No. 92-013
IN THE SUPREME COURT OF THE STATE OF MONTANA
1993
PORTAL PIPE LINE COMPANY,
Plaintiff and Appellant,
v.
STONEWALL INSURANCE COMPANY, UNITED
STATES FIRE INSURANCE COMPANY, AMERICAN
CENTENNIAL INSURANCE COMPANY and FIRST
STATE INSURANCE COMPANY,
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable G. Todd Baugh, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Bruce R. Toole, Lawrence B Cozzens,
.
Jon T. Dyre, Crowley, Haughey, Hanson,
Toole & Dietrich, Billings, Montana
For Respondent:
L. Randall Bishop, Jarussi & Bishop,
Billings, Montana (First State)
Filed: JAN 1 4 1993
D Submitted on Briefs: July 30, 1992
Decided: January 14, 1993
I
Cl'erk
Justice William E. Hunt, Sr., delivered the opinion of the Court.
Appellant Portal Pipe Line Company appeals from an order of
the Montana Thirteenth Judicial District Court, Yellowstone County,
granting respondent First State Insurance Company's cross-motion
for summary judgment pursuant to Rule 56, M.R.Civ.P.
We affirm.
Portal presents five issues for this Court to consider:
1. Did the District Court err in determining that Ashland's
negligence claims did not constitute an o occurrence" as defined by
First State's policy?
2. Did the District Court err in allowing First State to
rely on exclusions without reserving the right to do so prior to
the time the Ashland litigation was settled?
3. Did the District Court err in determining that the
~~prod~ct~~
exclusions language excluded coverage for Ashland's oil
damage claims?
4. Did the District Court err in determining that the
"operations performedm exclusion language excluded coverage for
Ashland's oil damage claims?
5. Did the District Court err in determining that the "level
of performancef1exclusion language excluded coverage for Ashland's
loss of use claims?
The complexity of this case requires that we provide a
backdrop before discussing the relevant facts to the present case.
Portal Pipe Line Company (Portal) operates a crude oil pipeline
running from Reserve, Montana, east through North Dakota and into
Minnesota. In 1984, Portal was sued by Ashland Oil Company
(Ashland) which had contracted for the purchase of crude oil to be
transported to its refinery at St. Paul, Minnesota, through
Portal's pipeline. In 1984, Ashland claimed that Portal earned
enormous profit by permitting certain shippers to inject an
extremely volatile high vapor pressure butane-gas (B-G mix) for
blending by Portal into its common stream of crude oil. This was
allegedly done in violation of the Portal tariff, a contract which
strictly governs the handling and operation of the crude oil
pipeline.
As a result of B-G mix injections, Ashland claimed that it
lost money each month from March 1980 through February 1984. On
March 1, 1984, Portal prohibited further injections of the highly
volatile butane-gas into the crude pipeline. Ashland's litigation
was settled on December 21, 1988.
In the present action before this Court, Portal sued its
excess insurers seeking to recover the dollars it spent settling
Ashland's claims for punitive and compensatory damages.
Originally, the respondents consisted of four insurance companies
providing insurance to Portal from September 30, 1979, to
September 30, 1984. During each of those five years, United States
Fidelity and Guaranty Company (USF&G) provided primary insurance
coverage of $500,000. The four respondents named in this action
were excess insurers, each providing $10,000,000 of insurance
coverage over and above the $500,000 of USF&Gfs primary coverage.
Portal's complaint alleged six separate counts seeking
declaratory judgment, breach of contract, and several tort claims.
On March 29, 1990, the court ordered the tort claims bifurcated
upon stipulation of all the parties.
On January 25, 1991, the court granted summary judgment in
favor of respondent Stonewall Insurance Company on the declaratory
judgment and breach of contract claims. Portal dismissed with
prejudice all claims against respondents American Centennial
Insurance Company and United States Fire Insurance Company. Portal
then filed a motion for partial summary judgment requesting the
District Court declare, as a matter of law, that at least some
coverage must exist under the First State insurance contract.
