                                                                                                                           Opinions of the United
2002 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-6-2002

Amerada Hess Corp v. Zurich Ins Co
Precedential or Non-Precedential:

Docket 99-3505




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"Amerada Hess Corp v. Zurich Ins Co" (2002). 2002 Decisions. Paper 155.
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                                              NOT PRECEDENTIAL

                UNITED STATES COURT OF APPEALS
                    FOR THE THIRD CIRCUIT

                   Nos. 99-3505 and 99-3512

                   AMERADA HESS CORPORATION;
              HESS OIL VIRGIN ISLANDS CORPORATION

            PAUL THOMPSON; JERAL STOKER; ESTATE OF
               ERNEST ISENBERG; JAMES MCKINLEY;
             REVEL CHELETTE, JR.; PATRICK BUNCH;
                        EDDIE BANNON,
                         Intervenors

                                 v.

                   ZURICH INSURANCE COMPANY

            PAUL THOMPSON; JERAL STOKER; ESTATE OF
               ERNEST ISENBERG; JAMES MCKINLEY;
             REVEL CHELETTE, JR.; PATRICK BUNCH;
                        EDDIE BANNON,
                  Appellants at No. 99-3505

                   AMERADA HESS CORPORATION;
              HESS OIL VIRGIN ISLANDS CORPORATION,
                   Appellants at No. 99-3512

        Appellate Division of the District Court for the
             Virgin Islands, Division of St. Croix
                     Civil No. 97-cv-00035
          District Judge: Honorable Raymond L. Finch

                      Argued: May 14, 2001
        BEFORE: McKEE, RENDELL and BARRY, Circuit Judges
                 (Opinion Filed: March 6, 2002)

ROBERT H. SHULMAN, ESQ. (Argued)
Lowery & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

MINDY G. DAVIS, ESQ.
Lowery & Simon
1299 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

GEORGE H. LOGAN, ESQ.
Nichols, Newman, Silverlight, Logan & D'Eramo
1131 King Street, Suite 204
Christiansted, St. Croix, USVI 00820
Attorneys for Appellants

K. GLENDA CAMERON, ESQ. (Argued)
Law Offices of Lee J. Rohn
1101 King Street, Suite 2
Christiansted, St. Croix, USVI 00820

LEE J. ROHN, ESQ.
Law Offices of Lee J. Rohn
1101 King Street, Suite 2
Christiansted, St. Croix, USVI   00820

THOMAS H. HART, ESQ.
Alkon, Rhea & Hart
2115 Queen Street
Christiansted, St. Croix, USVI   00820

Attorneys for Appellant-Intervenors

JOHN. B. WYSS, ESQ. (Argued)
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006

KEITH U. KUDER, ESQ.
Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006

Attorneys for Appellee

                            OPINION
McKEE, Circuit Judge.

     Hess Oil Virgin Islands Corporation and its parent company, Amerada
Hess
Corporation (collectively "HOVIC") sued Zurich Insurance Company seeking
coverage
under an insurance policy for injuries some workers suffered in an
explosion at HOVIC's
St. Croix oil refinery. Zurich denied coverage under the policy it had
issued to HOVIC,
and HOVIC eventually settled the claims that the injured employees had
filed against
their employer. Thereafter, HOVIC sued Zurich in an attempt to recover
under its
insurance policy.    The district court concluded that HOVIC's claim was
unambiguously
excluded from coverage under Zurich's policy, and granted Zurich's motion
for summary
judgment. For the reasons that follow, we will reverse.

