Texas Eastern Transmission Corp. v. Marine Office-Appleton & Cox Corp.

• Decision Date: 23 June 1978
• Docket Number: OFFICE-APPLETON,No. 76-1885,76-1885
• Parties: 3 Fed. R. Evid. Serv. 27 TEXAS EASTERN TRANSMISSION CORPORATION, Plaintiff-Appellee, v. MARINE& COX CORPORATION, Defendant, and Kansas City Fire & Marine Insurance Company, Defendant-Appellant, Fenix & Scisson, Inc., Intervenor-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 561

579 F.2d 561

3 Fed. R. Evid. Serv. 27

TEXAS EASTERN TRANSMISSION CORPORATION, Plaintiff-Appellee, v. MARINE OFFICE-APPLETON & COX CORPORATION, Defendant, and Kansas City Fire & Marine Insurance Company, Defendant-Appellant, Fenix & Scisson, Inc., Intervenor-Appellee.

No. 76-1885.

United States Court of Appeals, Tenth Circuit.

June 23, 1978.

Rehearing Denied Aug. 4, 1978.

Ronald R. Hudson, Oklahoma City, Okl. (Page Dobson, Oklahoma City, Okl., William C. McAlister, E. D. Hieronymus, John H. Tucker, Tulsa, Okl., with him on brief), of Rhodes, Hieronymus, Holloway & Wilson, Oklahoma City, Okl., and Tulsa, Okl., for defendant-appellant.

Burton J. Johnson of Looney, Nichols, Johnson & Hayes, Oklahoma City, Okl., Paul E. Stallings, Houston, Tex. (Eleanor Swift Glass, Houston, Tex., with him on brief), of Vinson & Elkins, Houston, Tex., for plaintiff-appellee Texas Eastern Transmission Corp.

T. Hillis Eskridge, Tulsa, Okl. (David B. McKinney, Tulsa, Okl., with him on brief), of Boesche, McDermott & Eskridge, Tulsa, Okl., for intervenor-appellee Fenix & Scisson, Inc.

Before SETH, Chief Judge, and LEWIS and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

This is a diversity case involving coverage under an insurance contract in a dispute between the insureds, Texas Eastern Transmission Corporation (Texas Eastern or plaintiff) and Fenix & Scisson, Inc. (Fenix & Scisson or intervenor) on the one hand and Kansas City Fire & Marine Insurance Company (Kansas City Fire & Marine or defendant), the insuror. Damages were stipulated, and the issue of liability under the policy was tried to a jury which found for Texas Eastern and Fenix & Scisson against Kansas City Fire & Marine, which has appealed to this Court.

A considerable amount is in controversy, as the judgments totalled $1,655,425.69. Issues on appeal include questions of interpretation of the insurance contract, burden of proof, jury instructions, allegedly prejudicial evidence, counsel's argument to the jury, venue, and whether post-judgment interest was improperly awarded on prejudgment interest.

Briefly the action involves the collapse of an underground storage cavern being constructed to hold approximately 200,000 barrels of liquified petroleum gas, at a time when construction was about 97% Completed. The cavern was being built near Lick Creek, Illinois, by Fenix & Scisson for Texas Eastern. The parties had acquired an "all risks" insurance policy from Kansas City Fire & Marine. The policy defines the property covered as:

LPG underground cavern consisting of shaft and mined cavern and all labor and completed work or work in progress, including any and all materials, equipment, machinery and appurtenances in which the Insured has an interest or for which the Insured may be liable or assumed liability prior to loss or damage, to be used in or incidental to the installation or completion of: 200,000 barrel cavern at Texas Eastern Transmission Corporation's Terminal near Lick Creek, Illinois.

Under the heading "perils insured" it states:

This policy insures against all risks of direct physical loss of or damage to the property covered, except as provided elsewhere in this policy.

Under the heading "perils not insured," as relevant here, it provides:

This policy does not insure against:

1. Loss, damage or expense caused by or resulting from error, omission, or deficiency in design, specifications, workmanship, or materials . . .

7. Loss, damage or expense caused by or resulting from dryness or dampness of atmosphere; . . .

The cavern collapsed in the middle of the night, at a time when no one was in it and the only persons known to be on the job site were two night security guards at the surface. There was no obvious earthquake, explosive sound or other unusual phenomenon except popping and cracking of the tin shaft construction building and settling of the earth. After the collapse it was impossible to enter the cavern, and the shafts were so full of rock that not even a TV camera could be lowered to a point where it could provide a meaningful look at the damage.