First State filed a cross-motion arguing that the undisputed
material facts established and absence of coverage. On August 29,
1991, theDistrict Court issued its memorandum and order granting
partial summary judgment to First State on the claims for
declaratory judgment and breach of contract. On October 29, 1991,
the court issued its order dismissing all remaining counts of
Portal's tort claims based upon Portal's original dismissal against
the other respondents. It is from these two orders that Portal
appeals.
I.
Did the District Court err in determining that Ashland's
negligence claims did not constitute an "occurrence" as defined by
First State's policy?
In order for summary judgment to be properly granted, the
moving party must demonstrate that there is no genuine issue of
material fact in light of the substantive principles that entitle
the party to summary judgment as a matter of law. Rule 56(c),
M.R.Civ.P.: Richland National Bank & Trust v. Swenson (1991), 249
Mont. 410, 816 P.2d 1045. If the moving party meets this burden,
then the burden shifts to the nonmoving party to demonstrate a
genuine issue of material fact. Swenson, 816 P.2d at 1050. "'Mere
denial or speculation will not suffice, the non-moving party must
show facts sufficient to raise a genuine issue. Swenson, 816
P.2d at 1050 (quoting Frigon v. Morrison-Maierle, Inc. (1988), 233
Mont. 113, 117, 760 P.2d 57, 60). All reasonable inferences that
may be drawn from the offered proof are to be drawn in favor of the
party opposing the summary judgment. Cereck v. Albertson's, Inc.
(1981), 195 Mont. 409, 411, 637 P.2d 509, 511.
With these principles in mind, we will discuss the following
issues:
First State's insurance policy provided coverage for property
damage which was caused by an "occ~rrence.~'The relevant portion
of First State's insurance agreement states the following:
To indemnify the INSURED for ULTIMATE NET LOSS
all sums which the INSURED shall be obligated to pay by
...
reason of the liability imposed upon the INSURED by law
or liability assumed by the INSURED under contract or
agreement for damages and expenses, because of:
....
B. PROPERTY DAMAGE, as hereinafter defined:
to which this policy applies, caused by an OCCURRENCE, as
hereinafter defined, happening anywhere in the world.
The policy also defines woccurrencew as:
[A]n accident or event including continuous repeated
exposure to conditions, which results, during the policy
period, in PERSONAL INJURY or PROPERTY DAMAGE neither
expected nor intended from the standpoint of the INSURED.
Portal maintains that the damage caused to Ashland was neither
an intended nor expected result of its decision to allow B-G mix
into its pipeline in violation of the tariffs. As a result, Portal
argues that its negligence claims fall under First State's policy
definition of "occurrence."
We have previously defined occurrence policy language in
Northwestern National Casualty Company v. Phalen (1979), 182 Mont.
448, 597 P.2d 720. We interpreted the language to mean that:
[I]t precludes coverage for bodily injuries or damages,
though not specifically intended by the insured, if the
resulting harm was within the expectation or intention of
the insured from his standpoint.
Phalen, 597 P.2d at 726.
We explained that the use of the word *'occurrence1'had a
broader definition than the word "accident*'and that the intent of
the policy is to insure the acts or omissions of the insured,
including his intentional acts, excluding only those in which the
resulting injury is either expected or intended from the insured's
standpoint. Phalen, 597 P.2d at 726.
In New Hampshire Insurance Group v Strecker (1990), 244 Mont.
.
478, 798 P.2d 130, we determined the applicability of this
exclusion by utilizing a two-pronged test. If either prong of the
test is satisfied, the acts at issue will fall within the exclusion
provision and are not covered under the policy:
The first prong is satisfied if the injury was caused
by an accident. The second prong is satisfied if the
injury was either expected or intended from the
standpoint of the insured.
Strecker, 798 P.2d at 132.
