National Fire Ins. Co. of Pittsburgh, Pa. v. Valero Energy Corp., 13-88-217-CV

• Decision Date: 31 August 1989
• Docket Number: No. 13-88-217-CV,13-88-217-CV
• Citation: 777 S.W.2d 501
• Parties: NATIONAL FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Appellant, v. VALERO ENERGY CORPORATION and Saber Energy, Inc., Appellees.
• Court: Texas Court of Appeals

Page 501

777 S.W.2d 501

NATIONAL FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA, Appellant, v. VALERO ENERGY CORPORATION and Saber Energy, Inc., Appellees.

No. 13-88-217-CV.

Court of Appeals of Texas Corpus Christi.

Aug. 31, 1989.

Rehearings Denied Oct. 5, 1989.

B. Mills Latham, Latham & Moss, Corpus Christi, W. James Kronzer, Houston, Michael R. Knox, Knox, Beadles & Johnston, R.B. Cousins, Thompson, Coe, Cousins & Irons, Dallas, for appellant.

Van Huseman, Bryan Powers, Paul Dodson, White, Huseman, Pletcher & Powers, Corpus Christi, William W. Kilgarlin, Powell, Popp & Ikard, Austin, for appellees.

Before BENAVIDES, UTTER and DORSEY, JJ.

OPINION

BENAVIDES, Justice.

Valero Energy Corporation and Saber Energy, Inc. (Valero), sued National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union), for failing to provide coverage under an insurance policy National Union issued to Valero insuring against property damage during a refinery expansion project. Valero sought to recover compensatory damages under the policy and exemplary damages for National Union's alleged breach of its duty of good faith and fair dealing, claiming that National Union demonstrated a conscious indifference to Valero's rights in denying liability. The case was tried to a jury, which found a covered and payable loss of $10,000,000, found that National Union denied Valero's claim without reasonable basis, and assessed exemplary damages at $15,000,000. Based on the jury's answers, judgment was rendered for Valero for $27,965,291.79, plus post-judgment interest and costs of court. National Union appeals by nineteen points of error.

The insurance agreement, known as an all-risk or builder's risk policy, insured generally, subject to certain named exclusions, against all occurrences causing physical loss or damage to property used in the expansion project during the expected construction period from December 15, 1981 to July 1, 1983, including any resulting loss of gross earnings.

The facts at trial were essentially undisputed. The expansion project added a Heavy Oil Cracker (HOC) to Valero's refinery in order to process high sulfur content crude oil. The project included the construction of several different processing units, including: the desalter; the hydrodesulfurization reactor unit; the dimersol unit; the alkylation unit; the heavy oil cracker itself; the citrate scrubber; the power recovery unit; and the expander. For purposes of the present case, the only unit and process of any significance is the citrate scrubber. Flue gas, a product of the refining process, passes into the citrate scrubber through a steel transition piece. Once in the citrate scrubber, the gas is sprayed with a mist which causes a portion of the gas to form acid. Panels of material called "demisters" create several chambers within the citrate scrubber to separate the liquid from the gas which is then discharged through the smokestack.

When Valero first attempted to put the citrate scrubber into operation during the testing phase of the project in the summer of 1983, it sustained substantial damages as a result of faulty design. The designing engineers failed to anticipate the environment and forces to which the components of the citrate scrubber would be exposed, used inadequate materials, and failed to properly channel the flue gas as it passed through the citrate scrubber. These design errors caused corrosion to occur when the improper flow allowed acid to back up into the transition piece, which was itself made of inadequate carbon steel. The corrosion left holes in the transition piece that allowed the flue gas and acid to escape. The faulty design also caused corrosion and physical damage to the demisters, which could not stand the force of the flow because they were made of inadequate plastic material, pieces of which broke off and blew out the smokestack. As a consequence of these defects and the resulting damage, Valero had to shut down the refinery several times between June 1983 and May 1984, in order to make repairs and alterations, and to replace the carbon steel transition piece and plastic demisters with an A20 steel transition piece and stainless steel demisters, which were substantial enough to withstand the environment within the unit.

National Union's first five points of error complain of no evidence and improper submission to the jury of questions concerning Valero's right to recover for the loss.

By its fourth point of error, National Union complains specifically that there was no evidence in the record that the loss inquired about did not come within the exclusionary provisions 6(h) and 6(j) of the policy.