When plaintiff and intervenor sought payment under the insurance policy they merely listed the origin and cause of the loss as "collapse" of the cavern. The defendant refused to pay in a letter asserting "there is no indication that this loss was caused by a fortuitous occurrence but on the contrary the indications up to this point are that the loss falls within the exclusions set out in the policy."

At trial plaintiff and intervenor showed that Fenix & Scisson was the pioneer in the construction of LPG underground storage caverns, having built approximately 70 of them, about 90% Of all such facilities in the noncommunist countries of the world. This was the fourteenth cavern it had constructed for Texas Eastern.

They presented evidence that a feasibility study and plans and specifications had been prepared and presented to Kansas City Fire & Marine at the time of application for the insurance policy, prior to commencement of construction. This was the 11th successive cavern Fenix & Scisson had insured with Kansas City Fire & Marine under similar policies. No objections to the plans were made by the insuror, and no inspections or complaints were made during construction prior to the collapse.

Evidence at the trial by plaintiff and intervenor was to the effect that the design of the Lick Creek cavern was similar to that of 31 caverns previously built in shale by Fenix & Scisson which were completed and placed in operation without any problems. Much evidence was introduced as to the room and pillar method of construction used here and in the other caverns, and testimony was presented by various witnesses, some qualified as experts, to the effect that this was by all appearances a good cavern which should not have collapsed. Some of the witnesses had made inspections within a few days of the collapse. One exhibit was a drawing containing dimensions of spaces and pillars made from a survey completed less than ten days prior to the collapse. Various theories were advanced by different witnesses, but they did not agree as to the probable cause of the collapse.

Defendant's evidence concentrated generally upon showing that the cavern was in poor condition throughout much of the construction period, with water present, and much slabbing and sluffing off of the pillars. Its evidence tended to show pillar failure as the cause of the cave-in, with the pillars too small to support the weight of the overburden. It also presented testimony that an earthquake, even if one occurred, would be unlikely to cause the collapse, and that sabotage was virtually impossible as a potential cause of the loss.

I

The most important issue here is the proper interpretation of the insurance policy in the context of the facts of this case. The policy is admitted to be "all risks," a standard type of insurance of increasing popularity.

A policy of insurance insuring against "all risks" is to be considered as creating a special type of insurance extending to risks not usually contemplated, and recovery under the policy will generally be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding the loss from coverage. No case has been found denying the above proposition, . . . (footnotes omitted).

Annot., 88 A.L.R.2d 1122, 1125 (1963).

The general rule, in accordance with the trial court's instructions to the jury in the instant case, is that the burden is upon the insured to prove that a loss occurred and that it was due to some fortuitous event or circumstance. See British and Foreign Marine Ins. Co., Ltd., v. Gaunt, (1921)2 A.C. 41; Atlantic Lines Ltd. v. American Motorists Ins. Co., 547 F.2d 11 (2d Cir. 1976). Then the burden shifts to the defendant to show that the loss was one excluded by some language set out in the policy.

The Restatement of Contracts § 291, comment a (1932) defines fortuitous event in terms of the parties' expectations:

A fortuitous event . . . is an event which so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, as the loss of a vessel, provided that the fact is unknown to the parties.

Acknowledging as authority such cases as British and Foreign Marine Ins. Co., Ltd., which hold that the insured need not prove the cause of loss, defendant here asserts that as a practical matter proof of cause of the loss is necessary in order to establish that the loss was by a fortuity. Defendant's theory is that the collapse was caused by a deficiency in the design of the underground cavern, that the evidence supports only that conclusion, but that the insured parties also must lose because they failed to establish an "external" cause of the collapse.

Defendant's contentions are similar to those made in Plaza Equities Corp. v. Aetna Casualty and Surety Co., 372 F.Supp. 1325 (S.D.N.Y.1974) where a 7,000 pound sculpture was attached to the roof of a shopping center, without supporting columns being added to the roof. The loss was found to be within the deficiency in design exclusion when the sculpture fell through the roof because the underlying structures would not support it.

The problem in the context of this case is that it is difficult to see what risks the insurance company was insuring against if the defendant's position is upheld. Its own expert testified that most earthquakes would not cause the cavern to collapse if it was properly constructed, and that it would be very difficult for saboteurs to set charges which would make a pillar collapse. No danger of fire, windstorm or the like would exist in this underground cavern.

Fenix & Scisson is the principal contractor in the entire...