The record reflects, and Portal does not dispute, that Portal
intentionally accepted high vapor pressure liquids for
transportation through its pipeline. The B-G mix could not have
been introduced into the pipeline without Portal's conscious
business decision to do so. Thetariff prohibitedthe introduction
of a product that would exceed vapor pressure of 13 pounds. Portal
interpreted the tariff in a manner which permitted it to ignore the
injection point pressure readings. Portal knew, despite its
subjective contentions to the contrary, that its actions were
expected to cause injury to Ashland's refinery.
Portal relies heavily upon our holding in Lindsay Drilling v.
U.S. Fidelity & Guaranty (1984), 208 Mont. 91, 676 P.2d 203, where
we held that similar policy language excluded from coverage damage
caused by the company or its employees. However, because the
complaint raised the possibility that core samples were salted by
third parties as a result of Lindsay's negligence, we held that a
duty to defend could not be ruled out on summary judgment.
In Lindsay, core samples were taken which were intended to
permit accurate evaluation of the precise nature of the mineral
content of the land included within the mining claim offered for
sale. The accuracy of any assay of the mining core samples
depended upon their purity. Plaintiff alleged that the samples
were lrsalted,rr
perhaps by an unknown defendant gaining access
through the negligence of Lindsay.
Unlike a mining claim core sample, the material contained
within the oil stream is always blended and "materially alteredr1
as
new injections from various shippers come on stream. There is no
uncertainty, in this case, as to who contaminated the common
stream. Therefore, Lindsay is not applicable to this case. We
hold that the District Court did not err in determining that
Ashlandrs negligence claims did not constitute an rroccurrencerl
as
defined by First State's policy.
11.
Did the District Court err in allowing First State to rely on
exclusions without reserving the right to do so prior to the time
the Ashland litigation was settled?
Portal maintains that First State is estopped from asserting
certain policy defenses because it did not adequately reserve its
rights. First State sent Portal three reservation of rights
letters during the pendency of the Ashland litigation. In the
letters, First State denied coverage on four grounds: (1) that the
policy was not an occurrence which took place within the effective
date of the policy; (2) that public policy may prohibit coverage
for punitive damages sought by Ashland; (3) that damages claimed by
Ashland did not constitute property damages under the policy; and
(4) that the policy did not cover any injury or destruction of any
oil sold, handled, or distributed by Portal. First State did not
advise Portal of any other policy defenses.
It is well established in Montana that an insurer has an
obligation to inform the insured of all policy defenses it intends
to rely upon. Section 33-18-201(14), MCA, of the Unfair Trade
Practices Act provides that an insurer may not:
[Flail to promptly provide a reasonable explanation
of the basis in the insurance policy in relation to the
facts or applicable law for denial of a claim ....
In Safeco Insurance Company v Ellinghouse (1986), 223 Mont. 239,
.
725 P.2d 217, we interpreted the above statute, stating:
Where an insurer, without reservation and with actual or
presumed knowledge, assumes the exclusive control of the
defense of claims against the insured, it cannot
thereafter withdraw and deny liability under the policy
on the ground of noncoverage, prejudice to the insured by
virtue of the insurer's assumption of the defense being,
in this situation, conclusively presumed ... the loss
of the right of the insured to control and manage the
case is itself prejudicial.
Ellinshouse, 725 P.2d at 221 (quoting 14 Couch, Insurance 2d,
5 51.85 (2d ed. 1982).)
In this instance, First State does not have the conflict of
interest present in Ellinqhouse. First State did not have a duty
to defend Portal, nor did it assume any defense of Portal. Portal
obtained independent counsel which represented Portal throughout
Ashland's litigation. Although First State did participate in
settlement negotiations which were likely to involve First State,
this did not constitute an assumption of Portal's defense. Portal
was not prejudiced by First State's reliance on the different
exclusions. We hold that First State did not waive its policy
defenses and is not estopped from asserting those defenses.