When the insurance company denies coverage based on an exclusion in the policy, it becomes the insured's burden to show that the exclusion does not apply. Travelers Indemnity Co. v. McKillip, 469 S.W.2d 160, 163 (Tex.1971); Sherman v. Provident American Insurance Co., 421 S.W.2d 652, 654 (Tex.1967); Brooks v. Blue Ridge Insurance Co., 677 S.W.2d 646, 651 (Tex.App.--Amarillo 1984, writ ref'd n.r.e.).

In the present case, National Union denied coverage based on the following exclusions in Clause 6 of the policy:

(h) loss or damage caused by rust, corrosion, frost or freezing unless resulting from a peril insured against; ...

(j) cost of making good faulty workmanship, materials, construction or design, but this exclusion shall not be deemed to exclude physical loss or damage arising as a consequence of faulty workmanship, material, construction or design; ....

National Union contends that under 6(h) all the damages occurring to the citrate scrubber were excluded from coverage as having been caused by rust or corrosion of the transition piece and demisters. The evidence is clear that corrosion was the immediate cause of damages to the unit, but that the corrosion itself was the result of faulty design. Generally, if loss occurs as a result of two concurring perils, one insured and one not, then the loss is covered only to the extent it can be traced to the covered peril. McKillip, 469 S.W.2d at 162; Auten v. Employers National Insurance Co., 722 S.W.2d 468, 470 (Tex.App.--Dallas 1986, writ denied); Cox v. Queen Insurance Co. of America, 370 S.W.2d 206 (Tex.Civ.App.--San Antonio 1963, writ ref'd n.r.e.). In Auten, for instance, where an all-risks homeowner's policy contained a simple blanket exclusion for losses due to contamination, the court refused to trace the chain of causation back to third-party negligence as a non-excluded origin. Auten, 722 S.W.2d at 471.

However, there is coverage when the exclusion is qualified by the terms of the policy to allow recovery where the otherwise excluded peril is itself caused by a covered peril. Adrian Associates, General Contractors v. National Surety Corp., 638 S.W.2d 138, 141 (Tex.App.--Dallas 1982, writ ref'd n.r.e.); see also Allstate Insurance Co. v. Smith, 450 S.W.2d 957 (Tex.Civ.App.--Waco 1970, no writ); Employers Casualty Co. v. Holm, 393 S.W.2d 363, 366 (Tex.Civ.App.--Houston 1965, no writ). In Adrian the policy excluded losses due to settling of the foundation, unless resulting from a peril not excluded. Due to the rupture of an underground water main, water accumulated under the insured's foundation and caused a void between the slab and the soil, which in turn caused the foundation to settle. The Court held that damages due to the settling were nevertheless covered as resulting from a peril not excluded under the policy. Adrian, 638 S.W.2d at 141.

In the present case, the exclusion for rust damage was qualified by an exception for damage resulting from a peril insured against. The evidence is uncontroverted that sudden and unexpected corrosion occurred as a result of a faulty design, rather than by the gradual natural deterioration causing ordinary rust. Since faulty design is a peril insured against under the policy, the corrosion damage involved here falls within the coverage of the policy. Therefore, to the extent that losses resulting from faulty design are covered by the policy and not excluded under 6(j), they are covered under the exception to the 6(h) rust exclusion.

The question remains whether clause 6(j) excluded from coverage the cost associated with the repair and replacement of the defective and damaged components of the unit. Clause 6(j) provides that the cost of "making good" faulty design is excluded, but further provides an exception to the exclusion for physical damages "arising as a consequence of" faulty design. The loss in the present case can be characterized in either or both ways: the use of an inadequate transition piece and demisters required Valero to replace them in order to "make good" the faulty design; however, as a consequence of the faulty design and the inadequacy of the components there was also physical damage to the transition piece and demisters which necessitated their replacement.

The court must adopt the construction of an exclusionary clause which favors the insured as long as that construction is not unreasonable. Blaylock v. American Guarantee Bank Liability Insurance Co., 632 S.W.2d 719, 721 (Tex.1982); Glover v. National Insurance Underwriters, 545 S.W.2d 755, 761 (Tex.1977). In the present case then, characterizing the loss sustained as a consequence of the faulty design brings it within the exception to the exclusion and thus within the coverage of the policy. Appellant's fourth point of error is overruled.

By its first point of error, National Union complains that the trial court erred in submitting Special Issue 1 to the jury for the reason that it constitutes an improper submission of a question of law. Special Issue 1 asked the jury: "Did a loss occur which was covered and payable under the policy?" The jury answered affirmatively. Special Issue 2 asked the jury: "What was the amount of such loss, if any, payable under the policy?" The jury answered $10,000,000. National Union contends...