                            I. FACTS
     In 1991, HOVIC began constructing an addition to an existing oil
refinery on the
island of St. Croix, United States Virgin Islands. This involved the
construction of a
Fluid Catalytic Cracking Unit ("FCCU"), also known as a "cat cracker." As
the name
suggests, the unit was to be used in the "cracking" phase of the refinery
process. HOVIC
contracted with Zurich Insurance Company to provide insurance coverage for
the FCCU
construction project.   The insurance contract was entitled, "Hess Oil
Virgin Islands
Corporation (HOVIC) Primary General/Third Party Liability Policy, Fluid
Catalytic
Cracking (FCCU Project) and Related Activities." App. at 242.
             A. The Terms of The Insurance Contract
     The insurance contract contains both general terms and conditions and
specific
endorsements. The general terms and conditions set forth the basic
coverage as explained
in Articles 1 through 9 of the policy. The attached endorsements address
special
situations in which coverage may be limited or excluded, for example,
"Nuclear Energy
Liability Exclusion Endorsement" or "Completed Operations/Products
Liability
Extension" and qualifies some of the terms and conditions in Articles 1
through 9.
     Pursuant to the general terms of the policy, in exchange for an
annual premium of
$1 million, Zurich agreed to pay HOVIC for "all sums which [HOVIC] shall
be legally
obligated to pay as damages... on account of personal injuries, including
death... caused
by or arising out of each occurrence during the policy period...." App.
at 246. An
"occurrence" is defined as: "...an accident... which results in bodily
injury or property
damage neither expected nor intended from the standpoint of [the
insured]." App. at 252.
The policy offered $2 million in coverage per occurrence, and included:

       the total sum [that] the insured pays or becomes obligated to pay
       by reason of Personal Injury... either through adjudication or
       compromise, and shall also include hospital, medical and funeral
       charges and all sums paid as salaries, wages, compensation, fees,
       charges, and law costs, premiums on attachment or appeal bonds,
       interest, expenses for doctors, lawyers, nurses and investigators
       of claims and persons, and for litigation, settlement adjustment
       and investigation of claims and suits which are paid as a
       consequence of any loss occurrence covered hereunder...

App. At 253-54. The general terms of the policy also required HOVIC to
notify Zurich of
an occurrence "as soon as practicable." The policy stated:
       Whenever the Insured's manager of insurance administration has
       information from which he may reasonably conclude that a loss
       occurrence covered hereunder is likely to involve this policy...
       notice shall be sent as soon as practicable to the Insurer.


App.  at 254.
     The "Seepage, Pollution and Contamination Clause" at issue here is
one of 14
endorsements that specifically limit or exclude coverage under the general
terms and
conditions of the policy.   That endorsement (also referred to as
"Endorsement 2")
specifically provides as follows:
[t]his insurance does not cover any liability for:
       Personal Injury or Property Damage arising out of the discharge,
       dispersal, release or escape of smoke, vapors, soot, fumes, acids,
       alkalis, toxic chemicals, liquids, or gases, waste materials or
       other irritants, contaminants or pollutants into or upon land, the
       atmosphere or any water course or body of water; but this
       exclusion does not apply if such discharge, dispersal release or
       escape meets all of the following conditions:

            a.   The discharge, dispersal, release or escape must be
neither
            expected nor intended by [HOVIC], and
            b.   The inception of the discharge, dispersal, release or
escape
            must take place during the policy period, and
            c.   The discharge, dispersal, release or escape must not
            continue for more than six days, and
            d.   The discharge, dispersal, release or escape must be
            reported to the insurer within 30 days from the inception
            of the discharge, dispersal, release or escape.