Did the District Court err in determining that the '*productw
exclusions language excluded coverage for Ashland's oil damage
claims?
A review of the language under Section B(3) of First State's
insurance policy indicates that coverage does not apply:
[Ulnder Coverage I(B) [Property Damage], to injury to or
destruction of or loss of ... (3) any goods, products
or containers thereof, manufactured, sold, handled, or
distributed, or work completed by or for the INSURED, out
of which the OCCURRENCE arises.
Exclusions of this kind are an attempt by the insurance
industry to eliminate the "moral hazardsa* to the insurer.
Donald M Zupanec, ScoDe of Clause Excludins From Contractor's or
.
Similar Liability Policy Damase to Pro~ertvin Care, Custody. or
Control of Insured, 8 A.L.R. 4th 563 (1981). The purpose of this
type of exclusion is intended to eliminate the possibility that an
insured will either cut corners or take unreasonable risks in the
performance of its insured operations and then shift the loss onto
the insurer. With this intent in mind, and applied to the facts of
this case, the clause is not ambiguous or unclear.
In Philadelphia Fire & Marine Insurance Company v. City of
Grandview (Wash. 1953), 255 P.2d 540, the Washington Supreme Court
defined *'handled*'
contained in a similar exclusion clause as:
To handle or to distribute, within the meaning of
the insurance policy, implies a conscious control over
and a conscious intent to parcel out whatever is to be
distributed.
Grandview, 225 P.2d at 545.
g rand view involved the accidental mixing of gas into the
city's water main which caused one house to explode and damaged the
next door neighbor's house. The Washington Supreme Court ruled
that the city of Grandview did not handle the gas within the
contemplation of the insurance agreement because it was not in the
business of handling gas but only water. As a result the exclusion
did not apply.
The facts of this case are just the opposite. Portal's
business involves the controlling of injection and transportation
of petroleum products in its common stream. Portal took conscious
control over and maintained a conscious intent to Ivparcel out"
crude petroleum, including the B-G mix which it allowed to be
intentionally mixed into the common stream.
Portal cites Smedly Company v. Employers Mutual Liability
Insurance Company of Wisconsin (Conn. 1956), 123 A.2d 755, which
interpreted "handledft a similar insurance policy exclusion that
in
referred to those commodities which the insured is in the business
of buying, selling, dealing, and trading.
This interpretation affords no relief to Portal. Portal was
also in the business of selling petroleum products. Portal had its
own wallowance oil" which it placed into the common stream and
regularly sold to Ashland. Since Portal cannot differentiate its
own allowance oil from that of its shippers, the common stream
consisted of the same goods and products which Portal regularly
traded and dealt. We hold the District Court did not err in
determining that the "product" exclusions language excluded
coverage for Ashland's oil damage claims.
IV.
Did the District Court err in determining that the "operations
performed1' exclusion language excluded coverage for Ashland's oil
damage claims?
Endorsement #2 of First State's insurance policy incorporates
the Broad Form Endorsement from Portal's USF&G primary insurance
policy, together with USF&G1s Exclusion A(2) (a). The exclusion
modifies the Broad Form Endorsement with the ensuing language:
This insurance does not apply:
(a) To property while on premises owned by or
rented to the insured for the purpose of having
operations performed on such property by or on behalf of
the insured.
The same exclusionary language existed in Topeka Railway
Equipment, Inc. v. Foremost Insurance Company (Kan. 1980), 614 P.2d
461. In that case, the insured, Topeka Railway, was in the
business of repairing and remodeling railroad cars. A number of
railway cars were delivered to Topeka at a United States Air Force
base. Two of the cars were damaged when one of the insured's cars
came loose and rolled down the tracks, causing a collision. The
insured was nothing more than a permissive user of the tracks. In
rejecting the application of the language, the Kansas Court ruled
that :
The (y) (2) (a) exclusion was rejected on the basis that
the accident did not occur on the premises owned by or
rented to the insured.
