OPINION OF THE COURT
VAN DUSEN, Senior Circuit Judge.
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.
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
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.
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.
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
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.
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:
A representative of Sharon Steel Corporation, called by the insurers, testified to the same effect:
This failure of proof is grounds for granting a judgment n. o. v. In considering a motion for judgment n. o. v., the court must view the evidence in the light most favorable to the party who secured the jury verdict. Firemen's Fund Ins. Co. v. Videfreeze Corp., 540 F.2d 1171, 1178 (3d Cir.1976), cert. denied, 429 U.S. 1053, 97 S.Ct. 767, 50 L.Ed.2d 770 (1977); 5A Moore's Federal Practice ¶ 5.07. However, a jury verdict may not stand if it is based on mere speculation. Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359, 47 S.Ct. 400, 71 L.Ed. 684 (1927); Columbia Metal Culvert Co. v. Kaiser Alum. & Chem. Corp., 579 F.2d 20, 25 (3d Cir.), cert. denied, 439 U.S. 876, 99 S.Ct. 214, 58 L.Ed.2d 190 (1978); Morris Bros. Lumber Co. v. Eakin, 262 F.2d 259, 263 (3d Cir.1950). Since the jury in this case could only speculate as to the effect of washing and the amount of coal that would have a sulphur content exceeding 1.6% at the time of delivery, it could only speculate as to how much coal would have been rejected by Sharon and been sold on the open market. The jury may not be permitted to do this. Accordingly, we will affirm the district court's grant of judgment n. o. v. on this issue. This limits Eastern to a recovery under the policy calculated on the value of its lost
The insurers appeal from the district court's entry of judgment on the second issue. They argue that the insurance policy is unambiguous and makes no provision for recovery of new expenses which an insured may incur due to an interruption. Accordingly, they argue that as a matter of law Eastern's loss incurred in selling substitute and brokerage coal to Sharon under the contract is not insured under the policy. Eastern, however, argues that the policy is ambiguous, and that the language should be construed to afford recovery. Eastern contends that recovery is assured under two separate provisions in the policy. The district court charged the jury in accordance with Eastern's theories. To determine whether this was error, we must analyze the policy.
The rules relating to the analysis of insurance policies in Pennsylvania are well established. Since the policy is a contract, the court's duty is to ascertain the intent of the parties as manifested in the language of the agreement. Mohn v. American Cas. Co. of Reading, 458 Pa. 576, 326 A.2d 346 (1974); Lovering v. Erie Indem. Co., 412 Pa. 551, 195 A.2d 365 (1963); Treasure Craft Jewelers, Inc. v. Jefferson Ins. Co., 583 F.2d 650, 652 (3d Cir.1978). The court should read policy provisions so as to avoid ambiguities, if the plain language of the contract permits. Pennsylvania Manufacturers' Association Ins. Co. v. Aetna Casualty & Sur. Ins. Co., 426 Pa. 453, 457, 233 A.2d 548, 551 (1967); Kattelman v. National Union Fire Ins. Co., 415 Pa. 61, 64, 202 A.2d 66, 67 (1964). A court should not torture the language of the policy in order to create ambiguities. Urian v. Scranton Life Ins. Co., 310 Pa. 144, 165 A. 21 (1933). If the language is unambiguous, interpretation of the contract is a matter of law for the court. Adelman v. State Farm Mut. Auto. Ins. Co., 255 Pa.Super. 116, 123, 386 A.2d 535, 538 (1978); Blocker v. Aetna Cas. & Sur. Co., 232 Pa.Super. 111, 114, 332 A.2d 476, 477-78 (1975). If an ambiguity does exist and if the insurer wrote the policy or is in a stronger bargaining position than the insured, the ambiguity is generally resolved in favor of the insured and against the insurer. Mohn v. American Cas. Co. of Reading, supra; Lovering v. Erie Indem. Co., supra at 556, 195 A.2d at 368; Hionis v. Northern Mut. Insurance Co., 230 Pa.Super. 511, 516, 327 A.2d 363, 365 (1974). However, the principle that ambiguities in policies should be strictly construed against the insurer does not control the situation where large corporations, advised by counsel and having equal bargaining power, are the parties to a negotiated policy. Eastcoast Equipment Co. v. Maryland Cas. Co., 38 Pa. D. & C. 2d 499, 511-12, 218 A.2d 91, 98 (Pa.C.P.1965), aff'd per curiam on opinion below, 207 Pa.Super. 383, 218 A.2d 91 (1966); 13 Appleman, Insurance Law and Practice § 7402, at 301 (1976).
