# Appendix — Texas Eastern Transmission Corp. v. Fidelity & Casualty Insurance

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1994
- **Citation:** 513 U.S. 915

## Text

Supreme Court, U.S.
FILED

93207 0 JUN 24 1994
i a.

ee

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1993

95
~~

TEXAS EASTERN TRANSMISSION CORPORATION,
Petitioner,
Vv.

FIDELITY & CASUALTY INSURANCE COMPANY OF

NEw York, et al.,
Respondents.

On Petition For A Writ Of Certiorari
To The United States Court Of Appeals
For The Third Circuit

APPENDIX

PETER J. NICKLES
Counsel of Record

COLEMAN S. HICKS

CurTIS A. BRADLEY
OFr COUNSEL: JACK L. GOLDSMITH
Covington & Burling
1201 Pennsylvania Ave., N.W.
Post Office Box 7566
Washington, D.C. 20044
(202) 662-6000

Attorneys for Petitioner

CHARLES ALAN WRIGHT
727 East 26th Street
Austin, Texas 78704
(512) 471-7188

TABLE OF CONTENTS

Order granting extension of time
to July 1, 1994, U.S. Supreme
Court, dated April 21, 1994 ... 2. ene. A-1

Order staying proceedings,

U.S. District Court for

the Eastern District of

Pennsylvania, dated
SN eee A-2

Order denying petition for

rehearing, U.S. Court of

Appeals for the Third

Circuit, dated February 3, 1994 ............ A-4

Opinion 1, U.S. Court of Appeals
for the Third Circuit, dated
I Sr ee yk od A-6

Opinion 2, U.S. Court of Appeals
for the Third Circuit, dated
Ee a A-49

Order vacating panel’s opinion

and judgment, U.S. Court of

Appeals for the Third Circuit,
ee A-69

Order staying mandate, U.S.

Court of Appeals for the

Third Circuit, dated

A‘ Th, THe 6 ks ik 3 ee eae A-72

Opinion, U.S. Court of Appeals
for the Third Circuit, dated
pGay 26, TS08 (...continued)
Judge Alito disagrees with the majority opinion on other grounds, he
joins the majority in this regard.

* In a supplemental stipulation regarding cross-claims and
counterclaims entered into by F & C and the excess insurers, and
approved and ordered by the district court on January 17, 1989, F & C
and the excess insurers preserved the excess insurers’ cross-claims in
the F & C action. With the exception of the initial pleadings, the excess
insurers failed to object to lack of service or in personam jurisdiction in
the F & C case. In its answer and counterclaim, Texas Eastern asserted
that "/Ajll of Texas Eastern’s insurers must bear, jointly and severally,
all indemnity, damages, defense costs, costs, and reasonable attorney’s
fees resulting from any of the foregoing claims,” belying Texas
Eastern’s own belief that its excess insurers were party to the F & C
action, and undermining Texas Eastern’s attempt to separate its claims
against F & C from its claims against the excess insurers. Furthermore,
Texas Eastern’s motion for leave to amend pleadings included the excess
insurers in the caption. Not only did the excess insurers respond on the
merits, but the district court ruled, in an order of July 25, 1991, to
dismiss ali or specific claims against certain of the excess insurers,
(continued...)

isspsaeibeaiiaaaaiiaiai

A-17

infer that the counterclaim defendants effectively waived the
defense of lezk of personal jurisdiction based on the absence
of service of process by acquiescing in personal jurisdiction.
See Zelson v. Thomforde, 412 F.2d 56, 58-59 (3d Cir.
1969); United States v. Article of Drug, 362 F.2d 923,
926-27 (3d Cir. 1966). Since service of process is to
provide notice of the pendency of the action, which the
excess carriers clearly had, and goes to the question of in
personam jurisdiction, in which the excess carriers have
clearly acquiesced, the district court’s exercise of personal
jurisdiction over the excess carriers in the F & C action
cannot be nullified by Texas Eastern’s failure to cause
summonses to be served on them. The district court
implicitly adopted such a holding when it entered judgment
in the F & C action "in favor of all carriers," and we affirm
this resolution of the question of personal jurisdiction in
F&C.

y I

Having disposed of contentions regarding personal
jurisdiction, we must now consider the claim that the
district court lacked subject matter jurisdiction over the
non-diverse counterclaim defendants in the F & C action.
In its counterclaim, Texas Eastern alleged ancillary
jurisdiction over the excess insurers. Ancillary subject
matter jurisdiction may be exercised over additional party
defendants to a compulsory counterclaim, or over third

“(.. .continued)

evidencing its assumption that the excess insurers were indeed parties to
the F & C action. Finally, the district court’s order and final judgment
of July 9, 1992, granted “final judgment on all claims in favor of all
insurance carriers.” (Emryhasis added.) This order was individually
entered on the docket in all three cases, including the F & C action.
Docket No. 88-5039, second entry of July 10, 1992.

A-18

party defendants. See Great Lakes Rubber Corp. v. Herbert
Cooper Co., 286 F.2d 631, 633-34 (3d Cir. 1961) (ancillary
jurisdiction extends to subject matter of counterclaim arising
out of transaction or occurrence which is subject matter of
opposing party’s claim of which court has jurisdiction, and
such counterclaim is "compulsory"); Field v.
Volkswagenwerk AG, 626 F.2d 293, 299 (3d Cir. 1980) (no
independent jurisdictional basis required for third party
claim when diversity jurisdiction obtained over original
claim). Nevertheless, Texas Eastern now claims that the
district court’s exercise of subject matter jurisdiction over
the counterclaims against the non-diverse excess insurers
was a form of pendent party jurisdiction precluded by the
Supreme Court in Finley v. United States, 490 U.S. 545,
109 S. Ct. 2003, 104 L. Ed. 2d 593 (1989) (declining to
exercise pendent party jurisdiction under Federal Tort
Claims Act unless statute conferring jurisdiction over
primary claim explicitly confers jurisdiction over pendent
party claim). Texas Eastern argues that neither the
diversity statute, 28 U.S.C. § 1332, upon which jurisdiction
over the original claim lies, nor any other arguably
applicable federal statute, authorizes such jurisdiction over
the excess insurers.?’

*% Texas Eastern further claims that the district court could have
assumed personal jurisdiction over the excess insurers only by virtue of
the discretionary authority represented in Federal Rule of Civil
Procedure 13(h). Rule 13(h) provides that: “[pJersons other than those
made parties to the original action may be made parties to a
counterclaim or cross-claim in accordance with the provisions of Rules
19 and 20." Because, inter alia, the court made no explicit reference to
its discretionary power to join the counterclaim defendants, Texas
Eastern argues that the court did not properly exercise its discretionary
authority.

(continued. ..)

A-19

In this regard, we note initially that the Supreme Court
has carefully distinguished a non-federal claim asserted by a
plaintiff which can be joined with a federal cause of action
arising from the same transaction despite its destruction of
complete diversity, from ancillary jurisdiction, which
typically involves "claims by a defending party haled into
court against his will, or by another person whose rights
might be irretrievably lost unless he could assert them in an
ongoing action in federal court. " Owen Equipment and
Erection Co. v. Kroger, 437 U.S. 365, 376, 98 S. Ct.
2396, 57 L. Ed. 2d 274 (1978). See also Ambromovage Vv.
United Mine Workers of America, 726 F.2d 972, 989 n.48
(3d Cir. 1984) ("ancillary" jurisdiction pertains to claims
other than those of plaintiff, such as compulsory
counterclaims, while "pendent" jurisdiction pertains to
plaintiff's non-federal claims where there is a federal claim
which gives the court jurisdiction). This subtle distinction
places in doubt Texas Eastern’s broad reading of Finley.

/(.. .continued)

Moreover, Texas Eastern asserts that Rule 13(h) prohibits Texas
Eastern’s counterclaim inasmuch as under the Rule a "‘counter-
claim . . . may not be directed solely against persons who are not
already parties to the original action. . .’". Texas Eastern’s letter
brief, September 8, 1993, at p. 19 (citing Baltimore & Ohio R. Co. v.
Central Ry. Services, Inc., 636 F. Supp. 782, 786 (E.D. Pa. 1986)).

We find Texas Eastern’s argument to be without merit because, as
we indicate in our opinion, we hold that the district court implicitly
found in personam jurisdiction over the excess insurers. Furthermore,
Texas Eastern’s counterclaim was not directed solely against the
counterclaim defendants, but requested the court adjudge that “all of
Texas Eastern’s insurers must bear, jointly and severally, all indemnity,
damages, defense costs... ". Answer and counterclaim of defendant
Texas Eastern, December 15, 1988, at p. 40 (emphasis added).

A-20

We note secondly that Congress has confirmed the
principle of ancillary jurisdiction over counterclaim
defendants in the enactment of the Judicial Improvements
Act of 1990, 28 U.S.C. § 1367 (using new statutory term,
"supplemental jurisdiction").” Section 1367(b) of the Act
restricts the extension of jurisdiction in diversity cases over
"claims by plaintiffs against persons made parties under
Rule 14, 19, 20, or 24," (emphasis added), and by its terms
would not extend to Texas Eastern’s counterclaims as party
defendant. "Supplemental" jurisdiction under the statute
extends to any related claim of the defendant that arises out
of the same case or controversy as the original claim. See
C. Wright, A. Miller, M. Kane, Federal Practice and
Procedure Civil 2d, § 1436 at 11 (Supp. 1993); see, also,
C. Wright, Federal Courts § 79 at 527 n.6 (4th ed. 1983)
("the bringing in of additional parties to respond to a

For the present purposes, § 1367(a) and (b) are of interest and read
as follows:

(a) .. .[I]n any civil action of which the district courts have
original jurisdiction, the district courts shall have supplemental
jurisdiction over all other claims that are so related to claims in the
action within such original jurisdiction that they form part of the
same Case or controversy under Article III of the United States
Constitution. Such supplemental jurisdiction shall include claims
that involve the joinder or intervention of additional parties.

(b) In any civil action of which the district courts have original
jurisdiction founds. solely on section 1332 of this title, the district
courts shall not have supplemental jurisdiction under subsection (a)
over claims by piaintiffs against persons made parties under Rule
14, 19, 20 or 24 of the Federal Rules of Civil Procedure, or over
claims by persons proposed to be joined as plaintiffs under Rule 19
of such rules, or seeking to intervene as plaintiffs under Rule 24 of
such rules, when exercising supplemental jurisdiction over such
claims would be inconsistent with the jurisdictional requirements of
section 1332.

To O_O

A-21

compulsory counterclaim does not destroy diversity
jurisdiction"). Thus, it would appear that the Judiciai
Improvements Act would preserve jurisdiction in the F & C
action.2 We hold that the additional non-diverse
counterclaim defendants do not destroy diversity jurisdiction
in the F & C action because there is complete diversity of
citizenship between the originally named parties.

3

Having found that federal jurisdiction was correctly
found in the F & C case and that all of the insurers are
parties to that action, we note the possibility that the
principle of ancillary jurisdiction might again be invoked to
ground subject matter jurisdiction in the remaining two
cases, AEGIS and Texas Eastern. We need not rely here on
the principle of ancillary jurisdiction, however, because we
find an indepe- dent source of federal subject matter
jurisdiction in both cases.

B. The AEGIS Case

The second of the actions that was before the district
court, Associated Electric & Gas Insurance Services, Lid. v.
Texas Eastern Transmission Corp., No. 88-2126, was filed
by two of Texas Eastern’s excess carriers on March 11,
1988 in the United States District Court for the Eastern
District of Pennsylvania, in which were joined as defendants

Y The Judicial Improvement Act of 1990 became operative on
December 1, 1990, well after the F & C action was filed. We make
reference to the Act merely to evidence the viability of the principles
which have generated the doctrine of ancillary jurisdiction in light of the
doubt cast upon such jurisdiction by Finley. We are satisfied however
that the Judicial Improvement Act codifies the implications of the
Court’s distinctions in Owen Equipment.

A-22

with Texas Eastern all other insurers, including ICI. Based
on the presence of the foreign state, ICI, as a party
"against" which a nonjury civil trial was brought,
jurisdiction in federal court was pursuant to 28 U.S.C.

§§ 1330(a) and 1603.” Texas Eastern argued that the

& The Foreign Sovereign Immunities Act, Pub. L. No. 94-583, 90
Stat. 2892 (Oct. 21, 1976) (FSIA), establishes the jurisdiction of the
federal courts in cases involving foreign sovereigns and the rights of
foreign sovereigns with regard to their non-immune commercial or
private acts to have actions brought against them adjudicated in a federal
bench trial. 28 U.S.C. § 1603 of the FSIA and its jurisdictional
provision, 28 U.S.C. § 1330, provide respectively that,

28 U.S.C. § 1603:

(a) A "Foreign state,” .. . includes a political subdivision of a
foreign state or an agency or instrumentality of a foreign state . . .

(b) An “agency or instrumentality of a foreign state” means any
entity —

(1) which is a separate legal person, corporate or otherwise, and

(2) which is an organ of a foreign state or political subdivision
thereof, or a majority of whose shares or other ownership interest is
owned by a foreign state or political subdivision thereof, and

(3) which is neither a citizen of a State of the United States. . .
nor created under the laws of any third country.

28 U.S.C. § 1330:

The district courts shall have original jurisdiction
without regard to amount in controversy of any
nonjury civil action against a foreign state as
defined in section 1603(a) of this title as to any
claim for relief in personam with respect to which
the foreign state is not entitled to immunity either
(continued. ..)

