Terra Industries v. Com. Ins. Co. of America

981 F.Supp. 581

TERRA INDUSTRIES, INC., Plaintiff, v. COMMONWEALTH INSURANCE COMPANY OF AMERICA, et al., Defendants.

No. C 97-4030-MWB.

United States District Court, N.D. Iowa, Western Division.

October 10, 1997.

COPYRIGHT MATERIAL OMITTED

Gregg E. Williams of Heidman, Redmond, Fredregill, Patterson, Plaza & Dykstra, L.L.P., Souix City, IA, Hugh R. McCombs

and Alan J. Martin of Mayer, Brown & Platt, Chicago, IL, for Plaintiff Terra.

Alan R. Miller of Robins, Kaplan, Miller & Ciresi, L.L.P., Boston, MA, Douglas G. Houser of Bullivant, Houser, Bailey, Pendergrass & Hoffman, Portland, OR, Michael W. Ellwanger of Rawlings, Niland, Probasco, Killinger, Ellwanger, Jacobs & Mohrhauser, Souix City, IA, for IRI Defendants.

MEMORANDUM OPINION AND ORDER REGARDING THE MOTION OF THE "IRI DEFENDANTS" FOR PARTIAL STAY OF PROCEEDINGS AND PLAINTIFF'S CROSS-MOTIONS FOR PROTECTIVE ORDERS

BENNETT, District Judge.

TABLE OF CONTENTS
  I. INTRODUCTION .........................................................585
     A. Procedural Background .............................................585
     B. Factual Background ................................................586
 II. LEGAL ANALYSIS .......................................................587
     A. Preliminary Issues ................................................587
        1. Power to stay proceedings ......................................587
        2. Rules of policy interpretation .................................588
           a.  A summary of the rules .....................................588
           b.  Terms dictated by statute and contra proferentem ...........588
     B. Preconditions To Suit .............................................591
        1. Requirements in case loss occurs ...............................593
        2. Appraisal ......................................................593
     C. Fulfillment Of Preconditions To Suit ..............................594
        1. Proof of loss ..................................................594
        2. Examinations under oath ........................................595
     D. Appraisal .........................................................595
        1. Untimely demand pursuant to the policy .........................596
           a.  The thirty-day deadline ....................................596
           b.  The sixty-day deadline .....................................596
           c.  The policy requirement .....................................597
        2. Preemption of appraisal by the filing of the lawsuit ...........598
        3. Waiver of the right to demand appraisal ........................601
        4. Protective order ...............................................604
        5. Power to stay proceedings in part pending appraisal ............606
        6. Scope of appraisal .............................................606
     E. Certification For Interlocutory Appeal ............................607
III. CONCLUSION ...........................................................609

When someone refers to a dispute as a "shape of the table dispute," as counsel for one of the parties in this case did during oral arguments, what image is called to mind probably depends upon how old you are — do you instantly think of the peace talks in the 1950s to end the Korean War, the Paris peace talks in the late 1960s and early 1970s to end the Vietnam War, one of the protracted labor disputes of the late 1970s, the Mid-East peace talks of the 1980s and early 1990s, or presidential summits of the mid 1990s? Whatever the historical context that phrase calls to mind, it probably sends a cold chill of despair or a sick feeling of frustration through you to think that, while serious substantive issues are pending, the parties can't even agree on the context in which those issues will be resolved. Yet, a "shape of the table" dispute does not necessarily suggest triviality or pointlessness of the dispute over the proper forum or procedure, at least not in a legal system founded upon the presumption that fair process is one of the best guarantors of substantial justice. The "shape of the table" dispute presented here is whether questions of the extent of loss from a catastrophic explosion should be determined through an appraisal process provided in an insurance policy or through the insured's lawsuit. Although frustrating, the court finds this dispute over the proper forum for initial determination of at least some of the measurement disputes between the parties — with potentially hundreds of millions of dollars at issue, more than two years of claims evaluation already behind the parties, and the prospect of years of litigation ahead — is anything but trivial.

