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Eastern Associated Coal Corp. v. Aetna Casualty & Surety Co.

decided: September 23, 1980.

EASTERN ASSOCIATED COAL CORP., APPELLANT IN NO. 79-2397
v.
AETNA CASUALTY & SURETY COMPANY; AMERICAN HOME ASSURANCE COMPANY; HIGHLANDS INSURANCE COMPANY; HOME INSURANCE COMPANY; FIRST STATE INSURANCE COMPANY; LEONARD RONALD HAYWARD AND ALL OTHER UNDERWRITERS AT LLOYDS SUBSCRIBING TO POLICY #2080712; EXCESS INSURANCE COMPANY, LTD.; INDEMNITY GUARANTEE ASSURANCE LTD.; LONDON & EDINBURGH INSURANCE COMPANY, LTD.; YASUDA FIRE & MARINE INSURANCE LTD.; NICHIDO FIRE & MARINE INSURANCE CO. LTD.; TUREGUM INSURANCE CO., LTD.; AND BALOISE INSURANCE CO. APPELLANTS IN NO. 79-2398



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 75-0855)

Before Adams, Van Dusen and Higginbotham, Circuit Judges.

Author: Van Dusen

Opinion OF THE COURT

This diversity case involves cross-appeals from a partial grant of the defendants' motion for judgment notwithstanding the verdict. The jury awarded Eastern Associated Coal Corporation (Eastern) $4,736,377. under a business interruption insurance policy held with the defendant insurers for losses incurred due to the closing of Eastern's Joanne Mine after an underground fire. The defendants moved for judgment n. o. v. on two grounds. First, the defendants' motion argued that there was insufficient evidence to support the plaintiff's theory concerning the sales value of a portion of the coal which would have been mined by Eastern during the interruption covered by the policy. The trial judged granted this portion of the motion and reduced the jury's award by $890,744. Eastern appeals from this action. Second, the defendants' motion argued that the insurance policy did not cover any expenses incurred by Eastern in obtaining alternative coal to fulfill its contractual obligation to supply metallurgical coal from the Joanne Mine to Sharon Steel Corporation. The trial court, 475 F. Supp. 586, denied this portion of the motion and entered judgment for $3,845,633. We affirm the trial court's grant of judgment n. o. v. with regard to the first portion of the motion and reverse the trial court's denial of judgment n. o. v. with regard to the second portion of the motion. The case will be remanded for entry of judgment against the defendant insurers in the amount of $287,277.

I.

Eastern, a West Virginia corporation with offices in Pittsburgh, Pennsylvania, operates a number of underground soft coal mines in Pennsylvania and West Virginia. In 1969, Eastern purchased the Joanne Mine, located near Rachel, West Virginia, from Sharon Steel Corporation. Some of the coal in the mine was metallurgical coal; the balance was classified as steam coal. Sulphur content is the distinguishing factor between the classifications. Metallurgical coal has a low sulphur content, and accordingly burns at high temperatures. It is required in the production of steel. Steam coal has a higher sulphur content, burns at lower temperatures, and is not suited to use in steel production. The purchase agreement with Sharon provided in part for a coal supply contract, under which Eastern agreed to furnish the metallurgical coal requirements of Sharon's Fairmont Coke Works, estimated at 250,000 tons annually, for a ten-year period. The contract contained base prices for coal and an escalator clause to cover increases in the cost of production. It also provided that the coal supplied would come from the Joanne Mine until its metallurgical coal reserves were exhausted. As the seam was estimated to contain 1,125,000 tons of metallurgical coal, the Joanne Mine was expected to supply Sharon for approximately four and one-half years. After exhaustion of the Joanne metallurgical area, Eastern was obligated under the contract to obtain metallurgical coal from other sources for the remainder of the term of the contract. The contract also contained a provision which required all metallurgical coal to have a sulphur content of less than 1.6%.*fn1 Sharon could reject any coal which did not comply with this specification.

In 1972 Eastern bought the business interruption insurance policy under which it is currently suing. The policy was part of a four-policy package which covered all of Eastern's mines in Pennsylvania and West Virginia for business interruption insurance. Eastern's protection under the total package was $20,000,000. Each layer insured $5,000,000. The first policy covered losses up to $5,000,000. sustained from the closing of any mine. The second policy covered losses from $5,000,000. to $10,000,000., the third up to $15,000,000., and the fourth up to $20,000,000. These policies were produced by Eastern's insurance broker, Marsh & McLennan, Inc., which selected the form, prepared the policies, and sent the policies to the insurers and underwriters for signature. Several insurers helped to underwrite each policy.

On January 14, 1974, a fire broke out as the result of an underground accident involving the derailment of a mine locomotive in the metallurgical section of the Joanne Mine. Within 24 hours the mine was totally sealed as a means of extinguishing the fire by depriving it of oxygen. This fire, however, terminated all mining operations for a 12-month period, which was the term of coverage under the policy.

During the year after the closing, Eastern's coal production at the mine was essentially zero. However, it was estimated that Eastern could have mined approximately 181,000 tons of metallurgical coal and 434,000 tons of steam coal during the year of coverage, if there had been no interruption. In determining recovery under the policy, the value of this lost production to Eastern is an important factor. The recovery increases directly in proportion to the value of lost production.