A-23

defendant insurers in the AEGIS action, most notably ICI,
should be realigned with AEGIS as plaintiffs to reflect their
alleged substantive party designations, making the suit no
longer "against" a foreign state, and thus depriving the
district court of FSIA subject matter jurisdiction. The
district court concluded that the principle of realignment is
inapplicable in matters in which subject matter jurisdiction
is predicated on something other than diversity of
citizenship. The district court found that the AEGIS case
was "ag2inst a foreign state" within the meaning of the
FSIA and exercised its jurisdiction over the matter.

In support of its argument for realignment, Texas
Eastern argues that the primary purpose of the AEGIS action
was to obtain a declaratory judgment that Texas Eastern was
not entitled to coverage under any of the policies issued to it
by the two excess carrier plaintiffs, and that ICI had a
common interest with the excess carriers on that primary
issue against Texas Eastern. Texas Eastern reasons
analogously that, under principles of realignment developed
in the context of the federal diversity jurisdiction statute, the
court was obliged to realign the nominal parties to reflect
their actual adversity of interest on the primary dispute as a
prerequisite to deciding whether a basis for jurisdiction

#(...continued)
under sections 1605-1607 of this title or under any
applicable international agreement.

We uphold the district court’s finding that ICI is a "foreign state” within
the meaning of 28 U.S.C. § 1603(a). The district court has determined
that ICI is “an agency or instrumentality of a foreign state” in that it is a
separate legal person, a majority of its shares are owned by a foreign
state, the Republic of Ireland, and it is neither a citizen of a state of the
United States, nor created under the laws of a third country. These
findings are not clearly erroneous.

A-24

remained under the FSIA. Texas Eastern argues that
because ICI as well as the remaining insurers nominally
designated as defendants should have been realigned with
the two excess carriers who brought suit, the action was not
"against a foreign state," and the jurisdictional authority of
the FSIA was improperly invoked to obtain jurisdiction.”
We disagree.

1.

It is beyond cavil that federal law determines whether
the elements of federal jurisdiction, original or removal,
have been satisfied. Here, of course, we must decide
whether the AEGIS action is "against" ICI, as required
under § 1330. Given this explicit jurisdictional requisite, it
is self-evident that Congress conditioned its conferral of
jurisdiction on the substantive party alignment of any
purported FSIA action. Thus we are obliged to ascertain the
real adversity of interest between AEGIS and ICI in the
AEGIS case and to realign them according to their
substantive interests before recognizing § 1330 jurisdiction.

It is also widely recognized that in enacting the FSIA
and related statutory amendments, Congress sought to create
a new division in addition to federal question and diversity
jurisdiction for federal subject matter jurisdiction. See,
e.g., Ruggiero v. Compania Peruana de Vapores, 639 F.2d
872 (2d Cir. 1981). It is further evident that enactment of
the FSIA was in response to unique policy considerations
touching on the international relations of the United States,

2% Because a number of the excess carriers share common citizenship
with Texas Eastern, diversity jurisdiction was precluded. Thus, if the
principle of realignment had been applied as Texas Eastern advocated,
there would not remain any basis for federal jurisdiction over the AEGIS
action.

A-25

considerations not apropos to the federal diversity statute.
Indeed, the Supreme Court has acknowledged Congress’
deliberate intent to circumvent much of the potential for
interference with the federal government’s foreign relations
caused by lack of uniformity and local bias in civil caselaw
involving foreign states as defendants by channelling private
actions against foreign sovereigns away from the state
forums and into federal courts to be adjudicated in nonjury
trials. Verlinden B.V. v. Central Bank of Nigeria, 461 U.S.
480, 497, 103 S. Ct. 1962, 76 L. Ed. 2d 81 (1983); see
also H. R. Rep. No. 94-1487, 94th Cong., 2d Sess. 13
(1976), reprinted in 1973 U.S.C.C.A.N. 6611-12. Thus,
the FSIA establishes the federal district courts as the forum
preferred by Congress for bringing suit against a foreign
state, and the policy of "jealous restriction" which has
characterized application of the diversity statute is not
operative in the FSIA context. City of Indianapolis v.
Chase National Bank, 314 U.S. 63, 76, 62 S. Ct. 15, 86 L.
_ Ed. 47 (1941) (Congress created diversity jurisdiction with
"jealous restriction"). It is with this in mind that we apply
the principle of realignment to the AEGIS case.

r

The landmark Supreme Court precedent applying the
principle of realignment states,

Diversity jurisdiction cannot be conferred
upon the federal courts by the parties’ own
determination of who are plaintiffs and
who defendants. It is our duty, as it is
that of the lower federal courts, to "look
beyond the pleadings and arrange the
parties according to their sides in the
dispute." Dawson v. Columbia Trust Co..,
197 U.S. 178, 180, [25 S. Ct. 420, 421,

A-26

49 L. Ed. 713 (1905)] . . . . Whether the
necessary "collision of interests," Dawson
v. Columbia Trust Co., supra, at 181 [25
S. Ct. at 421], exists, is therefore not to
be determined by mechanical rules. It
must be ascertained from the "principal
purpose of the suit,” East Tennessee, V. &
G. R. v. Grayson, 119 U.S. 240, 244, [7
S. Ct. 190, 30 L. Ed. 382 (1886)], and the
"primary and controlling matter in
dispute," Merchants’ Cotton Press Co. v.
Insurance Co., 151 U.S. 368, 385 [14

S. Ct. 367, 373, 38 L. Ed. 195 (1894)].

City of Indianapolis v. Chase National Bank, 314 U.S. 63,
69-70, 62 S. Ct. 15, 86 L. Ed. 47 (1941).

This landmark explication presents a two-tiered
methodology for judicial implementation of the federal
diversity statute. The first step obliges the federal court to
isolate the "primary purpose” or "primary and controlling
matter" in a multiple claim suit. The court then directs its
attention exclusively to this "primary" or substantively most
significant claim in order to facilitate ascertainment of
whether the statutory requisites of diversity jurisdiction have
been met. This "primary purpose" test, which ranks issues
according to their substantive importance in the lawsuit,
reflects the approach appropriate to a restrictive and limited
jurisdictional mandate, as in the case of the diversity statute.

It appears, in fact, to be uniquely well suited to the express
language and broad policy objectives of § 1332. We have
indeed adopted this test when determining that jurisdiction is
properly based on diversity of citizenship. See, e.g.,
Employers Insurance of Wausau v. Crown Cork and Seal
Co., Inc., 90S F.2d 42, 46 (3d Cir. 1990) (requiring a "real
dispute on a primary issue in the controversy" for purposes

A-27

of the diversity jurisdiction statute). The "primary purpose"
test, however, appears much less well suited to the purposes
of § 1330, which embodies an effort on the part of
Congress to encourage rather than merely permit litigation
in the federal courts.

The second step involved in implementing the
jurisdictional mandate at issue in the Court’s landmark
diversity realignment case obliges the federal courts to
"look beyond the pleadings and arrange the parties
according to their sides in the dispute. " This step, though
sometimes conflated with the first step in a diversity
analysis and hence commonty identified with diversity
jurisprudence, in fact represents a broader principle of
judicial interpretation of statutes conferring jurisdiction in
federal courts, where the statutory conferral of jurisdiction
is predicated upon the adversarial relationship of the
parties.” In other words, where party designations have

1 Although the “realignment” of parties typically occurs as part of a
federal court’s determination cf diversity of citizenship, the Supreme
Court has “realigned” nominal pari‘es in at least one case where
diversity of citizenship indisputably cicated grounds for original
jurisdiction in the federal district court, and was not challenged.
Chicago, R.I. & P.R. Co. v. Stude, 346 U.S. 574 (1954). In Stude,
state law provided for appeal to a state court from an administrative
condemnation proceeding instituted under state law and resulting in a
damages award to a landowner. The petitioner filed an appeal in state
court, designating the landowner as “plaintiff” and the petitioner as
“defendant,” as was required also by state law. The petitioner
subsequently sought to remove the state court proceeding on the ground
that 28 U.S.C. § 1441, the relevant federal removal statute, authorized
"the defendant or the defendants" to remove civil actions brought in a
state court of which the federal court has original jurisdiction. In the
conicxi « f examining the merits of a motion to remand, the Court
decided that the procedural provisions of the state law were not
controlling for purposes of construing the federal removal statute. Id.,
(continued. ..)

A-28

jurisdictional consequences under the relevant federal
jurisdiction statute, be it § 1332 diversity, § 1330 FSIA or
their related removal provisions, the principle of
"realignment" obliges the court to penetrate the nominal
party alignment and to consider the parties’ actual adversity
of interest for purposes of determining whether there is a
statutory basis for jurisdiction. Thus, despite some
confusion in nomenclature caused perhaps by the
commonplace application of "realignment" in the diversity
context, the principle embodied by the term "realignment"
is one of broader application and is not reducible io the
“primary purpose" test utilized in the diversity context. It
is incumbent upon us in the present appeal to consider
whether a complex FSIA case warrants departure from the
"piamary issue" analysis which we have adopted in the
context of diversity jurisdiction, and application of a more
inclusive realignment analysis.

With this in mind, we note that other circuits have
rejected the "primary purpose” test in favor of the more
lenient "substantial controversy" test to determine § 1330
jurisdiction where multiple claims are pleaded. See, e.g.,
American Motorists Insurance Company v. Trane Company,
657 F.2d 146, 149 (7th Cir. 1981) (substantial controversy

10. .continued) :
346 U.S. at 580. Thus the fact that the case was docketed in state court

with the petitioner as "defendant" was not dispositive for purposes of the

right to remove. The Court "realigned" the parties in conformity with

their substantive adversity of interest, and held that remand was proper.

The Court realigned the parties not to effectuate the limits of diversity
jurisdiction, which would not have been vitiated by realignment, but
rather to enforce the separate limits on removal jurisdiction. Thus, it is ;
clear that the obligation of the federal courts to realign parties to reflect
their true adversity of interest for purposes of deciding the statutory
basis for jurisdiction is not limited to cases purportedly based on

§ 1332.

A-29

applied to diversity action). Under the "substantial
controversy" ranking of issues standard, the court
determines, as precursor to potential realignment, which of
the conflicts asserted in the litigation are merely
"substantial," and thea whether the parties in question are
really opposed according to their true interests in any of
their substantial conflicts. Under this standard, it would not
defeat jurisdiction if there were no statutory basis for
jurisdiction on the primary issue in the litigation, as long as
the statutory elements of jurisdiction were present on any
other "substantial" issue.

In an even more lenient approach than the "substantial
controversy" test, a federal court might recognize a
plaintiff/defendant relationship of adversity if real adversity
exists between the parties on amy issue asserted in the
plaintiff's complaint, regardless of the relative significance
of that issue. Such a liberal approach has not been applied
to diversity cases in any circuit, as well it ought not given
the restrictive language and policy of § 1332. The present

complex FSIA vase, however, being one of first impi

1986
7. 1987
C. Texas Law
D. The Applicable Facts
E. Prejudice
XIV. Duty to Defend
A. The Policy Language
B. Texas Law

A-109
I. INTRODUCTION

Texas Eastern Transmission Corporation (Texas
Eastern), the owner-operator of a natural gas pipeline
system extending from natural gas well fields in Texas,
Louisiana, and the Gulf of Mexico to the New York
metropolitan area, brought suit against approximately
twenty-one insurance companies” (the Carriers) that
provided Texas Eastern with primary and excess
comprehensive general liability (CGL) insurance coverage
between 1958 and the present.” Texas Eastern seeks to
recover the expense that it will incur in the governmentally

v The insurance companies include Fidelity & Casualty Company of
New York, Associated Electric & Gas Insurance Services Limited,
Aetna Casualty & Surety Company, American Home Assurance
Company, Boston Old Colony Insurance Company, Continental Casualty
Company, First State Insurance Company, Highlands Insurance
Company, The Home Insurance Company, The Insurance Company of
North America, Insurance Company of the State of Pennsylvania,
Lexington Insurance Company, Midland Insurance Company (in
receivership), National Surety Corporation, Prudential Reinsurance
Company, Ranger Insurance Company, Republic Insurance Company,
Stonewall Insurance Company, United States Fire Insurance Company,
Certain Underwriters at Lloyd’s, London, and Certain London Market
Insurance Companies.

¥ Texas Eastern and the individual Carriers filed a Joint Submission
of Texas Eastern Policies in which they stipulated to the existence of
approximately fifty-seven insurance policies. Texas Eastern and the
London Market Insurers filed a Stipulation in which they agreed to the
existence of an additional fifty-three insurance policies.

A-110

mandated environmental cleanup of polychlorinated
biphenyl’ (PCB) contamination at multiple locations on
Texas Eastern’s property along the transmission line. The
total costs are estimated to exceed $750 million. After more
than two years of discovery, the parties have now filed
cross-motions for summary judgment.

Il. PROCEDURAL HISTORY

The present litigation consolidates three lawsuits, each
seeking declaratory judgment as to the respective duties and
liabilities of the Carriers to defend and/or indemnify Texas
Eastern against claims and settlements made by and with the
United States Environmental Protection Agency (EPA),
various state agencies, and private parties.

On December 11, 1987, Fidelity & Casualty Company
of New York (Fidelity or F & C), Texas Eastern’s primary
CGL carrier throughout all relevant periods, filed Case No.
87-2925T against Texas Eastern in the United States District
Court for the Northern District of Texas (Northern District
action). The Northern District action was a diversity case
establishing federal subject-matter jurisdiction pursuant to
28 U.S.C. § 1332.

¥ A polychlorinated biphenyl! is defined as “Any of a family of
industrial compounds produced by chlorination of biphenyl, noted
chiefly as an environmental pollutant that accumulates in animal tissue
with resuliant pathogenic and teratogenic effects." Webster’s II] New
Riverside University Dictionary 912 (1984).

‘ Texas Eastern has also asserted claims seeking damages for breach
of contract against all of its insurers.

