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Diamond Shamrock Corp. v. Lumbermens Mutual Casualty Co.

decided: August 29, 1972.

DIAMOND SHAMROCK CORPORATION ET AL., PLAINTIFFS-APPELLEES
v.
LUMBERMENS MUTUAL CASUALTY COMPANY, AN ILLINOIS CORPORATION, DEFENDANT-APPELLANT



Swygert, Chief Judge, and Stevens and Sprecher, Circuit Judges.

Author: Sprecher

SPRECHER, Circuit Judge:

This appeal is from a judgment in plaintiffs' favor in an action for declaratory judgment on an insurance policy covering loss caused by accident at plaintiff Diamond Shamrock Corporation's Deer Park, Texas, plant. We affirm in part and reverse in part.

On April 30, 1967, an explosion and fire damaged a compressor and surrounding area at Diamond's Deer Park plant. Diamond was covered by two insurance policies, one issued by co-plaintiff appellee Fireman's Mutual Insurance Company, and a second issued by Lumbermens Mutual Casualty Company, the defendant. The Fireman's policy insured Diamond against loss caused by fire. The Lumbermens' policy covered loss caused by "accident," but expressly excluded coverage for any loss caused by fire. Following the explosion, Fireman's acknowledged liability for certain portions of the damage, but denied coverage for damage caused by the initial explosion because it had not been "directly or indirectly" caused by fire. Lumbermens denied coverage under its accident policy on the basis of its belief that the explosion had been caused by fire.

Fireman's joined Diamond in an action for declaratory judgment against Lumbermens. Jurisdiction was based on diversity of citizenship. 28 U.S.C. ยง 2201. The trial court held that defendant Lumbermens was liable to Diamond under its policy and found that Diamond was entitled to $2,030,949, together with certain continuing interest and attorney's fees. Lumbermens' appeal alleges error on both the liability and damage issues, as well as in the award of attorney's fees.

I.

Lumbermens argues that the district court erred in finding liability under the contract because the initial explosion in the compressor was caused by an "independent hostile fire." Under Lumbermens' theory, the explosion resulted from the presence of a diffusion flame in the compressor which ignited the combustible raw gas mixture. In order for the explosion to have occurred in the manner postulated a number of factors would have had to have been present. A review of the evidence indicates that the district court was correct in deciding that several critical elements were missing, and that the explosion could thus not have been caused by "fire."

In the first place, defendant's theory is dependent upon the existence of pressure in the compressor at the time of the ignition of the gas mix of at least 105 psia. However, data collected during a previous shutdown indicates that the pressure in the compressor at the critical moment was substantially less than this figure. Lumbermens' theory of a fire was also predicated upon the assumption that the explosion occurred no more than 25 to 30 seconds following the action of Diamond's head operator in pushing a button which shut down the compressor by cutting off all power thereto. The evidence shows that the explosion did not occur in less than 45 to 60 seconds after the button was pushed. The record also indicates that the percentage of oxygen in the compressor at that time was between 10 and 15 per cent, considerably less than the 22 per cent required for an explosion in the manner theorized by defendants' expert. Finally, Lumbermens' theory depended upon the coincidence of having the weakest point of the compressor located at the same point as certain cast iron having the lowest tensile strength. The district court found that the probability of such an occurrence was exceptionally remote and nothing in the record indicates that a contrary finding should have been made.

The district judge accepted plaintiffs' theory of the explosion, finding that the cause was the ignition of combustible gas by heat generated by the rubbing of a labyrinth seal on the adjoining metal. Under this theory, the explosion originated near the inlet end of the high pressure casing of the compressor and proceeded for some distance as a deflagration -type explosion before transition to a detonation -type explosion. Plaintiffs' expert arrived at his opinion only after a two-year study of the problem which included inspection of the compressor area and the damaged section of the compressor. In contrast, none of Lumbermens' experts ever visited the Deer Park plant or examined the damaged compressor. Although tests which would have ascertained the validity of defendant's theory were scheduled at Atlantic Research Corporation, none were ever conducted. In view of the extreme improbability of defendant's only theory of a fire occurring as they have assumed and the substantial evidence supporting plaintiffs' theory of the explosion, we affirm the district court's findings on liability.*fn1

II.

Lumbermens challenges the legal sufficiency of the evidence supporting the judgment awarding Diamond $442,579 for direct property damage and the admissibility of certain evidence on this issue.

We find no merit in Lumbermens' argument that Diamond failed to offer legally sufficient proof on the amount of damage attributable solely to the explosion of the compressor. Defendant insists that Diamond was required to prove by detailed evidence exactly what objects were damaged, whether they had to be replaced, and the reasonableness of the amounts expended for repair or replacement. This argument was answered by the Sixth Circuit in Welders Supply, Inc. v. American Employers' Insurance Co., 358 F.2d 593, 602 (6th Cir. 1966), in which the court noted: "Were we to adopt the defendant's view of proof required by this policy in this sort of industry, we would render the policy utterly useless to a purchaser because of the impossibility of such proofs." Cf. Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 562, 75 L. Ed. 544, 51 S. Ct. 248 (1931).

In this case, Lumbermens agreed to the method used by Diamond to allocate the damage and, although it had access to all of the information pertinent to the allocations, objected to only one of Diamond's allocations.*fn2 In fact, at trial Lumbermens failed to offer any evidence at all on this question. On the basis of this record, we can only concur in the trial judge's finding that the method of allocation was "the only reasonable and fair one . . . since items in the area of the K-1 compressor which appeared to be damaged by fire were initially damaged by the compressor explosion."

Lumbermens' argument that Diamond's proof of the amounts actually paid for repairs and replacement was legally insufficient is equally without merit. Lumbermens' theory seems to be that the "proper measure of damages for the destruction of personal property is its value or reasonable worth at the time and place of such destruction." That formulation ignores the contract under which this action was brought. The policy explicitly provided that Lumbermens would be liable for either repair or replacement of damaged property, whichever cost less. Diamond's evidence showed that it had either repaired or replaced all of the property damaged by this compressor explosion. Absent any proof by Lumbermens that Diamond opted for the more expensive alternative, Diamond's evidence must be used as the proper measure of damage under the policy. ...


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