App. 262.
                       B. The Explosion.
     On August 9, 1993, a hose from a delivery tank truck burst while
catalyst was
being pumped into the FCCU, and catalyst sprayed out for about five to ten
minutes.
Despite the short duration of the discharge, some workers employed by the
subcontractor
at the FCCU were directly exposed to the catalyst. A short time later,
some of them
began complaining of various ailments including sore throat, chest
irritation, and
vomiting of blood. The foreman was allegedly notified of the incident but
no one notified
Zurich at that time. Similarly, HOVIC did not receive any formal
complaints or requests
for compensation from the exposed workers.
     On October 24, 1993, over two months after the accident, 11 workers
who had
been exposed sued HOVIC. alleging physical injuries due to their exposure
to the
catalyst. When one of the original plaintiffs died, his heirs brought a
second suit on
behalf of his estate. Except for the allegations relating to the death of
the one worker, the
two complaints were virtually identical. On November 8, 1993, three days
after it was
served with the first complaint, and again on November 10, 1993, HOVIC
notified Zurich
of the lawsuits and requested coverage. That notice was more than 90 days
after the
incident that caused the injuries.
     By letters dated October 4, 1994 and May 30, 1995, Zurich denied
coverage.    The
denial was premised on the third and fourth conditions of Endorsement No.
2.
Specifically, Zurich asserted that the exposure to the catalyst continued
for less than six
days, and HOVIC had failed to report the burst hose incident within thirty
days from the
discharge, dispersal, release or escape of the catalyst.
             C. Settlement of the Underlying Lawsuits
     On April 28, 1997, HOVIC settled the pending lawsuits for up to $1.6
million.
Under the terms of the agreement, HOVIC paid $160,000 in cash from its own
funds and
agreed to file suit against Zurich to force it to pay the remaining $1.44
million under the
insurance contract. If HOVIC prevails in the insurance coverage
litigation, the agreement
requires HOVIC to pay plaintiffs the remainder of the $1.6 million
settlement. If HOVIC
recovers more than $1.44 million, it will first recover the $160,000
already paid to the
plaintiffs, and plaintiffs will receive the balance of the recovery up to
$1.44 million. If
the recovery exceeds $1.44 million, the amount above that figure is to be
split into two
equal shares with one share going to HOVIC, and the remaining share being
divided
equally among the various plaintiffs.
     Pursuant to that agreement, HOVIC filed this declaratory judgment
action against
Zurich in 1997 in the United States District Court for the Virgin Islands.
The individual
claimants thereafter intervened as plaintiffs. After limited discovery,
HOVIC and Zurich
filed cross-motions for summary judgment. Zurich argued that the
pollution exclusion
provision precluded coverage, and that HOVIC could not satisfy any of
the conditions
that would prevent that exclusion from operating including the requirement
of notification
within 30 days of the "occurrence." Zurich also argued that, even if it
were liable under
the policy, its exposure was limited to the $160,000 HOVIC paid to settle
the claim, and
not the conditional amount of $1.44 million that HOVIC was seeking under
the settlement
agreement.
     In HOVIC's cross-motion for partial summary judgment, HOVIC argued
that the
pollution exclusion provision did not apply because the injury to the
workers was
precisely the type of risk covered by Zurich's FCCU Construction Project
Policy as an
"occurrence." HOVIC also argued that it notified Zurich promptly under
the general
terms of the insurance contract and that any delay in notification was
irrelevant because
Zurich was not prejudiced by the timing of the notice. Finally, HOVIC
argued that
Zurich was liable under the policy for the full amount of the workers'
injuries, and that
the policy recovery could not be capped at $160,000 given a valid two-
tiered settlement.
     The district court granted Zurich's motion for summary judgment, and
denied
HOVIC's motion for partial summary judgment; and this appeal followed.
             II. JURISDICTION AND STANDARD OF REVIEW
     The district court had jurisdiction pursuant to 28 U.S.C.    1332. We
have
jurisdiction pursuant to 28 U.S.C.    1291 as this is an appeal of a final
order of the district
court. We afford plenary review to a grant of summary judgment. Pearson
v. Component
Technology Corp., 247 F.3d 471,482 (3d Cir. 2001). Our review of the
district court's
legal interpretation of the insurance contract is also plenary. Patterson
v. American
Bosch Corp., 914 F.2d 384, 387 (3d Cir. 1990).
                         III. DISCUSSION