A-111

On March 11, 1988, Associated Electric & Gas
Insurance Services Limited (Aegis) and National Surety
Corporation filed Civil Action No. 88-2126 in the United
States District Court for the Eastern District of
Pennsylvania (Eastern District action) against Texas
Eastern, F & C, and Texas Eastern’s other CGL insurers.
Jurisdiction was based on 28 U.S.C. § 1330(a), 1603(a),
and 1605(2) of the Foreign Sovereign Immunities Act
(FSIA), because one of the insurers, the Insurance Company
of Ireland (one of the London Market Insurers), was an
instrumentality of a foreign state.

On March 21, 1988, Texas Eastern filed an action in
Texas state court, in Houston (Texas state court action),
against all cf its insurers.’ The Texas state court action
was removed to the United States District Court for the
Southern District of Texas on the basis of the FSIA and was
docketed in that court as Civil Action No. 88-1910.

In May 1988, the Northern District action was
transferred by the Judicial Panel on Multidistrict Litigation
to this court for consolidation for pretrial purposes with the
Eastern District action, pursuant to 28 U.S.C. § 1407; the
case was docketed in the Fasiern District of Pennsylvania as
Civil Action No. 88-5039. The cases were then designated
"Texas Eastern Transmission Corporation, PCB
Contamination Insurance Coverage Litigation, Case Number
MDL 764." In July 1988, the United States District Court
for the Southern District of Texas transferred the action
pending before it to this district, where it was docketed as
Civil Action No. 88-5707. The grounds for the transfer

2 Texas Eastern originally filed this action in New Jersey state court
on December 21, 1987. The suit was subsequently dismissed on March
17, 1988, on the ground of forum non conveniens.

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were not stated, but presumably the transfer was based on
28 U.S.C. § 1404(a). That case has been consolidated for
all purposes with MDL 764. (MDL 764 Order No.4,
Document No. 23.)

After extensive (and perhaps exhaustive) discovery, the
parties filed cross-motions for either partial or total
summary judgment. Texas Eastern moved for partial
summary judgment on six major issues seeking the
following legal rulings: (1) the pollution exclusion in its
insurance policies does not bar coverage for long-term
pollution; (2) all of its insurance policies were triggered due
to the latent nature of the PCB contamination; (3) the
Carriers’ defenses of late notice and misrepresentation
should be stricken; (4) the cleanup costs it has and will
incur are recoverable as "damages"; (5) F & C breached its
duty to defend Texas Eastern in the underlying lawsuits;
and (6) the underlying lawsuits asserted claims for bodily
injury, property damage, and personal injury.

The Carriers moved jointly for partial or complete
summary judgment on the following issues seeking the
following legal rulings: (1) no insurable occurrence ever
accrued; (2) the costs incurred by Texas Eastern were not
incurred as "damages" because of bodily injury or property
damage; (3) Texas Eastern provided late notice of its claims
to all Carriers; (4) civil fines and penalties are not insurable
as "damages"; (5) the owned property exclusion in Texas
Eastern’s insurance policies bars coverage for damage to
Texas Eastern’s own property; and (6) the pollution
exclusion in Texas Eastern’s insurance policies bars
coverage for all costs incurred to remediate the PCB
contamination. In addition, twelve of the Carriers
individually filed separate motions for partial or total
summary judgment in which some of the ower Carriers
joined. Finally, the Carriers jointly filed several motions to

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strike exhibits offered by Texas Eastern in support of its
motion for summary judgment.

I held hearings on the summary judgment motions on
January 13, 14, and 15, 1992. After consideration of the
briefs and the arguments made during the hearings, I have
reached numerous conclusions and decisions which are
hereafter set forth. I have decided most, but not all, of the
issues raised. I have determined that all of the Carriers are
entitled to summary judgement on all claims against them
because of Texas Eastern’s late notice. Other primary issues
have been decided in order to avoid extensive further
appeals and litigation in the event that a different result
occurs on appeal.%

Ill. SUMMARY JUDGMENT STANDARD

A court shall grant summary judgment "if the
pleadings, depositions, answers to interrogatories, and
admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter
of law." Fed. R. Civ. P. 56(c); Williams v. Borough of
West Chester, 891 F.2d 458, 463-64 (3d Cir. 1989). In a
motion for summary judgment, the court may examine
evidence beyond the pleadings. The court must always
consider the evidence, and the inferences therefrom, in the
light most favorable to the nonmoving party. United States
v. Diebold, Inc., 369 U.S. 654, 655 (1962); Ti igg Corp. v.
Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987).

¥ To the extent that I have declined to rule on any outstanding
motion in this case, the motion should be considered denied as moot.

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The initial burden is on the moving party to
demonstrate the absence of a genuine issue of material fact.
First Nat’l Bank v. Lincoln Nat’! Life Ins. Co., 824 F.2d
277, 280 (3d Cir. 1987). Once the moving party has
satisfied this burden, the nonmoving party must demonstrate
that genuine disputes exist concerning each essential element
of its case on which it bears the burden of proof at trial.
Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
For a dispute to be "genuine," a reasonable jury must be
able to return a verdict for the nonmoving party. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). If the
nonmoving party’s evidence is "‘merely colorable’ or is
‘not significantly probative,’ summary judgment may be
granted" in favor of the moving party. Egquimark
Commercial Fin. Co. v. C.I.T. Fin. Servs. Corp., 812 F.2d
141, 144 (3d Cir. 1987) (quoting Anderson, 477 U.S. at
249-50). In essence, it is my duty to determine whether the
nonmoving party has submitted evidence which "presents a
sufficient disagreement to require submission to a jury or
whether [the evidence] is so one-sided that [the moving
party] must prevail as a matter of law." Anderson, 477
U.S. at 251-52.

I have gone to great lengths to give Texas Eastern the
benefit of every doubt in interpreting the thousands of pages
of record evidence submitted by all parties. I have taken
this course because the Carriers’ summary judgment motion
heavily relies on factual findings, while Texas Eastern’s
summary judgment motion, by its own admission, relies
more on interpretations of the law than on express factual
findings. In the interest of fairness, I have made extensive

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findings concerning the “undisputed facts." See infra part
Vill.”

IV. MOTIONS TO STRIKE

A. Motion to Strike Texas Eastern’s Motion for Summary
Judgment

The Carriers contend that Texas Eastern’s motion for
summary judgment is merely a request for hypothetical
legal rulings calculated to induce me to reveal my position
on particular legal disputes and thereby enable Texas
Eastern to better prepare its case for trial. As an example,
the Carriers cite Texas Eastern’s motion for partial
summary judgment on the issue of whether gradual
discharge, dispersal, release, or escape of pollutants can be
"sudden and accidental" within the meaning of a pollution
exclusion Clause. In the Carriers’ view, Texas Eastern’s
motion is more appropriate to a Rule 16 conference or a
motion in limine, where evidentiary rulings are
appropriately requested and received.

Texas Eastern responds that seeking legal rulings
which narrow the issues for trial are entirely proper in Rule
56 motions, and that its motion need not necessarily allow
the court to pronounce final judgment on a particular claim,
as long as the court’s decision finally disposes of at least
some portion of that claim. In addition, Texas Eastern
asserts that it need not proffer substantial factual support for
its summary judgment motion because it primarily focuses

7 In this regard, "[oJnly disputes over facts that might affect the
outcome of the suit under the governing law will properly preclude the
entry of summary judgment. Factual disputes that are irrelevant or
unnecessary will not be coupted." Anderson, 477 U.S. at 248.

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on legal issues which are matters of law for the court to
decide and, thus, do not require an extensive factual
background.

Federal Rule of Civil Procedure 56(a) expressly
entitles a party to move for summary judgment "in the
party’s favor upon all [claims] or any part thereof." In my
view, Rule 56 is broad enough to allow Texas Eastern to
move for summary judgment on issues which are crucially
important to this litigation, and about which no factual
dispute exists. The interpretation of insurance policy
language is just such an issue. The Carriers’ motion to
strike will therefore be denied.

B. Motion to Strike Certain Evidence Offered by Texas
Eastern in Support of Its Motion for Summary
Judgment
The Carriers have also moved to strike certain

evidence relied on by Texas Eastern to support its motion

for summary judgment. First, the Carriers move to strike
exhibits 8-31, 47, [4]8, and 50 offered by Texas Eastern in
the Declaration of Laird Hart. Exhibits 8-18 are private
third-party complaints filed against Texas Eastern, alleging
injuries arising out of PCB contamination, not specifically
identified in Texas Eastern’s First Amended Complaint.

They were the subject of Texas Eastern’s motion for leave

to file a Second Amended Complaint which I held in

abeyance. (Order No. 42, Document No. 443.) Ina
memorandum and order filed contemporaneously with this
opinion, I have denied Texas Eastern’s motion for leave to
amend its complaint and therefore conclude that evidence of
the private third-party complaints is not properly before me.

Exhibits 8-18 will therefore be stricken.

Exhibits 19-27 present a more difficult question. Texas
Eastern has offered evidence of the drafting history of one

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form of a pollution exclusion used in many of the insurance
policies at issue in this litigation.’ For the reasons set
forth in my discussion of the "Pollution Exclusion" issue,
infra part XII, I have decided that consideration of this
evidence is permissible under Texas law and, thus, the
Carriers’ motion to strike exhibits 19-31 will be denied.

Exhibits 47 and 48 are excerpts from the depositions of
Texas Eastern expert witnesses John A. Cherry and
Bradford S. Cushing. The Carriers object to this evidence
on the ground that the excerpts are insufficient to allow me
to determine the experts’ qualifications, or the facts and
data upon which the opinions are based. Additionally, the
Carriers believe that this evidence sets forth mere
conclusions and does not offer any evidence of the experts’
thought processes or rationale. Texas Eastern has responded
by providing some of the deposition transcript missing from
its initial proffer. (See TApp.2 222: TApp. 223.) I am
Satisfied that when considered together with the additional
deposition testimony, this evidence is properly before the
court and the motion to strike will therefore be denied.

Exhibit 50 consists of two affidavits sworn by Karen
Hammerstrom, an EPA employee, which were submitted in
support of EPA’s enforcement action against Texas Eastern.

# Exhibits 28-31 are documents concerning the intent of various
insurance carriers (not necessarily parties to this litigation) regarding the
language of the pollution exclusion. For the purposes of this motion, I
will consider them as part of the proffered pollution exclusion evidence.

2 —_ I will refer to Texas Eastern’s Appendix filings as "TApp." and to
the Carriers’ Appendix filings as "App." Both Appendices were filed in
support of the summary judgment motions.

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Texas Eastern relies heavily on these affidavits to prove that
at least some of its response costs are the direct result of
actual or threatened third-party harm to property or persons.
Although the affidavits were not created specifically for this
litigation, they appear to be reliable and relevant, and
appear to satisfy the requirements of Federal Rule of Civil
Procedure 56(e). As such, they are properly before me.
The Carriers’ motion to strike the Hammerstrom Affidavits
will therefore be denied.

Second, the Carriers object to any reliance on Texas
Eastern’s "Statement of General Background Facts" filed
contemporaneously with, and in support of, its motion for
summary judgment because, in general, it does not cite to
record evidence. It is settled iaw that all evidence relied
upon in deciding a motion for summary judgment must be
reducible to admissible evidence. Texas Eastern admitted at
oral argument that its "Statement of General Background
Facts" was not "admissible evidence" and, as such, I have
not relied on it in deciding these motions for summary
judgment. The Carriers’ motion to strike Texas Eastern’s
"Statement of General Background Facts" will therefore be

granted.
C. Supplemental Motion to Strike

The Carriers have moved to strike certain additional
evidence offered by Texas Eastern. First, the Carriers seek
to strike paragraphs 4, 5, 7, and 8 of the Declaration of H.
Douglas Church, located at TApp. 191, on the ground that
the information contained therein is not based on Mr.
Church’s personal knowledge. The information in these
paragraphs relates to Texas Eastern’s historical practices
concerning PCB use and containment. The Carriers contend
that Mr. Church cannot have personal knowledge of events
which occurred before 1985, the date when he first became

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responsible for dealing with Texas Eastern’s PCB-related
problems.

Texas Eastern responds that although Mr. Church does
not have first-hand personal knowledge of all the events to
which he attested, he acquired personal knowledge by
reviewing relevant documents and discussing the issues with
senior management and other personnel from Texas
Eastern’s Operations, Engineering, Environmental, and
Legal departments. (Church Decl., TApp. 191, at ¢ 4.)
The Carriers have in turn challenged the quality of Mr.
Church’s efforts to "get up to speed" on these important
issues. (Ins.’ Reply in Supp. of Suppl. Mot. to Strike at
4-5.)

Federal .ule of Evidence 602 prohibits a witness from
testifying about an issue unless the witness has personal
knowledge of the matter. The Carriers complain that Mr.
Church’s knowledge cannot be personal to him because it
was acquired from third parties. This argument proves too
much. All perception is inferential to some degree. As the
Seventh Circuit recently noted:

Knowledge acquired through others may still be
personal knowledge within the meaning of Fed.
R. Evid. 602, rather than hearsay, which is the
repetition of a statement made by someone

1” Both parties have referred to a generic group of high level Texas
Eastern employees as "senior management." Although never defined, I
understand this term to refer to employees at Texas Eastern who are, or
were, responsible for making important policy and management
decisions concerning Texas Eastern’s corporate activities. This group is
not solely limited to officers and directors, but also includes high level
managers responsible for the oversight of Texas Eastern’s daily pipeline

operations.

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else . . . . Such a statement is different from a
statement of personal knowledge merely based, as
most knowledge is based, on information obtained
from other people.

Agfa-Gevaert, A.G. v. A.B. Dick Co., 879 F.2d 1518, 1523
(7th Cir. 1989).

