Vermont Elec. Power v. Hartford Steam Boiler Insp.

• Decision Date: 22 October 1999
• Docket Number: No. 2:98-CV-356.,2:98-CV-356.
• Citation: 72 F.Supp.2d 441
• Court: U.S. District Court — District of Vermont
• Parties: VERMONT ELECTRIC POWER COMPANY, INC., Plaintiff, v. The HARTFORD STEAM BOILER INSPECTION AND INSURANCE CO., Defendant, Continental Insurance Co., Defendant.

72 F.Supp.2d 441

VERMONT ELECTRIC POWER COMPANY, INC., Plaintiff, v. The HARTFORD STEAM BOILER INSPECTION AND INSURANCE CO., Defendant Continental Insurance Co., Defendant.

No. 2:98-CV-356.

United States District Court, D. Vermont.

October 22, 1999.

COPYRIGHT MATERIAL OMITTED

Bruce Calvert Palmer, Downs, Rachlin & Martin, St. Johnsbury, VT, for Vermont Electric Power Company, Inc., plaintiff.

Daniel L Burchard, McCormick, Fitzpatrick, Kasper & Burchard, Burlington, VT, Ernest J. Mattei, Day, Berry & Howard, Hartford, CT, for The Hartford Steam Boiler Inspection and Insurance Co., defendant.

OPINION AND ORDER

SESSIONS, District Judge.

This is a lawsuit brought by Plaintiff Vermont Electric and Power Company ("VELCO") against The Hartford Steam Boiler Inspection and Insurance Company ("Hartford") and Continental Insurance Company ("Continental") for breach of insurance contract. VELCO argues that the breach occurred when Defendants failed to reimburse VELCO for the cost of repair of three damaged transformers. Both Defendants moved for Summary Judgment. Plaintiff VELCO filed a cross-motion for partial Summary Judgment on liability. For the reasons that follow, Continental's motion for summary judgment is GRANTED, Hartford's motion for Summary Judgment is DENIED, and VELCO's cross-motion for Partial Summary Judgment on liability is DENIED.

Factual Background

For purposes of these motions, the following facts are assumed to be true. VELCO uses a Highgate Converter Station which has three transformers of identical design. Two of these transformers operate together and one serves as a back up. The transformers were installed in August of 1985. The first transformer stopped working on August 15, 1996, due to a short circuit problem caused by overheating. In April 1997, after the return of the first transformer, VELCO sent the second transformer for inspection and repair, and it was found to have identical problems to the first. The same was done with the third (spare) transformer in October of 1997. These problems were found to have been progressively caused by continuous damage, which were allegedly the consequence of defective design.

VELCO was covered by Allendale Mutual Insurance Company ("Allendale") under an all-risk policy when the losses were discovered in 1996 and 1997. Although the total loss suffered was $3,367,371, VELCO settled with Allendale for $2,384,769. VELCO seeks to recover the difference from previous carriers Hartford and Continental. Hartford insured VELCO from August 1990 through October 1993, and Continental supplied coverage from August 1988 through August 1990.

VELCO's asserts that its experts have concluded that the damage began at the time of installation in 1985 and was progressive and continuous throughout the periods of coverage by Hartford and Continental. Hartford and Continental refute this assertion, and, if their Summary Judgment motions are denied, seek additional discovery to pursue questions of cause and timing of the damage.

Discussion

Summary Judgment is appropriate when there is no genuine issue as to any material fact, and the moving party is entitled to a judgment as a matter of law. Fed. R.Civ.P. 56(c); Alexander & Alexander Services, Inc. v. These Certain Underwriters at Lloyd's, London, England, 136 F.3d 82, 86 (2d Cir.1998) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). The movant bears the burden of showing that no genuine issue of material fact exists. Gallo v. Prudential Residential Servs., 22 F.3d 1219, 1223 (2d. Cir.1994) (citing Heyman v. Commerce & Indus. Ins. Co., 524 F.2d 1317, 1320 (2d Cir.1975)). All ambiguities must be resolved and all inferences from the facts drawn in favor of the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In sum, "[t]he court must draw all reasonable inference in favor of the non-moving party and only grant summary judgment for the moving party if no reasonable trier of fact could find in favor of the non-moving party." Vermont Gas Systems, Inc. v. United States Fid. & Guar. Co., 805 F.Supp. 227, 231 (D.Vt.1992) citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Although the complaint has not specified the grounds for jurisdiction, the Court assumes that jurisdiction of this matter is based on diversity, 28 U.S.C. § 1332(a)(1). The Court applies Vermont law to the substantive issues. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

I. Continental's Motion for Summary Judgment

Continental contends that it is immune from liability on three separate grounds. First, they claim that during the time of coverage, VELCO did not suffer a "loss." Second, they claim that Plaintiffs failed to bring suit within the two year limitation period. Third, Continental argues that even if the loss had occurred during the policy period, the type of loss Plaintiffs allege was specifically excluded from coverage in the policy language. In light of exclusionary language of the policy, the Court need not address the first two issues.