There is no dispute concerning the value of the lost steam coal production. There is a dispute, however, concerning the value of the lost metallurgical coal production. The parties agreed at trial that value was to be determined by the contract price for coal which would be sold under contract and by market price for coal which would be sold on the open market. The dispute here concerns how much coal would be sold on the market. The insurers believe that all of the metallurgical coal would have been sold to Sharon under the contract. If this is the case, it is agreed that the total recovery under the policies for lost production would be $5,287,277.*fn2 Eastern, however, asserts that 77,000 of the 181,000 tons of lost metallurgical coal production would have been rejected by Sharon because they would have had a sulphur content in excess of the 1.6% requirement of the contract. Eastern, accordingly, asserts that the 77,000 tons would have been sold on the open market and should be valued at the higher market price. The increased revenues which would have been obtained from selling such coal on the open market are claimed to be $890,744.*fn3 Accordingly, Eastern asserts that its recovery should be at least $6,178,021.-the total of $5,287,277. plus $890,744. The insurers dispute recovery of the additional $890,744. This is the first issue we must resolve.

Eastern makes an additional claim under the policy. Eastern claims that the policy covered the expenses Eastern incurred in obtaining alternative coal to fulfill its contractual obligation to supply metallurgical coal from the Joanne Mine to Sharon Steel. After the fire, Eastern contended that due to a force majeure clause in its contract with Sharon, it was relieved of its obligation to supply Sharon with metallurgical coal. Sharon disagreed, and the dispute was brought to arbitration. The arbiter held that Eastern's obligation to Sharon continued despite the fire, and Eastern was accordingly forced to continue supplying Sharon with metallurgical coal.

This arbitration award exposed Eastern to a substantial new expense. Due to the oil embargo in 1973, the price of coal began to rise steadily. However, during the year of interruption the escalator clause in the contract with Sharon did not keep pace with the increase in market price. Under the contract with Sharon, Eastern was being paid $13.00 to $18.00 a ton for metallurgical coal, while the market price ranged from $50.00 to $75.00. During the interruption, Eastern obtained much of the coal for Sharon from its other mines. Such coal has been denominated "substitute coal." In selling the substitute coal to Sharon, Eastern was deprived of the profit it could have made by selling such coal on the market. Eastern calculated its loss during the year on substitute coal to be $1,599,461. Eastern met the remaining requirements under the Sharon contract by buying coal on the open market and reselling it to Sharon at the lower contract price. Coal bought on the market has been denominated "brokerage coal," and Eastern calculated its loss on brokerage coal to be $2,175,240. Totaled, Eastern determined its loss on its contract with Sharon to be $3,774,701, thus bringing the full liability claimed against the insurers to $9,952,722.*fn4 The insurers disputed Eastern's right to recover any money for the expense incurred in complying with Sharon's contract. This presents the second issue we must resolve.

In this case the insurers conceded recovery of $5,287,277. The first layer insurers made full payment under their policy. Therefore, the present suit concerns only the amount in excess of $5,000,000, which is $4,952,722. It is brought solely against the second layer of insurers, who have made no payments to date.

The trial judge denied the defendant insurers' motions for summary judgment and a directed verdict and submitted both issues to a jury. The jury returned a verdict against the insurers in the amount of $4,736,377, which is $216,345 less than the total demanded by Eastern. Post-trial motions for judgment n. o. v. were filed by the insurers. The trial judge granted judgment n. o. v. against Eastern on the first issue. He found the evidence supporting this claim to be speculative*fn5 and reduced the recovery by $890,744.*fn6 The judge denied the motion on the second issue and entered judgment against the defendant insurers for $3,845,633. The parties appeal from the grant and denial of judgment n. o. v., respectively.

II.

Eastern's appeal is from the trial judge's grant of judgment n. o. v. in the amount of $890,744. In reviewing the district court's order, we are guided by the substantive law of Pennsylvania.*fn7 Eastern attempted to show that 77,000 tons of metallurgical coal would have been rejected by Sharon and sold on the open market due to its high sulphur content. To this end, Eastern demonstrated that Sharon had the right to reject coal delivered with a sulphur content exceeding 1.6%, and that Sharon had in fact exercised that right on at least one occasion prior to the fire. Eastern also presented a letter from Sharon Steel Corporation authorizing Eastern to sell any rejected coal on the open market. Eastern, further, submitted evidence of the sulphur content of the coal remaining in the metallurgical portion of the mine at the time of the fire. This data had been obtained by analyzing bore samples of coal from the metallurgical section of the mine. Plaintiff argued that this data showed that approximately 77,000 tons of metallurgical coal in the mine had a sulphur content ranging from 1.6% to 2.0%.

The insurers do not challenge these facts. However, they assert that proof of the sulphur content of the coal in the mine is insufficient to prove the sulphur content of the coal at the time of delivery. They note that after removal from the mine and before delivery, the coal is "washed." This washing process reduces the sulphur content of the coal. Under questioning at trial, a representative of Eastern explained the process as follows:

"Q. By the way, do you know anything about washing coal? Do you know what it is, what it means?

"A. It's the process of taking coal as it comes from the ground, putting it through equipment from which ash and sulphur are removed.

"Q. Washing removes sulphur?

"A. Yes.

"Q. Is coal washed when it comes out of the ground at Joanne or is it just taken out of the ...


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