Mr. Church acknowledges that he relied on various
sources to acquire his knowledge of the events to which he
attests. He does not, however, offer his statement solely on
the authority of those statements, but rather vouches for the
statements’ truth himself. Mr. Church’s alleged reliance on
documents distinguishes this case from one in which a
declarant relies solely on the "say-so" of third parties. See,
e.g., Kaczmarek v. Allied Chem. Corp., 836 F.2d 1055,
1060-61 (7th Cir. 1987). I conclude that the Church
Declaration is sufficiently based on personal knowledge and
is therefore admissible evidence that can be relied on in
deciding these motions for summary judgment.

Next, the Carriers have moved to strike paragraphs 6
and 8 of the Declaration of Steve L. Horton, found at
TApp. 194. In paragraph 6, Mr. Horton states that after
discussions with environmental representatives of other
pipeline companies, it is his understanding that no other
piveline company has been required by EPA or any state
authority to install the same source control equipment that
Texas Eastern is required to install under the terms of the
EPA Consent Decree. (Horton Decl., TApp. 194, at { 6.)
The Carriers and Texas Eastern agree that this statement is
hearsay if it is offered to prove the truth of the matter, that
is, that no other company has, in fact, been required to
install the above-mentioned source control equipment.

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Texas Eastern contends that this evidence is being
offered only to establish what Steve Horton, Texas
Eastern’s Vice President of Environmental Affairs, believed
other companies have been required to do. Without ruling
on the relevance of Mr. Horton’s opinion, I will deny the
motion to strike; however, Mr. Horton’s statement is
admissible only to establish what he believed has been the
practice in the industry.

In Paragraph 8, Mr. Horton states that the residual
value of a computer and software, purchased by Texas
Eastern exclusively to help carry out the required activities
under the Consent Decree, will be little or none when the
activities are completed. (Horton Decl., TApp. 194 at ¢ 8.)
The Consent Decree involves a ten-year cleanup program.
(App. 385 at 16.) Thus, Mr. Horton is merely stating that
in his opinion, a computer purchased today will have little
value ten years from now.

The Carriers believe that Texas Eastern should offer
€xpert testimony on this issue, or at least lay testimony of
someone with expertise in the computer industry. Given the
nature of this testimony, I believe that Mr. Horton’s duties
make him sufficiently knowledgeable about the computer
and the work to which it is committed so as to permit iis
lay testimony to be admitted under Federal Rule of Civil
Procedure 701. Of course, the fact that he is not an expert
in this area may affect the persuasiveness of his testimony.

The Carriers also move to strike the excerpts of the
deposition testimony of Texas Eastern expert Davis L. Ford
concerning Texas Eastern’s waste Management practices.
(TApp. 31; TApp. 206.) The grounds for striking the
testimony are the same as those asserted in the Carriers’
original motion to strike the deposition testimony of experts
Cushing and Cherry. Texas Eastern has supplemented its

A-122

offer with additional deposition testimony sufficient to allow
its admission as evidence. (See TE’s Opp’n to Suppl. Mot.
to Strike at 13-14; Ex. F.) The Carriers’ argument that the
subject matter of Mr. Ford’s testimony is not helpful
because it fails to consider Texas Eastern’s PCB use goes to
the weight, not the sufficiency, of the evidence.’

Finally, the Carriers move to strike TApp. 127 and
129. These exhibits are part of the evidence offered by
Texas Eastern concerning circumstances surrounding ihe
drafting of the pollution exclusion which appears in a
number of the insurance policies at issue in this case.
Having decided that consideration of such evidence is
proper under Texas law to help determine whether the term
"sudden" is, or is not, ambiguous, I conclude that the
evidence is properly before me. For all of these reasons, the
Carriers’ supplemental motion to strike will be denied in its
entirety.

V. CHOICE OF LAW
The parties agree that Texas law applies’ to all of

the issues in this multidistrict litigation except those
concerning the insurability of civil fines and penalties,

i The Carriers’ motion to strike Ford’s report concerning Texas
Eastern’s waste management practices, (TApp. 203), on the ground that
the report will not be helpful in deciding the motions for summary
judgment, will also be denied for the same reason.

2/ I take this opportunity to observe the difficulty and irony of a
federal district court iudge sitting in Pennsylvania predicting what the
Supreme Court of Texas would do if faced with particular questions,
given that two of the three cases consolidated in this action originated in
Texas and concern activities which primarily occurred there.

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where the Carriers contend that the law of the state which
imposed the fine or penalty should apply. I will address the
choice of law issue regarding civil fines and penalties in my
discussion of that issue. (See infra part X.C.1.) Otherwise,
Texas law will be applied throughout this opinion.

It is axiomatic that the decisions of a state’s highest
court are the ultimate authority regarding state law.
Connecticut Mut. Life Ins. Co. v. Wyman, 718 F.2d 63, 65
(3d Cir. 1983). If the state’s highest court has not ruled on
the issue in question, it is my duty to predict how the state
court would rule. Pennsylvania Glass Sand Corp. v.
Caterpillar Tractor Co., 652 F.2d 1165, 1167 (3d Cir.
1981). In making these predictions, I have relied, to the
best of my ability, on lower Texas state court decisions,
well-reasoned authority from other jurisdictions, and other
relevant sources.

With respect to my use of sources other than the Texas
Supreme Court, I have relied first on lower court decisions
from the Texas state courts. Intermediate state court
decisions are presumptive evidence of state law.
Commercial Union Ins. Co. v. Bituminous Casualty Corp.,
851 F.2d 98, 100 (3d Cir. 1988). As the Third Circuit
recently stated:

Aithough we are not bound in a diversity case to
follow decisions of a state intermediate appellate
court, we are instructed that such decisions are
"not to be disregarded by a federal court unless it
is convinced by other persuasive data that the
highest court of the state would decide
otherwise."

iia

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Northern Ins. Co. v. Aardvark Assocs., Inc., 942 F.2d 189,
193 (3d Cir. 1991) (quoting West v. American Tel. & Tel.
Co., 311 U.S. 223, 237 (1940)).

I have also relied on decisions from other jurisdictions,
as well as other miscellaneous sources, to aid in my
predictions in instances where the lower courts have either
(1) not decided an issue, or (2) have decided an issue with
insufficient rationale to be a good indicator of what the
Texas Supreme Court would conclude if faced with a
similar question. Although I cannot guarantee that I have
predicted correctly, I have relied on my own understanding
of the law, and on the insurance and contract principles
which Texas courts have historically considered important,
to reach the conclusions which follow.

VI. GOVERNING PRINCIPLES OF INSURANCE LAW
A. Texas Rules of Insurance Contract Construction

Under Texas law, insurance policies are governed by
the same rules of construction which apply to contracts
generally. National Union Fire Ins. Co. v. Hudson Energy
Co., 811 S.W.2d 552, 555 (Tex. 1991); Barnett v. Aetna
Life Ins. Co., 723 S.W.2d 663, 665 (Tex. 1987); Garrison
v. Fielding Reinsurance, Inc., 765 S.W.2d 536, 538 (Tex.
Ct. App. 1989) (writ denied). "When terms of an insurance
policy are unambiguous, they are to be given their plain,
ordinary and generally accepted meaning unless the
instrument itself shows that the terms have been used in a
technical or different sense." Garrison, 765 S.W.2d at 538.

When the terms of an insurance policy are ambiguous,
a court should apply the construction that favors the insured
and permits recovery. Yancey v. Floyd West & Co., 755

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S.W.2d 914, 918 (Tex. Ct. App. 1988) (writ denied). A
term is ambiguous when the language of a policy is
susceptible to more than one reasonable construction.
Yancey, 755 S.W.2d at 918. “Where the clause of the
insurance policy subject to dispute involves exceptions or
limitations on the insurer’s liability under the policy, even
more stringent construction than usual is required." Jd.
(citing Glover v. National Ins. Underwriters, 545 S.W.2d
755, 761 (Tex. 1967)). The court must adopt the insured’s
construction of an exclusionary clause "as long as that
construction is not unreasonable, even if the construction
urged by the insurer appears to be more reasonable or a
more accurate reflection of the parties’ intent." Hudson
Energy Co., 811 S.W.2d at 555. However, courts should
refrain from creating an ambiguity where none exists.
Yancey, 755 S.W.2d at 918. In this regard, "a policy
which is otherwise clear is not rendered ambiguous simply
because it requires the insured to read the policy thoroughly
and carefully." Labatt Co. v. Hartford Lloyd’s Ins. Co.,
716 S.W.2d 795, 800 (Tex. Ct. App. 1989). Additionally,
mere disagreement over the interpretation of an instrument
does not make it ambiguous. Cohen v. Rains, 769 S.W.2d
380, 389 (Tex. Ct. App. 198°) (writ denied). Indeed, a
court must avoid a construction of the policy which renders
a portion of the contract meaningless. Liberty Mut. Ins.
Co. v. American Employers Ins. Co., 556 $.W.2d 242, 245
(Tex. 1977); Ideal Mut. Ins. Co. v. Last Days Evangelical
Ass’n, Inc., 783 F.2d 1234, 1238 (Sth Cir. 1986). If no
ambiguity exists, parol evidence is inadmissible to create an
ambiguity. Entzminger v. Provident Life & Accident Ins.
Co., 652 S.W.2d 533, 537 (Tex. Ct. App. 1983).
™~wever, in determining whether a contract term is
anibiguous, a court should consider the contract terms in
light of the surrounding circumstances. Sun Oil Co. (Del.)
v. Madeley, 626 S.W.2d 726, 731-32 (Tex. 1981).

a

—

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B. Texas Rules Concerning the Burden of Proof

Pursuant to Texas law, the insured bears the burden of
establishing that the claimed loss is within the coverage of
the policy. Employers Casualty Co. v. Block, 744 S.W.2d
940, 944 (Tex. 1988). The insured also bears the burden of
proving that it complied with all conditions precedent to
coverage. Trevino v. Allstate Ins. Co., 651 S.W.2d 8, 11
(Tex. Ct. App. 1983) (writ refused n.r.e.).

Texas law also requires the insured to prove that the
loss does not fall within an exclusion or exception where the
sasurer pleads such exclusion or exception to coverage.
Sherman v. Provident Am. Ins. Co., 421 S.W.2d 652, 654
(Tex. 1967); American Home Assurance Co. v. Brandt, 778
S.W.2d 141, 143 (Tex. Ct. App. 1989) (writ denied); Britt
v. Cambridge Mut. Fire Ins. Co., 717 §.W.2d 476, 482
(Tex. Ct. App. 1986) (writ refused n.r.e.). I recognize that
this is a minority rule, but it appears to be the settled law in
Texas. Finally, if it is determined that the policy
provides coverage for only a portion of the insured’s loss,
the burden of apportioning the damages between covered
and noncovered losses is on the insured. Winn v.
Continental Casualty Co., 494 S.W.2d 601, 606 (Tex. Civ.
App. 1973).

1¥ Texas Eastern does not have the burden of proof on the Carriers’
affirmative defense of misrepresentation. See Koral Indus., Inc. v.
Security-Connecticut Life Ins. Co., 788 S.W.2d 136, 141 (Tex. Ct.
App.), writ denied, 802 S.W.2d 650 (Tex. 1990). Because I will grant
summary judgment to the Carriers on the issue of “Late Notice," I do
not reach the merits of the misrepresentation claim.

vas
Wiehe a Relea eae _tieablbaie

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VII. IMPUTATION OF EMPLOYEE KNOWLEDGE

When individual parties are involved in litigation, the
determinatioi: of what a party knew or intended is rarely a
simple matter. Engaging in a post hoc analysis of what an
individual was thinking requires powers of clairvoyance
which most mortals do not possess. This difficult task is
even more formidable when a corporate party is involved.
A corporation operates solely through its individual
employees. The employees’ knowledge and intentions must
therefore ordinarily be deemed the knowledge and intentions
of the corporation. As Judge Dalton observed:

A corporation can only act through its employees
and, consequently, the acts of its employees,
within the scope of their employment, constitute
the acts of the corporation. Likewise, knowledge
acquired by employees within the scope of their
employment is imputed to the cor, ration. In
consequence, a corporation cannot piead
innocence by assvrting that the information
obtained by several employees was not acquired
by any one individual employee who then would
have comprehended its full import. Rather, the
corporation is considered to have acquired the
collective knowledge of its employees and is held
responsible for their failure to act accordingly.

United States v. T.I.M.E.—D.C., Inc., 381 F. Supp. 730,
738 (W.D. Va. 1974). When dealing with a corporation as
large as Texas Eastern, imputation requires an inquiry into
the minds of literally thousands of people, and in this case,
spanning a time period of three to four decades.

The difficulty of this task does not relieve the parties
(or me) of the duty to attempt to reconstruct what Texas

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Eastern "knew" at the relevant times. If a corporation were
able to escape this imputation of knowledge, it would
always be in a position to limit its liability by professing
corporate ignorance. At the other extreme, the imputation of
every bit of knowledge known to each individual
employee—from the Chief Executive Officer to the most
recently hired recruit—would likely paralyze a corporation
as upper level management attempted to keep informed of
all information known to all of the corporation’s employees.

Cognizant of this dilemma, courts have created a
compromise approach which limits the information imputed
to the corporation to that which was learned in the course of
an employee’s employment-related activities, and which is
known by an employee of a sufficient level of corporate
responsibility to justify charging the corporation with that
knowledge. Texas law is in accord with this approach.
Texas Eastern is a corporation and each employee is an
agent for the corporation. In accordance with Texas agency
law, knowledge which an employee or other agent acquires
in the course of employment is imputed to the principal.
Green Tree Acceptance, Inc. v. Holmes, 803 S.W.2d 458,
460 (Tex. Ct. App. 1991) (writ denied). Texas law makes
it clear that this rule of imputation does not depend upon
whether the principal actually shares the agent’s knowledge,
Williams v. Jennings, 755 S.W.2d 874, 883 (Tex. Ct. App.
1988) (writ denied), because a principal should not be
entitled to the benefits of the agent’s services without being
charged with the agent’s knowledge. Wellington Oil Co. v.
Maffi, 150 S.W.2d 60, 63 (Tex. 1941).