I. INTRODUCTION

A. Procedural Background

This is one of several lawsuits to arise from the catastrophic explosion on December 13, 1994, of a fertilizer plant in northwest Iowa owned by plaintiff Terra Industries, Inc. in which four persons were killed, eighteen were injured, and the fertilizer plant and its owner sustained enormous damage now alleged to exceed $360 million. In this litigation, Terra has brought a declaratory judgment action against dozens of its insurers concerning the extent of their liability for Terra's loss. In the last two-and-one-half years, the insurers and Terra have engaged in the enormous tasks of assessing the damage and the extent of Terra's insurance coverage and repairing and rebuilding the facility. The insurers have paid just over $200 million of Terra's claims, but approximately another $160 million in claims remained unresolved when Terra filed this lawsuit on April 11, 1997.

This matter comes before the court pursuant to the May 23, 1997, motion of the so-called called "IRI defendants"¹ a group of Terra's insurers who are responsible for approximately half of Terra's insurance coverage, for a partial stay of proceedings pending completion of alternative dispute resolution procedures the movants assert are required under the Industrial Risk Insurers Property Insurance Policy for Minorca U.S.A., Complaint, Exhibit 1 (hereinafter the "IRI Policy").² The IRI defendants contend that Terra filed this litigation prematurely, because Terra had not yet complied with all of the requirements. Specifically, the IRI defendants contend that Terra had failed to file a formal proof of loss, to submit to examinations under oath, or to pursue appraisal procedures prior to filing suit. The IRI defendants contend that these steps precedent to suit are required by the terms of the IRI Policy and the Iowa insurance statute that dictates those terms. Terra contends that these requirements have been either waived or substantially complied with under the circumstances of this case, including the two-and-one-half year investigation of Terra's claim undertaken by Terra and the insurance companies. Terra also contends that appraisal simply is not a prerequisite to suit and that the IRI defendants' demand for appraisal is simply too late to be effective.

In addition, this matter comes before the court pursuant to Terra's cross-motions for protective orders, filed July 1, 1997, and August 12, 1997, respectively. In those motions, Terra seeks protection from what Terra describes as the IRI defendants' belated attempts to take examinations under oath and to compel recourse to the appraisal procedures. Terra contends that the IRI defendants are attempting to delay litigation that all parties recognized was inevitable by asserting procedures that have been waived or that are not reasonably required. Terra also contends that the IRI defendants are attempting to use these procedures for premature, duplicative, and one-sided discovery in this lawsuit. The IRI defendants contend that Terra should not obtain the protection of this court from execution of provisions of the relevant insurance policy, particularly where those provisions are dictated by Iowa law.

The parties have submitted extensive briefs and exhibits, and the court heard oral arguments on September 30, 1997.³ Terra submitted some additional exhibits following the oral arguments by agreement of the parties.

B. Factual Background

The record reveals the following factual context for the present motions. On December 13, 1994, a catastrophic explosion occurred at Terra's fertilizer plant at Port Neal, Iowa. The amount of damage to Terra's Port Neal facility as a result of the explosion was unprecedented, as was the scale of the response to that disaster by both Terra and its insurers. Terra immediately marshaled investigation and reconstruction efforts and provided access to the site by a large team of engineers and investigators employed by the insurers. For approximately four months, the parties exchanged information, Terra's invoices were reviewed to determine whether they stated "incident related (IR)" or "non-incident related (NIR)" expenses, and those invoices were paid accordingly by the insurers. However, at the end of that period, Terra informed its insurers that it wished to concentrate exclusively on repairing and rebuilding its facility, and, although it would continue to submit invoices, it wished to be relieved of the necessity of submitting to claims evaluations until it could make a final submission. The insurers acceded to that request.

For approximately the next year, the insurers were still allowed to maintain their investigators on the site, but they made preliminary IR and NIR determinations without Terra's participation. Claims were not paid during this period, although the insurers had paid over $200 million of Terra's claims up to that time. Throughout this period, Terra requested extensions of time to file a final proof of loss of its claim and to institute suit if required. Those requests for extensions were granted by the insurers.

On October 3, 1996, Terra made what it considered to be its final submission of documents concerning the repair and...