To~ekaRailway, 614 P.2d at 463.
In this instance, the facts are just the opposite. We
conclude that Portal's pipeline constituted "premises owned by
. . . the insured.
Portal, however, contends that the word "operati~ns~~
is
undefined in First State's policy which makes the exclusion clause
ambiguous and should be strictly construed against First State. We
acknowledge that the term "operations" is not defined in the
insurance agreement. Therefore, we must look to the plain and
ordinary meaning of the word.
Webster9s defines "operationnv ~nperformance a practical
as of
work or of something involving the practical application of
principles or processes." Websterrs New Collegiate Dictionary
797-98 (1973). The evidence reflects that all of the crude
petroleum which comprised the common stream was delivered to Portal
so that it could be injected into the pipeline, blended into the
common stream, and then pumped to Minnesota through the application
of pressure from Portal's compressors and booster stations along
the way. We adopt the reasoning of the District Court that if the
common stream was at first tfclean"or "bargained forw then it
became contaminated or "unbargained for" when, while making its way
through the pipeline, Portal watered it down with B-G mix. The
property was damaged while Portal performed pipeline operations
upon it while it was on the premises of Portal for precisely that
purpose. We hold that the District Court did not err in
determining that the "operations performed" exclusion language
excluded coverage for Ashland's oil damage claims.
Did the District Court err in determining that the 'Ilevel of
performance1' exclusion language excluded coverage for Ashland's
loss of use claims?
Portal asserts that the "level of performance1'exclusion does
not apply to Ashland's oil claims. First State's insurance policy
Exclusion C provides that coverage would not apply under the
resulting conditions:
[Tlo loss of use of tangible property which has not been
physically injured or destroyed, resulting from:
(1) a delay in or lack of performance by or on behalf
of the INSURED of any contract or agreement or
(2) the failure of the INSURED'S products or work
performed by or on behalf of the INSURED to meet
the level of verformance. aualitv. fitness or
durability warranted or represented by the INSURED:
butthis exclusion does not apply to loss of use of
other tangible property resulting from the sudden
and accidental physical injury to or destruction of
the INSURED'S products or work performed by or on
behalf of the INSURED after such proaucts or work
performed by or on behalf of the INSURED have been
put to use by any person or organization other than
the INSURED. [Emphasis added.]
Portal's tariff with Ashland is a contract of carriage under
the Interstate Commerce Act. The tariff mandated that petroleum
products exceeding 13 pounds of vapor pressure were not to be
transported in the pipeline. If something is injected into the
pipeline which would exceed 13 pounds, then the product received by
Ashland was considered contaminated and deprived Ashland the
benefit of its bargain. In its lawsuit, Ashland contended that
Portal's common stream did not meet the specifications of the
tariff and that such nonconformance caused extensive damage. We
agree with the District Court that the tariff was a contract of
carriage which expressly warranted and represented that the
I'products or work performed" by Portal in creating and transporting
its common stream of crude petroleum would attain a certain defined
level of "quality" or 8ffitness.'B We hold that the District Court
did not err in determining that the fllevel of performance"
exclusion language excluded coverage for Ashland's loss of use
claims. We hold that the granting of summary judgment in favor of
First State was proper.
We affirm.
We concur:
Chief Justice
t
January 14, 1993
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the following
named:
Bruce R. Toole; Lawrence B. Cozzens; Jon T. Dyre
Crowley, Haughey, Hanson, Toole & Dietrich
P.O. Box 2529
Billings, MT 59103
L. Randall Bishop
Jarussi & Bishop
P.O. Box 3353
Billings, MT 59103
Patrick Watt
JARDINE, STEPHENSON, BLEWETT & WEAVER
P.O. Box 2269
Great Falls, MT 59401
ED SMITH
CLERK OF THE SUPREME COURT
STATE,OF WONTANA
BY:
Depu
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