Texas Eastern is thus charged with the knowledge of
its employees as long as that knowledge was gained in the
course of the individual employee’s employment-related
activities. Of course, not all of Texas Eastern’s emplovees
will have knowledge of particular events, but this does not

ee

Pra tate ak ca a checiak hs

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prevent the corporation from being charged with the
knowledge of those who do.

Texas Eastern has raised an objection to being charged
with the collective knowledge of its many employees for the
purpose of determining the intent of the corporation. In
Kern Oil & Refining Co. v. Tenneco Oil Co. , 792 F.2d
1380, 1386-87 (9th Cir. 1986), cert. denied, 480 U.S. 906
(1987), the court concluded that under Texas law, a
corporation’s subjective intent could not be established by
imputing the collective knowledge of its employees. In
Tenneco, the court reviewed 4 district court’s determination
that an overpayment of money was recoverable by the payor
corporation, because it was made based on a mistake of
fact, and thus was involuntarily made.

Under Texas law, if a party to a contract makes an
overpayment, even though it is under no legal obligation to
do so, it cannot recover the money if it was voluntarily paid
with full knowledge of the relevant facts. Tenneco, 792
F.2d at 1386. The payee argued that the corporate party
could not claim that its payment was made under a mistake
of fact when its employees collectively knew all of the
relevant facts. The Ninth Circuit concluded that the
collective knowledge could not be imputed because Texas
law required that the overpayment be truly voluntary, that
is, done intentionally or purposefully or by choice of one’s
own accord or by the free exercise of the will; the collective
knowledge was insufficient to charge the corporation with
this action. Id.

It is apparent to me that the Tenneco court assumed
that Texas law required the corporation to subjectively
intend to make the overpaymen:. Tenneco is distinguishable
from the present litigation because, as will be explained in
this opinion, Texas insurance law is not concerned with the

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subjective intentions of the insured, but with the objective
ones. In an objective analysis, the focus of the inquiry is
what the corporation is likely to have known, and not
necessarily what the corporation in fact intended. Under
these circumstances, I believe the Texas Supremie court
would require the corporation to be charged with the

collective knowledge of its employees.’

As I previously observed, information known to
corporate employees should not be blindly imputed to the
corporation. An inquiry should be made as to whether the
employee had a sufficient level of corporate responsibility to
justify charging the corporation with that particular bit of
knowledge. I do not understand this requirement to mean
that an employee must have climbed to a particular rung on
the corporate ladder, as Texas Eastern has argued, before
an employees’s knowledge will be imputed. Rather, I
believe this to mean that the knowledge must be
substantially related to the task which the corporation has
assigned the employee to perform. Therefore, information
known to an employee which relates to the performance of
the employee’s job will be imputed to Texas Eastern.

Vill. FACTS
A. Preliminary Issues

Both Texas Eastern and the Carriers have submitted
versions of the "undisputed" facts. The Carriers initially

i Other courts have recognized the subjective/objective distinction.
See, e.g., United States v. LBS—New York, Inc., 757 F. Supp. 496,
501 n.7 (E.D. Pa. 1990) ("Although knowledge possessed by employees
is aggregated so that a corporate defendant is considered to have
acquired the collective knowledge of its employees . . . specific intent
cannot be aggregated similarly.")

A-131

filed the "Insurers’ Statement of Material Facts As To
Which No Genuine Issue Exists" (SOF). Texas Eastern
responded to the Carriers’ filing with "Texas Eastern’ s
Response To The Insurers’ Statement Of Material Facts As
To Which No Genuine Issue Exists" (TRSOF), in which
Texas Eastern either disputed the Carriers’ assertions or
admitted them. Texas Eastern contemporaneously filed its
own version of the material facts in "Texas Eastern
Statement Of Facts" (TSOF). Finally, the Carriers’ filed a
response to the TRSOF.

The Carriers’ response to the TRSOF raised several
important issues. First, the Carriers objected to the filing
of the TSOF after Texas Eastern had filed its motion for
summary judgment. In the Carriers’ view, Texas Eastern
bore the initial burden of "identifying those portions of the
‘pleadings, depositions, answers to interrogatories, and
admissions on file, together with affidavits, if any,‘ which
it believe[d] demonstrate the absence of a genuine issue of
material fact." Celotex, 477 U.S. at 323. By failing to meet
this burden in its initial filing, the Carriers contend that
Texas Eastern gained an unfair advantage by waiting until
the Carriers had "tipped their hand before it too committed
itself." (Ins.’ Reply to TRSOF at 2 n.1.)

The Carriers are clearly correct in their assertion that a
party seeking summary judgment must file, in support of its
motion, a statement of the facts which is supported by
record evidence. However, this is not a case where a party
as failed to file such a statement, but one in which a party
has failed to file its statement contemporaneously with its
original motion.

Texas Eastern filed a response to the SOF, and its own
TSOF, on September 9, 1991, almost two months after its
initial filing of the summary judgment motion, filed on July

——— ee

A-132

12, 1991. There is no dispute that taken together, the
TRSOF and the TSOF satisfy the Celotex requirement of
identifying those portions of the pleadings which Texas
Eastern believes demonstrate the absence or existence of a
genuine issue of material fact.

In light of the voluminous filings in this case, I
conclude that while it would have been more appropriate for
Texas Eastern to have filed its statement of facts with its |
summary judgment motion, the Carriers have not been |
significantly prejudiced by Texas Eastern’s late filing. All
of the filings in this case were made pursuant to a Case
Management Order, which clearly sets forth the timetable
for opposition and reply briefs. Texas Eastern filed its
statement and response well within the allowable time. For
these reasons, I will consider both the TRSOF and the

TSOF in the disposition of these motions.’

The second issue raised by the Carriers in their reply
brief is the sufficiency of the record evidence upon which
Texas Eastern relies to "dispute" many of the Carriers’
factual assertions. Having reviewed Texas Eastern’s
responses, I conclude that the Carriers have raised
numerous meritorious objections. Because many of the
factual assertions are immaterial to my decision on the
pending motions, I will not restate each of these objections
in detail.

In the factual section which follows, I have set forth
what I conclude to be the "undisputed" facts. These facts

1¥ The TSOF should not be confused with Texas Eastern’s
"Statement of General Background Facts” which I have previously
concluded cannot be relied on because it lacks sufficient references to
record evidence. (See supra pp. 12-13.)

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will be relied upon in deciding the cross-motions for
summary judgment. Many of the facts have been admitted
by Texas Eastern or by the Carriers. Some of the facts,
however, have been disputed by the parties, but after a
thorough investigation of the record evidence, the disputes
have been found not to be "genuine." The facts below
reflect many of the Carriers’ above-mentioned objections.
In many instances, but not all, I will discuss the reasons for
my conclusion that no genuine dispute exists.

B. Factual Background
1. Texas Eastern’s Corporate History
Texas Eastern was incorporated in Delaware on

January 30, 1947. In that year, it acquired the War
Emergency Pipeline from the United States Government and

i’ In each paragraph of the TRSOF, Texas Eastern repeated the
Carriers’ original allegation as it appeared in the SOF, and then stated
its response. My citations to the TRSOF refer not to the Carriers’
statements, but to Texas Eastern’s. For example, if Texas Eastern did
not dispute a proposition, or disputed it on different grounds, a citation
to that paragraph in the TRSOF refers to Texas Eastern’s acceptance of
the proposition. Sometimes Texas Eastern claims to have disputed a
proposition, but I find that the only dispute raised by Texas Eastern is
immaterial. In that situation, I have treated the fact as undisputed by
Texas Eastern, and have therefore included a TRSOF cite as an
admission by Texas Eastern that the fact is indeed undisputed. On
certain occasions, when Texas Eastern’s dispute is material, I have cited
to the TRSOF for the text of Texas Eastern’s re: ,onse itself. When I
wish to cite to a fact alleged to be undisputed by the Carriers, but
materially dispuied by Texas Eastern, I have cited to the SOF instead.
Likewise, when I wish to cite to a fact alleged to be undisputed by
Texas Eastern, I have cited to the TSOF. In short, any citation
beginning with "T" can be understood to mean that Texas Eastern has
agreed to, or has not materially disputed, the proposition stated.

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converted it from liquid service to a natural gas pipeline
system. (TRSOF { 1.)

The Texas Eastern Corporation was incorporated in
Delaware in 1976. It was incorporated as the parent holding
company of Texas Eastern and other subsidiaries. In 1989,
the Texas Eastern Corporation was acquired by Panhandle
Eastern Corporation. The real party in interest in this
litigation is Texas Eastern, not its parent holding company
or any of the unidentified subsidiaries, and I will refer
solely to Texas Eastern in this opinion.

By 1987, Texas Eastern operated a natural gas
transmission network which included as its primary
operation a pipeline approximately 9,500 miles in length
from supply areas in Texas, Louisiana, and the Gulf of
Mexico to the New York Metropolitan area.’ (TRSOF {
5.) Approximately 65 stations at various locations along the
pipeline system used turbine-driven centrifugal compressors
to increase the pressure of the natural gas being transmitted.
(TRSOF 2.)

2. Texas Eastern’s Operational History

In late 1957 or early 1958, Texas Eastern identified a
problem with the lubricating oil used at its centrifugal
compressor stations. It was suspected that the extreme heat
of the turbines caused the oil to ignite; the ignitions caused
a number of dangerous fires. (TSOF 44 4, 5.) In response
to the fires, Texas Eastern conducted an extensive study of

iv __ The pipeline passes through, among others, the following states:
Texas, Louisiana, Mississippi, Arkansas, Alabama, Tennessee,
Kentucky, Missouri, Illinois, Indiana, Ohio, West Virginia,
Pennsylvania, Maryland, and New Jersey. (TE’s First Am. Compl. at {
39.)

A-135

commercially available fire-resistant lubricants and, in
1958, selected Monsanto Chemical Corporation’s
(Monsanto) OS-81" as a replacement. (TRSOF { 6, 8.)
The lubricant (apparently almost all PCB) had PCB
concentrations of approximately 88%-90%. (TRSOF 13.)

Texas Eastern immediately began installing the new
lubricant in some of its turbine-driven centrifugal
compressors. (TRSOF {{ 17, 18.) By 1970, Texas Eastern
had installed the lubricant in 24 compressor units, at 19
compressor stations, located 1.1 approximately 8 or 9 states.

(TRSOF { 19.)

Texas Eastern used the Monsanto lubricant in its
centrifugal compressors as both a lubricant and a seal oil.
(TRSOF { 31.) As a seal oil, the lubricant provided a
pressurized seal against the natural gas compressed inside
the compressor cases, which prevented the natural gas from
escaping into the atmosphere. (TRSOF { 32.) The
centrifugal compressors were designed as "closed systems"
and should therefore have operated without a noticeable
leakage of oil. (TRSOF ¢ 35; TSOF ¢{ 31-33.) Texas
Eastern was aware, however, that the lubricating oil was
"used" or "consumed" by the compressors, thereby
requiring a routine replacement of the oil. (TRSOF f 37,
38.) Texas Eastern prepared and maintained a "Compressor
Department Annual Report" which detailed the amount of

/ The lubricant purchased from Monsanto has been known in its
various formulations as OS-81 (beginning in 1958), MCS-153
(beginning in 1961), and Turbinol-153 (beginning in 1970). (TRSOF q
13.) All appear to have contained high PCB concentrations.

A-13¢

lubricant consumption at each compressor station. (TRSOF

q 37.)

The parties vigorously dispute the reason for the large
consumption of the lubricant oil. Texas Eastern contends
that many senior employees believed that most of the lost
lubricant was simply vaporized by the extreme heat of the
turbine-driven centrifugal compressors, in the same way that
oil is consumed in an automobile. (TSOF 4 31.) The
Carriers concede that some of Texas Eastern’s employees
may have believed that lubricant was being consumed in this
manner. However, the Carriers have produced evidence
which establishes th:: key Texas Eastern personnei were
aware that the compressor system was designed in a manner
that all but guaranteed that some ljubricant would leak out of
the compressors, come into contact with the natural gas,
and enter into the pipeline.”

For example, Texas Eastern’s Superintendent of
Compressor Stations, E.C. Riall, testified that he was
aware, at the time he was working for Texas Eastern, that
the passage of some amount of lubricant into the
compressor case was "an inherent design of centrifugal
compressors." (Dep. of Eugene Riall, App. 56 at 186).
See also App. 14 at 358-59 (deposition testimony of Texas
Eastern’s Assistant Chief Engineer, Conrad W. Marvin,

1‘ The compressors consumed a substantial amount of lubricant. For
example, of the 210,713 gallons of lubricant purchased from Monsanto,
Texas Eastern’s compressors consumed 175,856 gallons of the lubricant
from 1958 to 1977. (TRSOF { 39.)

2 Texas Eastern admits that there was a large leakage of lubricant
from the compressor waits into the natural gas pipeline. The only
material dispute concerns when Texas Eastern became aware of this
fact.

A-137

stating that Texas Eastern understood that the seal oil leaked
as early as 1949).

There were occasional accidents and malfunctions
involving the compressor unit systems, which explains how
some of the lubricant was lost; the vaporizing of lubricant
provides a second potential explanation. These explanations
are insufficient, however, to explain the disappearance of
the majority of the used lubricant, and Texas Eastern has
offered insufficient evidence to refute the testimony of its
own employees. Those Texas Eastern employees who
testified that they understood that the seal oil system was
not worling perfectly and that a significant amount of
lubricant was thereby lost, must therefore be believed.’

