November 17, 1995, and it was renewed through at least February 15, 1997.

The Builder's Risk and Operations Policies (collectively, the "Policies") both identified BCH as the primary insured and M/K as an additional named insured.³ Significantly, at the outset of its involvement in the Project, M/K knew only of the Builder's Risk Policy and of its status as an additional insured thereunder. M/K did not know until November 1998 of the existence of the Operations Policy, or that it was named as an additional insured thereunder.

The relevant terms of the Policies, as focused upon by the parties and the district court, are substantially the same. They each specify certain "Conditions" to be complied with by the insureds concerning, inter alia, notices of loss or damage, proofs of loss for use in the settlement of claims, and legal actions, as follows:

3. In the event of loss or damage under this insurance [policy], you [insured] must:

...

b. As soon as possible, notify us [Federal] of the loss or damage. Give us a description of the PROPERTY involved and details as to how, when and where the loss or damage occurred.

...

g. File with us, or with our authorized representative, sworn proof of loss containing the information we request to settle the claim. You must do this within 60 days after the date of the loss.

...

10. No one may bring a legal action against us under this policy unless:

a. There has been full compliance with all the terms of this policy....

J.A. 758-60 (Builder's Risk Policy) (emphasis added); see also J.A. 1499-1501 (Operations Policy) (same).

B.

1.

M/K commenced construction on the Project in approximately November 1993. The Recycling Facility was completed in the fall of 1995, and the Energy Facility was finished in February 1996. During late 1995 and early 1996, problems arose with the equipment at the Energy Facility because personnel at the Recycling Facility had improperly operated that Facility's equipment, including its trommels, magnet, and eddy current separator. As a result, the Recycling Facility produced baled municipal waste containing excessive amounts of unacceptable waste materials, such as metal, aluminum, glass, grit, and moisture, which was delivered to the Energy Facility ("Unacceptable Waste").⁴ The Unacceptable Waste caused the formation of a sticky, abrasive substance that jammed the Energy Facility's conveyors, plugged its boiler nozzles, and damaged its fuel-handling system and its boiler tubes. The damages resulting to the Energy Facility, in turn, adversely impacted the performance of the Recycling Facility — in that the Energy Facility was unable to use the baled municipal waste from the Recycling Facility — resulting in a suspension of the Recycling Facility's operations.

These problems caused a substantial loss of revenue and business income to BCH and M/K between November 1995 and December 1996. During that period, BCH insisted to M/K that the losses and damages suffered at the Energy Facility had resulted from M/K's improper implementation of BCH's design criteria for the Recycling Facility. M/K reluctantly concurred in this analysis, under which the coverage provisions of the Builder's Risk Policy would not have been implicated because the Policy excluded from coverage any loss or damage resulting from a design flaw.

2.

During the period of the Project's construction and its early operations, Federal's representatives were regularly present at the Facilities, and Federal was aware of the problems the Facilities were experiencing as those problems were occurring. Between May 1995 and November 1996, a Federal Loss Control Consultant, Bret Martin, inspected the Facilities on at least seven occasions. During those visits, he discussed the Project with the M/K personnel responsible for overseeing it, as well as with other Federal personnel responsible for the Project's insurance coverage. According to Martin, the purpose of inspecting such a project is to verify that the risks associated with the project satisfy Federal's minimum underwriting standards for fire protection, life safety, and disaster recovery, and to assist the insured in meeting those standards. On January 26, 1996, during one of his visits to the Facilities, Martin discussed with Garry Haynes, a senior boiler machinery inspector with Federal, the problems M/K was experiencing with the Energy Facility's boilers and its fuel-handling and conveyor systems. During another such visit by Martin, Everette Compton, M/K's Project Safety Director, advised Martin that portions of the Energy Facility's conveyor system were wearing out more rapidly than M/K had expected. By late January 1996, Martin concluded that the problems associated with the Energy Facility's fuel-handling and conveyor systems resulted directly from BCH's improper design specifications for the conveyor system. Because design flaws were excluded from coverage under the Policies, Federal did nothing on the basis of the knowledge acquired by Martin and his colleagues.

In the fall of 1995, under the threat that BCH would seek damages from M/K because of the problems being encountered at the Facilities, and due...