As pointed out at page 1071 above, Eastern's insurance broker selected the policy forms, prepared the policies, and sent them to the insurance companies for execution. Under these circumstances, the Pennsylvania cases indicate that conflicts over the interpretation of an insurance contract should be resolved against the party preparing the contract. See Sykes v. Nationwide Mutual Insurance Co., 413 Pa. 640, 643, 198 A.2d 844, 845 (1964) ("where ambiguity clouds interpretation the contract in controversy must be interpreted against its authors"); Cadwallader v. New Amsterdam Cas. Co., 396 Pa. 582, 586, 152 A.2d 484, 487 (1959) ("if there be any ambiguity in the contract of insurance it must be resolved in favor of the insured since it was the insurer who wrote the contract" (emphasis added)). At a minimum, the above cited cases require that we not construe the language against the defendants.
These legal principles are fully applicable to the interpretation of business interruption insurance policies in Pennsylvania. Cleland Simpson Co. v. Fireman's Ins. Co. of Newark, 11 Pa. D. & C. 2d 607, 612-13, 140 A.2d 41, 44 (Pa.C.P.1957), aff'd per curiam on opinion below, 392 Pa. 67, 140 A.2d 41
With these legal principles in mind, we turn to the language of the policy in controversy. The policy sets out a general statement of its coverage and then addresses the determination of the value of the loss insured. It reads as follows:
As noted above, the insurers argue that this policy is unambiguous and makes
Paragraph 10-b sets forth a formula precisely limiting the scope of recovery. The policy states that the business interruption loss shall not exceed "the reduction in earnings less charges and expenses which do not necessarily continue during the interruption." A close analysis of the terms of this formula demonstrates that it is subject to only one reasonable interpretation.
The first element of the formula is "the reduction in earnings." To understand this element, the term "earnings" must first be understood. On the facts of this case, earnings are the "total net sales value of production." This phrase refers to the value of the coal which Eastern would have mined during the period of interruption, if operations had continued.
The second element of the formula is the phrase "charges and expenses which do not necessarily continue during the interruption." This language refers to expenses that the insured business incurs during normal operations which, because of the work stoppage, it does not need to incur during the interruption, such as fuel to run machinery in the mine.
From this review of the formula used to calculate recovery under the policy, we believe it is apparent that the policy makes no provision for recovery of an expense which is newly created by the interruption, such as Eastern's substitute and brokerage coal cost. The policy merely insures that the
Despite the failure of the language of paragraph 10-b to insure against new expenses, Eastern argues that coverage for new expenses must be provided on the basis that business interruption insurance should protect insureds from all loss due to business interruptions. Eastern bases this assertion on the generally accepted statement that business interruption insurance "is designed to do for the insured in the event of business interruption caused by fire, just what the business itself would have done if no interruption had occurred ..." National Union Fire Ins. Co. v. Anderson-Prichard Oil Corp., 141 F.2d 443 (10th Cir.1944). Eastern extrapolates from this general statement that the recovery must leave the insured in the same financial position it would have been in at the end of the policy's term had no interruption taken place. Eastern argues that, because it is in a worse financial position after the interruption, due to the new expenses, than it would have been in if no interruption had occurred, new expenses must be covered.
Eastern's argument based on this general statement fails because the policy makes no provision for recovery of new expenses and because the clear language of the policy limits recovery to the amount derived from the formula discussed above. If new expenses are to be compensated, the express language limiting recovery would have to be ignored. Since there is no ambiguity, there is no basis for ignoring this language.