     HOVIC insists that it was paying a premium of $1 million per year to
insure
against just this type of accident, that it is unreasonable to interpret
its policy with Zurich
in a manner that excludes coverage for the very risk it was attempting to
cover, and that
the language of the policy does not support reading such a sweeping
exclusion into an
endorsement to its general risk policy.
     HOVIC argues that the conflict between the coverage afforded under
the general
terms and conditions of the policy on the one hand, and the pollution
exclusion in
Endorsement No. 2 on the other hand, creates an ambiguity. HOVIC asks us
to resolve
this ambiguity in favor of coverage arguing that this policy was intended
to exclude only
the cost of traditional environmental "spills" or discharges one normally
associates with
environmental discharge. Under HOVIC's interpretation, such costs are
excluded under
the Endorsement unless the four conditions contained therein are
satisfied. In that event,
according to HOVIC, the exclusion in the Endorsement does not operate, and
Zurich is
still obligated to pay for contamination and clean up. Zurich insists
upon a literal
interpretation of the same language in Endorsement No. 2 and argues that
it means that
any injury resulting from any discharge is excluded from coverage.
     HOVIC's interpretation is supported by both the regulatory history of
the
Endorsement and judicial interpretation of it. Several courts have
concluded that "the
predominant motivation in drafting an exclusion for pollution-related
injuries was the
avoidance of the 'enormous expense and exposure resulting from the
'explosion' of
environmental litigation.'" American States Ins. Co. v. Koloms, 687 N.E.2d
72, 81 (Ill.
1997) (emphasis in original, citations omitted); Doerr v. Mobil Oil Corp.,
774 So.2d 119,
132 (La. 2000) (accepting that the pollution exclusion clause "was
originally designed to
exclude from coverage only that property and personal damage which
resulted from
traditional forms of pollution.").
     However, other courts have interpreted such endorsements in a manner
that is
consistent with the position Zurich urges us to take here. Those courts
have focused on
the precise language of the exclusion clause itself, and have concluded
that the exclusion
has a much broader reach and excludes all injuries related to exposure to
materials the
policy defines as "pollutants." See Reliance Ins. Co. v. Moessner, 121
F.3d 895 (3d Cir.
1997) (applying Pennsylvania law). As the district court correctly noted
here, "the source
of the disagreement within the jurisprudence seems to lie in the fact that
the language of
the clause is 'quite specific' on its face, and yet a literal
interpretation of that language
results in an application of the clause which is 'quite broad.'" Dist. Ct.
Op. at 12, citing
American States v. Koloms, 687 N.E.2d 72, 78 (Ill. 1997).
     After analyzing the conflicting positions of HOVIC and Zurich, the
district court
concluded that the interpretations offered by both were "compelling," and
that the
strength of each interpretation reflected the divergence of jurisprudence
of the various
courts that have interpreted this language. Nevertheless, the court
concluded that Zurich's
policy was unambiguous and enforced what it believed was a literal reading
of its
provisions.    In doing so, however, the court failed to realize that
"conflicting
interpretations of the policy is strongly indicative of th[is] policy's
essential ambiguity."
New Castle County v. National Union Fire Ins. Co. of Pittsburgh, PA 174
F.3d 338, 347
(3d Cir. 1999).
     The very fact that HOVIC and Zurich were able to offer conflicting,
yet
"compelling," interpretations establishes the essential ambiguity in this
policy. Where
"there is more than one reasonable reading of a policy provision ...that
provision must be
construed against the insurance company which has drafted it." Buntin v.
Continental
Ins. Co., 583 F.2d 1201, 1207 (3d Cir. 1978) (emphasis supplied).
Moreover, as we have
previously stated in interpreting an insurance policy under Virgin Islands
law, any
ambiguity in an insurance policy is to be "construed against the insurer,
and in a manner
which is more favorable to coverage." Id.     Thus, under Virgin Islands
law, "[i]f the
insured proffers a reasonable interpretation of an ambiguous term, then
that term controls
and the insured is entitled to judgment as a matter of law so long as the
undisputed facts
fall within the purview of the meaning offered by the insured." In re Tutu
Wells
Contamination Litigation, 78 F.Supp 2d 456, 466 (D.V.I., 1999).    Here,
there are no
disputed material facts outside the interpretation offered by HOVIC, and
we therefore
hold that HOVIC is entitled to judgment as a matter of law.
     In addition, we note that our conclusion that HOVIC is entitled to