"The cardinal principle for the construction and interpretation of insurance contracts — as with all contracts — is that the intentions of the parties should control." Newmont Mines Ltd. and Esso Resources Canada Ltd. v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir.1986). However, ambiguous policy language often makes this a difficult task. The determination of whether language is ambiguous is a question of law resolved "by reference to the contract alone." See O'Neil v. Retirement Plan for Salaried Employees of RKO Gen., Inc., 37 F.3d 55, 59 (2d Cir. 1994), citing Burger King Corp. v. Horn & Hardart Co., 893 F.2d 525, 527 (2d Cir. 1990). Language is ambiguous when "it is `capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement.'" O'Neil at 59, citing Care Travel Co. v. Pan Am. World Airways, 944 F.2d 983, 988 (2d Cir.1991). When it is impossible to determine the exact meaning of an ambiguous provision, the Court should employ the rule of contra proferentum, which construes the ambiguity against the drafter of the insurance policy. "It is a general rule of construction in Vermont that a doubtful provision in a written instrument is construed against the party responsible for drafting it." Trustees of Net Realty Holding Trust v. AVCO Fin. Servs. of Barre, Inc., 147 Vt. 472, 520 A.2d 981, 983 (1986), citing Page v. Lyle H. Hall, Inc., 125 Vt. 275, 214 A.2d 459, 463 (1965).

The Continental policy contains the following language in the section on exclusions from coverage:

4. This policy does not insure against loss caused by any of the following. However, any ensuing loss not excluded or excepted in this policy is covered.

C. Faulty, inadequate, or defective:

(2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction ... of part of all of any property, on or off the described premises.

Plaintiffs characterize the damage to the transformers as an "ensuing loss." They argue that the ensuing loss was the "consequence[] of the defective design and is the remainder of the repair and replacement costs that VELCO sustained" and thus must be reimbursed under the policy. Plaintiff's Reply to Continental's Opposition to Partial Summary Judgment on Liability at 7, (No. 98-cv-356). The loss itself, however, was not the design defect, but the damage to the transformers; the defective design was the cause. An ensuing loss would be one which occurred subsequent to the overheating of the transformers, for example, fire destruction of the building which housed the transformers.

Furthermore, to characterize the design defect as the loss from which the damage to the transformers ensued simply defies logic. If the transformers had never malfunctioned and the design defect had gone unnoticed indefinitely, VELCO would have suffered no loss. Therefore, the design defect alone cannot qualify as the initial loss from which the damage from the transformers ensued. If the damage to the transformers is considered an ensuing loss, then the exception swallows the exclusion. "Where a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk. See Aetna Cas. & Sur. Co. v. Yates, 344 F.2d 939 (5th Cir.1965); 80 Broad St. Co. v. United States Fire Ins. Co., 88 Misc.2d 706, 707, 389 N.Y.S.2d 214 (N.Y.Sup.Ct.1975), affd. 54 A.D.2d 888, 390 N.Y.S.2d 768 (N.Y.App.Div.1976); Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal.App.3d 170, 270 Cal.Rptr. 405 (Cal.Ct.App.1990)." Narob Dev. Corp. v. Insurance Co. of N. Am., 219 A.D.2d 454, 454, 631 N.Y.S.2d 155 (N.Y.App.Div. 1995).

This case presents precisely the type of situation in which the loss is directly related to the original excluded risk. Characterizing the damage to the transformers as an ensuing loss would supersede Continental's exception for losses caused by design defect. As Continental's policy unambiguously excludes coverage for such losses, Continental's motion for summary judgment is granted.

II. Hartford's Arguments for Summary Judgment

In moving for Summary Judgment, Hartford makes two separate claims. First, they argue that there was no legally cognizable loss during the period Hartford insured VELCO. Second, they claim that Summary Judgment is required due to VELCO's failure to commence the action within the twenty four month limitation period in the Hartford policy.

In arguing that no legally cognizable loss occurred during the period of coverage, Hartford relies on the "manifestation" theory of coverage trigger. "The ...