Moreover, there is no support in the case law for Eastern's argument. National Union Fire Ins. Co. v. Anderson-Prichard Oil Corp., supra, and the many other cases citing the general statement concerning business interruption insurance quoted above do not address the problem of whether to award recovery for new expenses produced by an interruption. They simply note in situations where new expenses have not been incurred, that the recovery under a business interruption insurance policy is likely to return the insured to the financial status it would have been in if no interruption had occurred. In situations where no new expenses are incurred, this statement is correct. In light of the lack of ambiguity in the policy, the absence of any provision compensating new expenses in paragraph 10-b's formula, and Eastern's failure to uncover any cases in which recovery for new expenses was obtained under a business interruption policy,
The district judge also charged the jury with a second theory of recovery for the substitute and brokerage coal expense under the policy. The court charged that these additional expenses could be compensated under the "Expenses Incurred to Reduce Loss" provision of paragraph 10-b of the policy. This charge was also incorrect.
The provision provides as follows:
Here, again, the words of the policy are not sufficiently ambiguous to necessitate the application of rules of construction. See American Alliance Ins. Co. v. Keleket X-Ray Corp., 248 F.2d 920, 930 (6th Cir.1957). As noted above at page 1076, Pennsylvania cases hold that a clause must be ambiguous before a court applies rules of construction.
Eastern argues that its substitute and brokerage coal expense was "incurred by the Assured to reduce loss" caused by the interruption and, therefore, is covered by the policy. We do not doubt that Eastern's liability to Sharon was reduced by its resort to substitute and brokerage coal. However, Eastern fails to take account of the exact words of the policy. The provision compensates insureds for expenses incurred "to reduce loss hereunder" (emphasis added). We believe the phrase "loss hereunder" plainly refers to loss compensated under the policy.
Our interpretation is consistent with the clear intent of the "Expenses Incurred to Reduce Loss" provision. The provision is designed to encourage insureds to undertake new expenses which will result in an overall reduction of the insurer's liability. Support for our interpretation can be found in the Sixth Circuit's case of American Alliance Ins. Co. v. Keleket X-Ray Corp., supra. In Keleket the district court had awarded recovery under a provision of a business interruption insurance policy substantially similar to the one at bar
Id. at 930-31 (emphasis added).
As the brokerage and substitute coal expense in no way served to reduce the insurer's liability under the policy, it cannot be compensated under the "Expenses Incurred to Reduce Loss" provision. Eastern's interpretation, which renders the word "hereunder" meaningless, is plainly at odds with the unambiguous meaning of the provision.
Our review of the pertinent case law and the language of this policy convinces us
In conclusion, we hold that the district court did not err in entering judgment n. o. v. against Eastern based on the speculative nature of the evidence concerning the high sulphur content of some of the coal to be delivered to Sharon Steel Corporation. We further hold that the district court erred in denying the motion for judgment n. o. v. against Eastern with respect to the brokerage and substitute coal expenses. Accordingly, the case will be affirmed in part, reversed in part, and remanded to the district court for entry of judgment against the insurers for $287,277, the amount conceded to be owed by defendants.
However, Eastern elsewhere makes the argument that inferences can be drawn from the evidence at trial that washing is ineffective in reducing sulphur. None of these alleged inferences is supported by the record.
First, Eastern's letter refers to plaintiff's exhibit 20 (765a-770a). Eastern implies that this exhibit demonstrates the difference in sulphur content of coal before and after washing. In fact, the exhibit merely shows the percentage of sulphur in washed coal, when it has 5% moisture in it, compared to the percentage of sulphur in the identical washed coal, when it has 0% moisture in it. Thus, exhibit 20 is silent with regard to the effectiveness of washing.
Second, Eastern's reply brief, at 35, asserts that because washing is a "mechanical cleaning" process, it is ineffective in reducing sulphur which is measured by a "chemical analysis." There is no logic to this assertion. It is obvious that if a "mechanical cleaning" process reduces the sulphur content, the reduction will be reflected in a later "chemical analysis."