Texas Eastern’s contention that the compressor seal
systems were designed as "closed systems" with no leakage
or "consumption" of lubricant oil is immaterial because
there is no credible evidence which tends to establish that
all Texas Eastern employees were working under this
assumption or, more importantly, that this assumption was
correct. Texas Eastern’s reliance on the fact that its senior
management was unaware of the extent of the seal oil
failures, and the amount of oil which leaked into the
pipeline, is equally unavailing. Texas Eastern’s managers,
charged with running the individual compressor stations,
knew that lubricant oil was escaping down the pipeline and
Texas Eastern is therefore charged with that knowledge.

2/ —_ Further supporting this conclusion is the fact that Texas Eastern
tested at least one epoxy, used to coat the inside of the natural gas
pipeline, for compatibility with OS-81, and replaced the “O” rings in its
compressor units with ones compatible with the Monsanto lubricant.
(TRSOF 4{ 46, 47.) Texas Eastern admits to taking these measures as
a precaution to guard against the possibility that lubricant would escape
into the pipeline. (TRSOF { 47.)

A-138

Texas Eastern cannot hide behind its senior management’s
ignorance of the basic aspects of its compressor stations’
daily operations. For all of these reasons, there is no
material dispute that Texas Eastern was aware, for many
years, that some of the lubricant oil was escaping from the
turbine-compressors and entering the natural gas pipeline.

The centrifugal compressors operating on Texas
Eastern’s natural gas pipeline were routinely started-up and
shut-down during the course of normal pipeline operation.
(TRSOF 4 48.) During start-up, the compressor was purged
of air and pressurized, and natural gas present in the
compressor case was vented to the atmosphere through the
compressor vent stacks. (TRSOF { 49.) During shut-down,
the compressor case was depressurized and the natural gas
within the compressor case was again vented to the
atmosphere. (TRSOF 4 50.)

During start-up, any lubricant present in the
compressor case was vented into the environment from the
compressor vent stacks along with the air and natural gas.
During shut-down, any ‘ubricant present in the compressor
case was similarly vented along with the natural gas.
Although the parties disagree as to whether Texas Eastern
was aware at the times relevant to this litigation that
lubricant was being vented and lost into the environment in
this manner, they do agree that at least some of Texas
Eastern’s operational employees understood that lubricant

A-139

was sometimes being vented into the air (and settling on the
ground) along with the natural gas. (TRSOF ] 54.)

Pipeline liquids, consisting of hydrocarbon
distillates” and water, routinely entered Texas Eastern’s
natural gas pipeline. (TRSOF 4 57.) The lubricant that
escaped from the compressor cases and entered the pipeline
mixed with those fluids already present in the pipeline.
From the time it began operations in 1947, Texas Eastern
used its compressor stations as sites for the collection,
removal, storage, and disposal of those pipeline liquids.»
(TRSOF £ 56.) Texas Eastern primarily ased two methods
for the removal of pipeline liquids: gas/liquid separation
equipment (scrubbers and strainers) and cylindrical devices
known as "scrapers" or "pigs."“’ (TRSOF 63.)

The liquids accumulated by scrubbers, strainers,
scrapers, and pigs were routinely’ discharged into

2 Pipeline distillates can be harmful to the human body and to
vegetation depending on the nature and extent of the exposure. It was
therefore undesirable to allow the distillates to come into contact with
property on which vegetation growth was desirable. In this regard,
Texas Eastern personnel considered pipeline liquids to be pollutants if
they escaped in undesirable quantities from their containment pits.

2 —_ This was no small task. Texas Eastern removed twenty million
gallons of liquid from its pipeline during the thirty year period 1957
through 1987. (TRSOF { 62.)

2/ Pigs are shafts with attached brushes and/or rubber cups that,
when inserted into a pipeline segment, make contact with the pipeline
wall, and push the liquids forward to collection areas in the pipeline.

2 —_ There is some dispute as to whether Texas Eastern’s personnel

“routinely” dumped pipeline liquids within the scope of their

employment or merely dumped the liquids "as needed.” This is a
(continued...)

A-140

unlined earthen pits at the compressor stations.

(TRSO¥ {4 71, 77; TSOF ¢ 74.) The PCB-based lubricant,
carried along in the pipeline liquids, was thereby discharged
into the unlined earthen pits. (TRSOF 4 73.)

Texas Eastern used its pits to collect, contain, and
prevent the escape of pipeline liquids te other areas
including neighboring third-party property. (TSOF { 74.)
The pipeline liquids were generally burned, but in some
cases were hauled away, or were applied by Texas Eastern
employees to kill weeds or control dust on dirt roads.’
(TSOF 4 75; TRSOF 4{ 84-86, 101, 106.) Texas Eastern
personnel understood that some of the liquids were absorbed
into the ground, but it is disputed whether this was an
intended method of disposal or simply a fact about which
Texas Eastern was aware. (See App. 113, at 002021610;

>. ..continued)

distinction without a difference. It is clearly established that Texas
Eastern personnel repeatedly dumped pipeline liquids into the unlined
earthen pits whenever the responsibilities of their jobs required such
dumping.

2 _ The pits were generally about ten to thirty feet in diameter on
isolated portions of the compressor station sites. The pits were typically
lined with clay or dug in hard, compact, non-porous ground. (TSOF 4
77.) The pits were ordinarily surrounded by an earthen berm, made
from the material excavated in the process of digging the pit, that served
as a precaution against accidental overflow. (TSOF { 78.)

2/ Although Texas Eastern disputes the Carriers’ contention that
Texas Eastern “disposed” of its pipeline liquids intc the pits, there is no
doubt that in most instances Texas Eastern intended the pits to be the
pipeline liquids’ final resting place. For example, at some compressor
station locations, the earthen pits had built-in pilot lights that
automatically ignited any incoming liquids. (TSOF ¢ 79.) No evidence
has been produced to explain what saleable or other value existed for the
burnt remains of Texas Eastern’s pipeline liquids.

er ee ee oem,
Saas x

ee ee

A-141

App. 118, at 002021192; App. 119 at 002021024—All
three Effluent Discharge Survey reports indicating that
absorption of pipeline liquids was known to occur. )

The pits proved to be imperfect containment vessels,
however, and during the period between 1958 and 1976,
Texas Eastern was aware of instances where pipeline liquids
escaped from the pits and migrated onto other areas of
Texas Eastern’s property or the property owned by
neighboring third parties. (SOF 44 114-152; TSOF 1
52-62.) In 1973, Texas Eastern voluntarily conducted an
"Effluent Discharge Survey" of all compressor station
facilities. (TRSOF 4 132.) The purpose of the study was to
identify potential problem areas by soliciting information
from each compressor station location that had, or may have
had, effluent discharges, particularly those that may have
had liquids drain off Texas Eastern’s own property.
(TRSOF 4 133.)

The survey results indicated that some of the lubricant
used in the compressors was migrating from Texas
Eastern’s property to the property of third parties. (TRSOF
{{ 135, 137, 143-45.) These instances were considered
isolated occurrences and were gener:.lly remedied once
Texas Eastern was made aware of their existence. The
survey also establishes that Texas Eastern was fully aware
of both potential and actual occurrences of off-site migration
of pipeline liquids, and once Texas Eastern understood that
the pipeline liquids contained PCBs, Texas Eastern should
have been aware of the potential for off-site PCB
migration.

Although Texas Eastern personnel were warned of the
potential for overflow from the pits due to rainfall, and
were instructed to guard against it, Texas Eastern was
aware that overflows occasionally occurred. (TRSOF

A-142

147.) Texas Eastern was also aware of the potential for
movement of the pipeline liquids from the compressor
stations to other property from various sources, including
the earthen pits and the pig receivers. (TRSOF { 151.) In
1975, Texas Eastern drafted a "Water Pollution Prevention
and Control Plan" for the purpose of controlling this
undesirable spread of pipeline liquids. (TRSOF {4 150-51,
231-32.)

3. Texas Eastern’s Knowledge of PCBs in its
Lubricant

In February 1970, Monsanto sent correspondence to its
customers alerting them to an increasing concern over the
adverse environmental impact of Monsanto’s
PCB-containing products and Monsanto’s intention to
reformulate those products. (SOF ¢ 183.) Monsanto
recommended that PCBs no longer be used in applications
which would lead either directly or indirectly to the
contamination of food and water supplies for humans or
animals. (TRSOF ¢ 184; TSOF 4 12.) Following its own
advice, Monsanto terminated its sale of certain products
containing PCBs to certain of its customers.

After informing its customers of the decision to
terminate the sale of certain products, however, Monsanto
published a promotional booklet about Turbinol-153, stating
that it had a history of safe use as both a lubricant and
control fluid in commercial pipeline gas turbines. (TSOF {
14; App. 27 at 2.) Texas Eastern was aware of this booklet.
(TSOF ¢ 14.) On January 7, 1972, however, Monsanto
proposed that Texas Eastern sign a hold harmless agreement
promising to indemnify Monsanto for any future liability
arising out of the sale of Turbinol-153 after January 15,
1972. (TRSOF 4 187; App. 186.) Monsanto further
informed Texas Eastern that because Turbinol contained

PARNREMT TIT Re

A-143

“major amounts" of certain polychlorinated bipheny!
products (PCBs), it would no longer sell any Turbinol to
Texas Eastern after June 30, 1972. (TRSOF $ 189: App.
186.)

Texas Eastern elected not to sign the hold harmless
agreement, but it did attempt to purchase Monsanto’s
remaining stock of lubricant oil available for sale before the
January 15, 1972 deadline. (App. 190.) Monsanto
apparently refused to sell Texas Eastern any more
PCB-based lubricant. (/d.) In May 1972, Texas Eastern
began a program referred to as the "phase-cut" or
“change-out" program to replace the PCB-based lubricant
with non-PCB-based oil. (TRSOF { 199.)

4. The Change-Out Program

Because Turbinol-153 and the replacement oil were
compatible, the change-out program did not necessarily
require Texas Eastern to flush the turbine driven
compressors of the PCB-based lubricant and replace it with
non-PCB-based oil. (App. 194 at 3.) Complete flushing was
advisable from an ecological standpoint, however,
presumably because anything less would have resulted in
Texas Eastern’s continued use of a lubricant containing
PCBs. On April 12, 1972, Texas Eastern chose the
replacement for Monsanto’s Turbinol-153. (App. 214 at 2.)
In May 1972, Texas Eastern began installation of the
replacement lubricant.

(Id.

—_ Once removed from a compressor unit, the PCB-based oil was
used for “make-up” (replacement) in those units which continued to use
the PCB-based lubricant. (TSOF ¢ 24.) Three units were changed out in
1972, and an additional three units were changed out in 1973. (TSOF 4
24, 25.)

A-144

The speed with which Texas Eastern conducted its
change-out program is a subject of dispute between the |
parties. The Carriers contend that the speed depended upon
the rate of consumption of the PCB-based oil in the turbine
compressor units. (SOF ¢ 203.) Texas Eastern responds
that it intended to convert its compressors to non-
PCB-based lubricants as quickly as possible, but that it was
restrained by the technical difficulty of the change-out and
the difficulty of finding an appropriate replacement
lubricant. (TSOF ¢¢ 21-26.)

Ultimately, the rate at which Texas Eastern completed
the change-out probably depended on a! of these factors.
There can be no dispute, however, that Texas Eastern was,
at least initially, concerned with utilizing as much of the its
remaining inventory of Turbinol-153 as it could. (Dep. of
Walter Woods, App. 42 at 754-59; App. 195 at
010028581.) To achieve this end, Texas Eastern made its
change-out decisions based, at least in part, on the lubricant
consumption rates of various compressor stations—choosing
to change those compressor stations with higher
consumption rates !ast. (App. 203; Dep. of Eugene Riall,
App. 56 at 109-12; App. 200.)

As early as August 1972, Texas Eastern was aware of
evidence indicating that a break-down product of the
Monsanto Oil was in the compressor units and the pipeline,
contaminating the non-PCB-based replacement lubricant.
(App. 213.) In July 1976, Texas Eastern’s testing
confirmed that some of the replacement lubricant was
contaminated with PCBs. (TRSOF 4 223.) In the same
year, one Texas Eastern employee wrote a memorandum in
which he indicated that he understood that using the PCB
lubricant meant that the oil was being spread throughout the
entire pipeline system. (App. 211.) This evidence indicates
that Texas Eastern was on notice, during this time period,

A-145

that the change-out program had not completely solved its
PCB lubricant problems.

Throughout the change-out program, Texas Eastern
continued to dump pipeline liquids into the unlined earthen
pits at its compressor stations. Texas Eastern was aware that
the amount of liquids accumulating in its pits was increasing
and raised some concerns as to whether the pits were
adequate containment vessels. (App. 221.) One explanation
for this increase is that Texas Eastern’s management
discouraged burning in the disposal pits as early as 1972,
(App. 220 at 010020659), and implemented a formal "no
burn" policy in 1975. (App. 221; TRSOF ¢ 235.) This
required Texas Eastern to rely more heavily on evaporation
and siphoning to reduce the amount of liquid in the pits.
(App. 221)

By July 11, 1975, Texas Eastern’s Operating
Department abandoned the policy of disposing pipeline
liquids into the unlined pits in order to comply with
environmental regulations being established by the various
States in which Texas Eastern operated. (App. 223.)
Subsequently, Texas Eastern commenced a program to
install diffuser tanks at the compressor stations to replace
the unlined earthen pits as the receptacles for the pipeline
liquids. The replacement program was substantially
completed by 1985. (TRSOF 4 237.) After a pit was
replaced by a diffuser tank, the pit was backfilled by
pushing in the surrounding berm with a buildozer and
grading the area to its natural contours. (App. 165 at 12.)