judgment as a
matter of law is consistent with the reasonable expectations of these
parties as evidenced
by the language of the policy. See Oritani Savings and Loan Assoc., v
Fidelity and
Deposit Co. of Maryland, 989 F.2d 635 (3rd Cir. 1993) (applying New Jersey
law). In
Oritani Savings and Loan we noted that insurance policies are to be
interpreted in a
manner that is consistent with the parties' reasonable expectations. Id.,
at 638. After
noting the problems that often arise from the technical nature of
insurance policies we
stated that, "[c]overage will be provided if policy language is
'insufficiently clear to
justify depriving the insured of [its] reasonable expectation that
coverage would be
provided'" (quoting Sparks v St. Paul Ins. Co., 100 N.J. 325, (1985)).
"In most cases,
'the language of the insurance policy will provide the best indication of
the content of the
parties' reasonable expectations.'" Medical Protective Company, 198 F.3d
at 106
(applying Pennsylvania law), citing Moessner, 121 F.3d at 903.
     Here, Zurich's interpretation of Endorsement No. 2 would not only
result in an
application that "is 'quite broad,'" as the district court noted; it would
result in an
exclusion that would swallow the very coverage that Hess was paying for.
As noted
above, Endorsement No. 2 excludes coverage for injuries and damage
resulting from the
"discharge, . . . [of all toxic materials or irritants] . . .into or upon
land, the atmosphere or
any water course or body of water . . ." unless certain conditions are
satisfied.
Webster's New International Dictionary defines "atmosphere" as including:
"the whole
mass of air surrounding the earth . . . the air of a given place or
locality . . . ." Thus, if the
policy excludes damages for injury or loss resulting from discharges "into
or upon the
land," water, and air, there is precious little space where the insured
risk might occur.
Therefore, the interpretation that Zurich insists upon, and that the
district court adopted,
would have the practical effect of excluding coverage for all of HOVIC's
business
activities (assuming an injury due to "discharge," etc.) as any discharge
would have to
occur on land, or in the Earth's atmosphere. Here, a hose burst, and
toxic materials were
released into the air (i.e. "atmosphere") thereby injuring some workers.
We can not agree
that HOVIC and Zurich intended to exclude such injuries under Endorsement
No. 2 while
affording coverage for liability resulting from industrial accidents on
HOVIC's premises.
HOVIC is, after all, in the business of handling toxic materials.
     Zurich attempts to counter this result by arguing that the HOVIC's
policy resulted
from involved negotiation between sophisticated parties who were well
aware of the
scope of coverage they were bargaining for. However, HOVIC was paying for
something
more than the mere illusion of coverage. Yet, under Zurich's
interpretation, that is all
HOVIC received for its $1 million per year premium. We do not believe that
HOVIC, a
company whose business involved handling and processing toxic materials,
consciously
negotiated an insurance policy with an annual premium of $1 million and
intended to
exclude damages resulting from all discharges of toxic materials anywhere
on land, air or
sea. See Ducote v Koch Pipeline, 730 So. 2d 432, 436 (La. 1999) (applying
Louisiana
law the court stated: "An insurance policy should not be interpreted in an
unreasonable or
a strained manner so as to enlarge or to restrict its provisions beyond
what is reasonably
contemplated by its terms or so as to achieve an absurd result."). See
also Dodson v St.
Paul Insurance Co., 812 P.2d 372, 376 (Okla. 1991) (applying Oklahoma law,
the court
stated, "The construction of an insurance policy should be a natural and
reasonable one,
fairly constructed to effectuate its purpose, and viewed in the light of
common sense so as
not to bring about an absurd result.").
     Moreover, HOVIC offered the testimony of Kevin Beebe, HOVIC's Manager
of
Corporate Insurance, who represented HOVIC when it purchased the Zurich
policy, and
John Talarico, HOVIC's Property & Claims Administrator. They both stated
that "it is
Hess' belief and expectation that the [injuries at issue] are covered
under the policy."
App. at 472; 474. Although, as Zurich notes, these statements do not
necessarily
constitute sufficient evidence to establish HOVIC's reasonable expectation
as a matter of
law, they are certainly consistent with the result reached by applying the
principles of
contract interpretation that must guide our analysis.
     Furthermore, Zurich could have provided an endorsement that would
have
unambiguously achieved the exclusion that Zurich now maintains is
accomplished by
Endorsement No. 2. See McKusick v. Travelers Indemnity Co., 329, 632