Finally, Eastern argues that because a shipment of coal mined in early January 1974 had a sulphur content of 1.59% after washing, and other coal, which would have been mined at the end of January 1974, had an in-mine sulphur content of 1.64%, it can be inferred that washing is essentially ineffective. Again, Eastern's argument is based on speculation. We are asked to assume, without supporting evidence, that the coal which was washed had an in-mine sulphur content of 1.64%. We can make no such assumption because it was undisputed that the concentration of sulphur in the coal varied throughout the mine.
Also, it is noted that it may well not have been possible to grant summary judgment for the insurer before trial because evidence offered at the trial might have disclosed an ambiguity. See Horowitz v. American Casualty Co. of Reading, Pa., ___ Pa.Super. ___, 419 A.2d 660 (1980) (reversing summary judgment for insurer on issue whether business interruption policy excluded coverage because court "unable to say that [insured's] interpretation of the ... exclusion is clearly wrong"). The appellate court in Horowitz held that the trial judge improperly decided on summary judgment that the exclusion was unambiguous. It remanded since the ambiguity "upon appropriate testimony might be resolved" in the insured's favor, even though the policy was negotiated and not merely the insurer's form. The exclusion in Horowitz differed from the one we construe today. More important, Eastern had an opportunity at trial to produce evidence of an ambiguity, but failed to do so based on the record before us.
limits the insurer's right to assert that an expense, which was continued, was not necessary.
Cont. Expenses & Lost Net Profit Calculation of Loss Sales Value of Production of 615,659 tons ... $10,565,028 Less: Ordinary Payroll .......................... $2,146,576 Work Comp. & S.S. ......................... 242,939 Materials ................................. 1,047,544 Power ..................................... 189,500 United M.W. Welfare ....................... 517,510 Royalty ................................... 49,253 Taxes ..................................... 369,776 4,563,098 __________ ___________ Gross Earnings ........................ $ 6,001,930 General & Administrative Exp. Projected Salaries & Foreman ........................ $1,146,763 $ 904,687 Work. Comp. & S.S. ........................ 158,953 125,568 Town & Incidental ......................... 28,842 7,398 Power (fixed) ............................. 123,874 123,874 Vacation & Holiday ........................ 415,849 -- Insurance ................................. 41,548 41,548 Property Taxes ............................ 50,633 50,633 Pension & Insurance ....................... 155,938 155,938 Other Inc. & Exp.-Mining .................. 17,753 17,753 Depreciation .............................. 523,137 523,137 Miscell. Inc. & Exp.-Adminis .............. 28,283 28,283 Pittsburgh Overhead ....................... 193,845 193,845 Sales Expenses ............................ 169,636 169,636 Development & Depletion ................... 90,780 3,145,834 88,881 _________ ___________ __________ Projected Net Profit .................. $ 2,856,096 2,856,096 ___________ ___________ Projected Net Profit & Cont. Expenses .... $5,287,277 (Plaintiff's Exhibit 54, 784a.)This sheet follows the formula described in the text to arrive at the recovery figure of $5,287,277. "Earnings" is the value of projected sales: $10,565,028. This figure is reduced by non continuing expenses. Eastern has separated non-continuing expenses into two categories. The first category is under the heading "less" and totals $4,563,098. When this amount is subtracted from the earnings figure, $6,001,930 remains. The second category is under "General & Administrative Exp." Under the heading "Projected," the insured has added all expenses, continuing and non continuing. This amount totals $3,145,834. This amount is also subtracted from earnings, leaving $2,856,096. The insured then added all of the continuing "general and administrative expenses" (found in the right-hand column) to the $2,856,096. figure to arrive at the final claim of $5,287,277. The effect of subtracting all continuing and non-continuing expenses from earnings and then adding all continuing expenses was to reduce earnings only by the amount of non continuing earnings in accordance with the formula in the policy.