5. Tracking Environmental Legislation
In the early 1970s, PCBs became generally known as a

potential hazard to human health and the environment. Not
surprisingly, Congress and numerous state legislatures

ELE PSA LR SSA eee eae CER YS

A-146

moved to regulate the uses of the toxic substance. Texas
Eastern was aware of this legislative activity. (TRSOF {{
241-47.) Acting pursuant to the authority granted it by the
Toxic Substances Control Act (TSCA),2 EPA
promulgated a final rule on May 31, 1979, which, inter
alia, prohibited the use of PCBs in concentrations above 50
parts per million (ppm), except in totally enclosed systems.
(App. 279, 44 Fed. Reg. 31544.) The rule, however,
authorized the continued use of PCBs above the 50 ppm
limit in natural gas pipeline compressors until May 1, 1980,
in systems which were not totally enclosed. (App. 279, 44
Fed. Reg. 31551.)

In September 1978, Texas Eastern understood that it
was impermuissible to dispose of liquid mixtures of PCBs in
excess of 500 »»pm in landfills. (App. 236.) The only
permissible disposal method was to incinerate the waste in
an EPA approved incineration facility. (TRSOF { 250;
App. 236.) Employees at Texas Eastern were also aware of
EPA requirements regarding PCB storage facilities.
(TRSOF 4 254; App. 237.) With these rules in mind,
Texas Eastern constructed and used storage buildings, at
various compressor stations, to store drums containing the
PCB-based lubricant. (TRSOF ¢ 255.) Due to the danger
of storing large amounts of petroleum oil on its property,
Texas Eastern advised its first-party property insurers, in
December 1978, about the storage buildings, but did not
give notice to its third-party liability carriers. (App. 242;

App. 245; TRSOF 4 258.)

2 15 U.S.C. § 601 ef seq.

aha aia aS ie YD ee EE ent TN ES

A-147
6. PCB Contamination ir the Natural Gas Pipeline

In January 1981, Texas Eastern learned that PCBs
were detected in a Long Island residential gas meter.
(TRSOF { 263.) A subsequent investigation by Texas
Eastern, in a 36 location sampling program, conclusively
revealed that Texas Eastern’s pipeline liquids were
contaminated with PCBs. (App. 276.) The Brooklyn
Union Gas Company informed Texas Eastern that it would
seek, from Texas Eastern, reimbursement of the cosis
incurred for cleaning up the PCB contamination, (App.
267), and Texas Eastern provided notice of these claims to
Aegis, its excess liability carrier, (TApp. 148), but not to
its other third-party liability insurance carriers. (TRSOF § |
266.)

As a result of Texas Eastern’s testing and the
discovery of PCBs in its pipeline liquids, Texas Eastern
met with EPA officials, on March 27, 1981, to discuss
Texas Eastern’s remedial plans. (App. 277.) According to a
Texas Eastern internal memorandum, Texas Eastern’s Vice
President of Operations, F.L. Cohagan, told EPA’s John
Seitz that Texas Eastern planned to test all of its pipeline
liquids for PCBs before disposal, and that Texas Eastern
would use accumulator tanks (instead of open pits) for
collecting liquids at the compressor stations. (/d.) J.
Clifton Williams, Texas Eastern’s Director of Technical
Services, testified at his deposition that Mr. Cohagan also
explained to Mr. Seitz that the pits would continue to be
used until all of the accumulator tanks had been installed.
(Dep. of J. Clifton Williams, TApp. 7 at 644-48, 659-60.)

By letter dated May 27, 1981, EPA informed Texas
Eastern that it was establishing a four-part program to
reduce the risk from PCBs in gas pipeline systems: (1) to
ensure the proper handling of PCBs removed from the

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pipeline, (2) to obtain information on ways to preveui
further movement of PCBs into other systems, (3) to
implement the best option identified in step two, and (4) to
obtain information on the possible methods for removing
any remaining PCBs from the system. (App. 282.)
Subsequently, Texas Eastern sent its response to EPA’s
letter outlining its proposed plan for handling the PCB
liquids in its pipeline. (App. 281.) Texas Eastern and EPA
agreed upon a plan for the cleanup in late 1981 or early
1982. (TRSOF 4 284.)

7. PCB Cleanup

On July 23, 1982, EPA instituted an enforcement
proceeding against Texas Eastern pursuant to the Toxic
Substances Control Act alleging that Texas Eastern was
using PCBs in violation of 15 U.S.C. § 2614(1) & 40
C.F.R. § 761.20(a). (App. 287.) The gravamen of the
violation was Texas Eastern’s continued use of compressor
fluids containing PCB concentrations exceeding 50 ppm in
its turbine driven compressors. (/d.) On August 3, 1982,
Texas Eastern entered into a Consent Order, Consent
Agreement, and Compliance Schedule with EPA addressing
the use of lubricant contaminated with PCBs in its pipeline
system. (App. 288; App. 289; App. 290.) Texas Eastern
did not provide notice of these activities to its third-party
liability carriers.

The agreements, both formal and informal, entered
into by Texas Eastern and EPA did not cover the
remediation of the unlined earthen pits. Texas Eastern does
not dispute the fact that at some of its compressor stations,
Texas Eastern continued to use the pits to "dispose," or at a
minimum, to "temporarily store," (TSOF 4 86), pipeline
liquids known by Texas Eastern to be contaminated with
residual PCBs. In fact, Texas Eastern admits that it was

ers. ee

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necessary to continue using the pits until appropriate
accumulator tanks could be installed at all of the compressor
Station sites known to contain contaminated lubricant,
pipeline liquids, or both. (Dep. of J. Clifton Williams,
TApp. 7 at 644-48, 659-60.)

For example, as of August 27, 1982, Texas Eastern’s
St. Francisville, Louisiana station received pipeline liquids
into its pits containing PCBs in a concentration ranging
from 7 ppm to 2700 ppm. (App. 293.) In addition, sampling
in pits on its Transwestern Pipeline System (a wholly owned
subsidiary of Texas Eastern) in Corona, New Mexico made
Texas Eastern aware that PCBs were present at those sites
and had migrated into the soil from an unlined earthen pit.
(TRSOF 4 298.) Although Texas Eastern contends that it
was noi aware of any off-site migration of the PCBs, the
estimated cost of "decontamination" at the Corona
compressor station alone was in excess of $ 500,000. (App.
298.) After Texas Eastern attempted to remediate the
Corona site in 1983, it was xpparent to Texas Eastern
employees responsible for the remediation attempt that the
PCBs had migrated from the lubricant into the sides and
bottom of the disposal pit. (TRSOF 4 298.)

As Texas Eastern gradually stopped discharging
Pipeline liquids into its pits, it routinely backfilled them
with earthen fill. (App. 165 at i2.) At Texas Eastern’s St.
Francisville, Louisiana; Union Church, Mississippi; and
Clinton, Mississippi stations Texas Eastern closed the pits
by (1) skimming the oil off the surface of the pipeline
liquids and carting it away for incineration, (2) draining the
water out of the pit and filtering it for low level PCB
contamination, (3) solidifying PCB sludge by mixing it with
fly-ash, and (4) installing a plastic cover w prevent any
percolation through the solidified mass. (App. 305.) The

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pits were then marked so that they could be easily located at
a later date. (App. 2 at 88-89.)

On November 29, 1984, EPA Region 9 issued a civil
administrative complzint against the Transwestern Pipeline
Company (Transwestern) for improperly marking, storing,
and disposing of PCB-laden waste oils into unlined earthen
pits in Arizona. (App. 307.) At this time, Texas Eastern
was completing, or had completed, the sale of Transwestern
to Houston Natural Gas (HNG). (Dep. of Bolivar Andrews,
App. 309 at 159-61.) In April 1985, Transwestern entered
into a Consent Agreement and Final Order with EPA. (App.
306.) Around this time, Texas Eastern entered into an
agreement with HNG to amend the contract of sale so that
Texas Eastern would bear some financial responsibility for
the costs of remediating PCBs from pits in the Transwestern
System. (App. 311.) Texas Eastern did not provide notice
of this agreement to its third-party liability carriers.

As a result of the Transwestern Complaint, Texas
Eastern undertook a survey of its pit use along its entire
pipeline system. (TRSOF { 312.) In August 1985, EPA
issued a Notice of Non-Compliance to Texas Eastern’s
Delmont, Pennsylvania compressor station for violations of
TSCA regulations concerning the marking, storage,
disposal, and record keeping of PCBs. (App. 317.) A
subsequent meeting was held with EPA on August 29,

1985, and ‘fexas Eastern advised EPA that it was preparing
to close the earthen pits formerly used to contain PCB-laden
pipeline liquids at stations where the pits had been replaced
by liquid separators and/or accumulator bottles. (App. 319.)
EPA advised Texas Eastern that it should submit
information regarding the location, site, predominant usage,
current status, and closure date of some of the pits. (TRSOF
¢ 320.) Presumably, Texas Eastern then understood that it

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could no longer use the pits to hold, even temporarily, any
pipeline liquids containing more than 50 ppm of PCBs.

Texas Eastern admits that it realized, by late 1985, that
it would have to formulate a remediation plan for the
unlined earthen pits—something it had previously believed
to be unnecessary. (Dep. of Howard Homeyer, App. 315 at
134.) To facilitate the creation of the plan, Texas Eastern
hired Roy F. Weston, Inc. (Weston), a national
environmental consulting firm, to determine the nature and
extent of the PCB contamination around the pits. (App.
323.) Simultaneously, Henry H. King, President of Texas
Eastern, consulted with Steve Mulliken, Director of Texas
Eastern’s Risk Management Department, regarding the
possibility of insurance coverage for the earthen pit
remediation. Mr. King reached the initial conclusion that
CGL insurance policies would not cover the estimated 40 to
50 million dolJars that the remediation program would cost.
(TRSOF 4 325; App. 324; Dep. of Henry King, App. 318
at 121-22.)

In November 1985, Texas Eastern employees met with
employees of Wesion to discuss Weston’s work schedule.
(TRSOF { 333.) At this time in late 1985, the manager of
Texas Eastern’s Environmental Protection Department,
Robert Salzer, understood that many of the pits and landfills
at the compressor stations were not in compliance with
federal regulations regarding the storage and disposal of
PCBs. (Dep. of Robert Salzer, App. 105 at 49-50, 453-63.)

8. The Results of Weston’s Survey

In January 1986, Weston and Texas Eastern held a
progress meeting to discuss the results of Weston’s initial

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sampling of six compressor station sites. (App. 340.)

On February 18, 1986, Weston provided Texas Eastern with
a draft report entitled "Compressor Station Disposal Pit
Investigation." (App. 341.) This report included the results
of Weston’s initial six-site survey. (/d.) Weston concluded
that

[borings drilled adjacent to but outside
of the pit perimeters indicated very low
to no PCB content, and, thus, minimal
migration of PCBs from the pits.
However, the PCB presence in the
drainage swales and surface water
bodies indicates that the potential for
off-site migration exists.

(App. 341 at 001363937.) The report did not, however,
conclusively find evidence of off-site migration although
reasonable minds might differ about this characterization of
the report. (Dep. of Bradford Cushing, TApp. 106 at 294,
374-75, 539, 670-71.)

In the months following the delivery of Weston’s initial
report, Texas Eastern’s senior management received a
number of general briefings concerning the PCB "situation."
Examples include (1) a February 27, 1986 Board of
Directors meeting at the Ocean Reef Club in Key Largo,
Florida, (App. 343), (2) a February 28, 1986 Public Policy
Committee meeting, (Dep. of Fred Wichlep, App. 344 at
213-18), and (3) a March 5, 1986 meeting of the Executive

2 __ The survey was conducted at six compressor station sites and
included eight pits. The parties have refereed to the study as both the
"six" and the “eight” site survey, and I will refer to it as the "six-site
survey.”

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Committee of the Board of Directors, (App. 345). In late
April 1986, Texas Eastern’s senior management was briefed
about the estimated cost and duration of a pit remediation
effort. (App. 347; App. 348.)

On April 1, 1986, EPA requested additional
information from Texas Eastern regarding its use of earthen
pits located at various compressor stations. (TRSOF € 345.)
Texas Eastern responded on April 25, 1986, and provided
EPA with a final version of Weston’s pilot program report
(six-site survey) dated April 21, 1986. (TRSOF 4 348.) In
Texas Eastern’s April 25, 1986 letter to EPA, it admitted
that it had used the earthen pits for the collection of pipeline
liquids at certain compressor stations until the fall of 1985.

(TRSOF { 349.)

Texas Eastern subsequently met with EPA officials on
April 30, 1986, to discuss the status of Weston’s pit
investigation, and to discuss a draft "action plan" prepared
by Texas Eastern for the remediation of the compressor
station sites. (TRSOF 4 350.) Texas Eastern represented
to EPA officials that it would continue its efforts to identify
and control PCBs found at the Texas Eastern sites which
may have been exposed to PCBs. (App. 350.) Texas
Eastern also expressed a desire to reach an agreement on a
remediation plan, possibly in the form of a consent decree,
(App. 76), and criteria for determining how clean the Texas
Eastern sites would have to be after remediation was
completed. (App. 350; App. 351.)

EPA officials, specifically Michael Wood, were clearly
displeased with Texas Eastern’s continued use of its earthen
pits after 1981, the date Texas Eastern claims that it first
learned its pipeline liquids were contaminated with PCBs.
(App. 350; App. 353.) Texas Eastern explained that the
logistics of replacing the earthen pits required a gradual

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phaseout, and made it nearly impossible to cease all use of
the pits at that time. EPA indicated to Texas Eastern that
some of the latter’s activities, specifically the closing of the
pits at its St. Francisville, Union Church, and Clinton
compressor stations, by solidifying the PCB liquids with fly
ash, (TRSOF ¢ 353), were almost certainly violations of
TSCA.