N.W.2d 525
(Mich. App. 2001). The exclusion in McKusick stated: "[t]his insurance
does not apply
to: ... '[b]odily injury' or 'property damage' arising out of the...
discharge, dispersal,
seepage, migration, release or escape of pollutants: ... which arises out
of 'your work'...;
or which arises out of 'your product.'" Zurich could have similarly
inserted language
excluding injuries to workers resulting from the workers' exposure to
pollutants while
they are engaged in the normal course of the ordinary business of the
insured. We do not
suggest that this precise language would necessarily remove all questions
of coverage in
accidents such as occurred here, but it would surely be a more precise way
of expressing
the intent that Zurich claims is embodied in Endorsement No. 2 of this
insurance policy.
Accordingly, we hold that injuries to the individual workers at HOVIC's
facility are
covered as a matter of law, and the district court erred in denying
HOVIC's motion for
summary judgment.
        C. Extent of Coverage of Two-Tiered Settlement
     We believe that the district court also contravened Virgin Islands
law in limiting
Zurich's exposure to the amount defined by the first tier of HOVIC's
settlement
agreement. See Evanston Ins. Co. v. Treister, 794 F.Supp. 560 (D.V.I.
1992). In Treister,
an insurer argued that it should not be liable to the insured for the
entire amount of a
settlement because the insured had supposedly colluded with the plaintiff
and would
suffer no personal loss since his personal liability was limited to the
amount the court
would determine the insurer owed in a declaratory judgment action. Id. at
573. The court
rejected this argument. The court held that once the insurer declined
coverage, the
insured "had the right to enter into a reasonable settlement with the
[plaintiff], and to
recover, within policy limits, the amount of that settlement" from the
insurer. Id. at 573-
74. Moreover, because the settlement agreement was reasonable, the court
entered a
declaratory judgment directing the insurer to cover the entire amount
negotiated by the
insured and the plaintiffs at settlement.
     Here, the district court expressly declined to follow Treister.
Rather, the court
distinguished it by focusing upon the "legally obligated to pay" provision
in the Treister
policy. Zurich's policy contains the same language. HOVIC's policy with
Zurich
requires the latter to pay "all sums which [HOVIC] shall be legally
obligated to pay...
[whether incurred through] adjudication or compromise." App. at 246.
Zurich argues
that since HOVIC is only legally obligated to pay the first tier of the
settlement, Zurich's
liability is limited accordingly. This argument was also expressly
rejected in In re Tutu
Water Wells Contamination Litig., 78 F. Supp. 2d 423 (D.V.I. 1999).
Tutu Water Wells
concerned a coverage dispute arising out of the insurer's refusal to
provide coverage,
defend or indemnify the insured against numerous environmental actions
following
gasoline leakage into the surrounding water wells. There, however, the
court held that the
holding in Treister was consistent with the common law as understood
throughout the
United States, and declined to follow the district court's subsequent
decision here to the
contrary. The court reasoned that "[a]llowing an insurer, after it
abandoned its duties
under the insurance agreement, to thereafter assert as a defense the
language of the very
contract it refused to honor would lead to an unjust result inconsistent
with the principles
of Virgin Islands law." Id. at 431. We agree. Moreover, a contrary
holding would
encourage insurers to decline coverage they are legally obligated to
provide in the hopes
of capping any future liability to the amount of any settlement that the
insured may reach
with the injured claimant. Where an insured has recovered a judgment
against an insurer
after settling underlying claims, the insured is legally obligated to pay
the injured parties
pursuant to the terms of any settlement agreement, and the insurer remains
liable to the
insured up to the policy limits where it has undertaken to pay amounts the
insured is
obligated to pay "by adjudication or compromise."
                        III. CONCLUSION
     For the above reasons, we hold that the district court erred in
granting summary
judgment to Zurich based upon Endorsement No. 2, and in limiting
Zurich's exposure to
the amount HOVIC has paid pursuant to the first tier of its settlement
agreement with
claimants. We will therefore reverse the order of the district court, and
remand with
instructions that the district court enter judgment for HOVIC pursuant to
this opinion.
TO THE CLERK OF THE COURT:
     Please file the foregoing Opinion.

                                        /s/Theodore A. McKee

Circuit Judge