In light of these discussions with EPA, Texas Eastern
requested that Weston enlarge its study to include 54
additional compressor station sites (54-site survey). (TRSOF
{ 354.) During the course of the 54-site survey, Weston
communicated some of its findings regarding on-site
contamination to some of Texas Eastern’s employees,
although the specifics of these conversations are not known.
(App. 3 at No. 411.) In December 1986, Texas Eastern
received a preliminary report of the results of Weston’s
54-site survey. (App. 3 at No. 432.) Texas Eastern’s
attorney admitted at oral argument that the survey gave
Texas Eastern reason to believe that off-site contamination
had indeed occurred. (Tr. of Hr’g on Mot. for Summ. J.,
January 13, 1992 at 93-94.) A copy of this initial report
was forwarded to EPA in December 1986. (App. 3 at No.
437.) Texas Eastern presented the final results from
Weston’s 54-site survey to EPA in March 1987. (TRSOF 4
391.)

In July 1986, Texas Eastern’s Risk Management
Department (which included its Insurance Department) was
aware of the PCB presence in or on soil located at Texas
Eastern’s compressor station sites. (Dep. of Stephen
Mulliken, App. 261 at 284-87.) At this time, Texas
Eastern’s Insurance Department requested that Querbes &
Nelson, Texas Eastern’s insurance brokers, compile a list of
all CGL policies issued beginning in 1956. (Dep. of James
Farley, App. 359 at 706.) The list was received by the

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Insurance Department at the end of July or early August
1986. (/d.) Texas Eastern received information regarding
claim notification requirements under these policies on or
about December 9, 1986. (TRSOF 44 381, 383.)

On November 5, 1986, Texas Eastern representatives
met with representatives from EPA and the Department of
Justice to discuss PCB contamination at the compressor
station sites. At the conclusion of the meeting, all parties
understood that a judicially enforceable agreement would
have to be entered into concerning the pit remediation.
(TRSOF 4 368.)

9. Texas Eastern’s Problems Become Public
Knowledge

On February 21, 1987, several newspaper accounts of
Texas Eastern’s problems and its discussions with EPA
were published. (TRSOF 4 387.) Prior to this time, Texas
Eastern had not given notice to its insurers that it had
entered into negotiations with EPA concerning the PCBs.
(SOF ¢ 388.) During meetings held in London, England, in
February 1987, concerning the renewal! of Texas Eastern’s
liability insurance, Texas Eastern advised the London
Underwriters that it had a PCB problem and that it was not
making a claim against the insurers at the time "because the
occurrences being investigated by Weston had not yet given
rise to suits or claims against Texas Eastern," (App. 4 at
39. See also Dep. of David Fenton, App. 135 at 76-82),
and because Texas Eastern believed that no third parties
were involved. (Dep. of Stephen Mulliken, TApp. 2 at
304.) Texas Eastern discussed similar issues with
representatives of its other lower-level liability carriers in
March 1987. (App. 4 at 39.) On March 17, 1987,
representatives of Texas Eastern testified before the United
States Senate Subcommittee on Superfund and

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Environmental Oversight concerning the PCB contamination
of its earthen pits. (TRSOF { 397; App. 2 at 2.)

10. Texas Eastern’s Negotiations with EPA

On April 14, 1987, Texas Eastern met with EPA
representatives for the purpose of outlining the framework
within which a Consent Decree would be negotiated
covering the cleanup of Texas Eastern’s compressor station
sites. (App. 381.) On August 18, 1987, in a letter to David
Batson, EPA’s chief negotiator, Carol Dinkins, Texas
Eastern’s attorney, outlined certain proposals made by
Texas Eastern on which Ms. Dinkins believed an agreement
had been reached. (App. 382.) By the middle of October
1987, both Texas Eastern and EPA came to an “Agreement
in Principle" which the parties formally executed in writing
in November 1987.

Ultimately, EPA and Texas Eastern entered into a
consent decree in an action entitled United States of America
v. Texas Eastern Transmission Corp. in June 1988. (TRSOF
q{ 411; App. 385.) The Complaint and the Consent Decree
were both filed the same day. Pursuant to the Consent
Decree, Texas Eastern was obligated to clean up property
which it had contaminated with PCBs. All of ine property
was either owned or operated by Texas Eastern, and none |
of the property was owned by third parties. (TRSOF {
499.) The Consent Decree required continued monitoring
of groundwater under Texas Eastern’s land, but did not
specifically require or provide for reme‘iation of any
groundwater. Although Texas Eastern did not admit
liability, it did agree to pay a civil penalty in the amount of
$ 15 million. (App. 385 at 11.) Texas Eastern also agreed
to reimburse EPA for costs already expended up to $ 1.5
million. The estimated total cost of the cleanup is presently
in excess of $ 750 million.

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Additionally, in April 1987, Texas Eastern entered into
a Consent Decree with the Pennsylvania Department of
Environmenia! Resources (PaDER) wherein Texas Eastern
agreed to test soil and groundwater for possible PCB
contamination and to remediate any discovered
contamination. (Consent Order, App. 227C.) Subsequently,
Texas Eastern also agreed to pay a penalty of $5.3 million
to settle other PaDER claims that Texas Eastern had
violated provisions of the Solid Waste Management Act, (35
Pa. Stat. Ann. § 6018.101 ef seq.), and the Clean Streams
Law, (35 Pa. Stat. Ann. § 691.1 ef seq.).

Several other states initiated administrative or judicial
actions against Texas Eastern alleging violations of state
environmental laws, including New Jersey, Mississippi, and
Kentucky. (See TE’s First Am. Compl. {4 53-56, 65-68,
90-94; App. 227H-I; App. 227J-K; App. 227M-O.) The
New Jersey action has been partially resolved, requiring
Texas Eastern to pay a civil penalty in the amount of
$850,000; however, issues concerning Texas Eastern’s
potential remediation responsibilities remain outstanding.
The Mississippi and Kentucky actions have apparently been
resolved by consent decrees.

Finally, as many as thirteen private third-party suits
were filed against Texas Eastern alleging property and
personal injury damage resulting from the PCB
contamination. Only two of these complaints (the Bondy and
Atwood actions) are actually involved in the present
litigation, because I have denied Texas Eastern’s motion for
leave to amend its complaint and add the additional eleven
complaints filed after the commencement of this action.
(See supra pp. 10-11.) Bondy v. Texas Eastern
Transmission Corp., filed January 29, 1988, was terminated
by summary judgment granted in favor of Texas Eastern.

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(TE’s First Am. Compl. at ¢ 104.) Atwood v. Texas
Eastern Transmission Corp., filed July 1, 1989, was
terminated by a settlement between the parties.*!’

11. Texas Eastern’s Notice to Its CGiL Carriers

Texas Eastern first gave forma! notice of its
negotiations with EPA, and of its "claim" under the various
insurance policies, to its third-party liability carriers by
letter dated August 19, 1987. (TRSOF 4 414.) After a
December 9, 1987 meeting, in Houston, between Texas
Eastern and the Carriers failed to resolve important
questions concerning Texas Eastern’s insurance claims,

F & C filed suit against Texas Eastern, and as is recounted
in the "Procedural History,” this multidistrict litigation
resulted. According to Texas Eastern, it has continued, at
least up to January 1992, to provide the Carriers with
copies of all relevant documents regarding the filing and
settlement of claims arising out of the PCB contamination.

Ir, sum, Texas Eastern now seeks a declaration that all
of its costs incurred to comply with the EPA Consent
Decree, the various state decrees and settlements, and the
various private third-party actions are covered losses under
the CGL insurance policies issued by the Carriers. The
Carriers seek a declaration that they are not responsible for

2 The violations alleged in the state agency actions are in many
respects duplicative of Texas Eastern’s remediation responsibilities
under the EPA Consent Decree. I have, therefore, focused primarily on
the Federal Consent Decree in resolving these summary judgment
motions. As I observed in my memorandum denying Texas Eastern’s
motion for leave to amend its pleadings, the private third-party actions
raise factual issues which in some cases vary significantly from those
presently involved in this case.

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these costs. With the undisputed facts in mind, I will now
address the issues, which in my view, are at the heart of
this insurance coverage dispute.

IX. OCCURRENCE

The Carriers have moved for summary judgment on
the issue of whether the PCB contamination constitutes an
“occurrence” under any or all of Texas Eastern’s insurance
policies. The Carriers contend that Texas Eastern knew or
should have known that it was polluting its own property
and the property of third parties. Therefore, they argue,
there was no "occurrence" pursuant to any of Texas
Eastern’s insurance policies because Texas Eastern
"intentionally" caused all of the damage for which it is now
seeking insurance coverage. Texas Eastern denies this
allegation, and responds that since material factual disputes
exist as to what Texas Eastern and its employees knew and
intended, summary judgment is inappropriate on this issue.
For the following reasons, I agree that factual disputes exist
which prevent the granting of summary judgment on the
“Occurrence” issue.

A. The Policy Language

The policies issued to Texas Eastern obligate the
Carriers, in some cases, to indemnify the insured for, and
in others, to pay on behalf of the insured

sums which the insured becomes legally
obligated to pay as damages because of
bodily injury, personal injury or damage
to or destruction of property caused by

an occurrence.

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(Ins.” Mot. Summ. J.—No Occurrence at 2) (emphasis
original). The definition of an “occurrence” varies among
the policies, Sut the Carriers admit that all of the policies
provide coverage for an "accident," and none of the policies
provide cov>rage for intentionally caused harmful acts.

B. Texas Law

It is a fundamental principle of insurance law that
insurance contracts should provide coverage only when a
loss is fortuitous. R.E. Keeton & A.I. Widiss, Insurance
Law § 5.3 (aj, at 475 (1988). The principle of fortuity is
typically reflected in a liability policy’s requirement that the
insured’s loss arise from an "occurrence" or an "accident."
Republic Nat’! Life ins. Co. v. Heyward, 536 S.W.2d 549
(Tex. 1976) and Argonaut Southwest Ins. Co. v. Maupin,
500 S.W.2d 633 (Tex. 1973) establish that Texas law is in
accord with these general principles of insurance law.
Under Texas law, harm which is the "naturai and probable
result" of intentional acts is not fortuitous and therefore is
not covered by general liability insurance policies.

In Maupin, the insured removed some "borrow
material" (sand and gravel) from the property of a third
party under the mistaken belief that he had the property
owners’ permission to do so. The property’s true owners
subsequently sued the insured for trespassing on the
property. The insurance carrier refused to defend the
insured in the suit, contending that no covered occurrence
had taken place because the suit alleged an intentional act

Poe

a ND LN PBs back ease a:

A-161

(trespass) and the policies only provided coverage for
"accidents" or "occurrences." 22

‘ The Maupin court concluded that the removal of the
sand and gravel was neither an accident nor an occurrence
because the damage to the property was the "natural result"
of the insured’s intentional acts: "‘Where acts are

voluntary and intentional and the injury is the natural result
of the act, the result was not caused by accident even
though that result may have been unexpected, unforeseen.
and unintended.’" Maupin, 500 S.W.2d at 635 (quoting
Thomason v. United States Fidelity & Guar. Co., 248 F.2d
417, 419 (Sth Cir. 1957)). That the insured was unaware of
the property’s true owners had no bearing on whether the
trespass was caused by "accident." The insured did what he
intended to do when he removed the sand and gravel from
the property. The only mistake (or accident) made by the
insured concerned the property’s true ownership and the
court concluded that the insurance policies did not provide
coverage for accidents of that type. Maupin, 500 S.W.2d at
635.

In Heyward, the Texas Supreme Court again addressed
the meaning of "accident," this time in the context of an
accidental death rider to a life insurance policy. The court
held tinat

injuries are "accidental" and within the
coverage of an insurance policy . . . if,
from the viewpoint of the insured, the

3 The policy defined "occurrence" as "either (a) an accident, or (b)
in the absence of an accident, a condition for which the insured is
responsible which during the policy period causes physical injury to or
destruction of property which was not intended." Maupin, 500 S.W.2d
at 634 n.1.

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injuries are not the natural and probable
consequences of the action or occur-
rence which produced the injury; or in
other words, if the injury could not
reasonably be anticipated by [sic]
insured, or would not ordinarily follow
from the action or occurrence which
caused the injury.

Heyward, 536 S.W.2d at 557. It is settled Texas law that
injuries which are the "natural and probable consequences"
of intentional acts are not fortuitous injuries covered by
insurance.

Numerous lower Texas courts are in agreement. For
example, in Baldwin v. Aetna Casualty & Sur. Co., 750
S.W.2d 919 (Tex. Ct. App. 1988) (writ denied), the insured
allegedly damaged state roads by intentionally causing its
admittedly overweight trucks to be driven on Texas
highways. Citing Maupin, the court held that there was no
accidental occurrence under the insurance policies because
the act of continually sending out the overweight trucks was
intentional, although the insured did not necessarily intend
to damage the road. Baldwin, 750 S.W.2d at 921.

In Southern Farm Bureau Casualty Ins. Co. v. Brock,
659 S.W.2d 165 (Tex. Ct. App. 1983) (writ refused n.r.e.),
the insured intentionally rammed his truck into a second
vehicle to prevent the second vehicle’s driver from shooting
at someone. The court held that the insured was not
entitled to recover for damage sustained by his vehicle
under an automobile collision insurance policy covering
only "accidental" damage. Citing both Maupin and
Heyward, the court reasoned that the d

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_1789%3A2. Public record. Not legal advice.