Westinghouse Insurance Issues

FYI, wtg to hear from Andy in terms of whom else to distribute to.

----- Forwarded by Carlos Sole/NA/Enron on 05/14/2001 02:08 PM -----

=09"Thomas Hetherington" <thetherington@bracepatt.com< 05/14/2001 01:59 PM =
=09 To: <carlos.sole@enron.com< cc: <andrew.edison@enron.com< Subject: =
Westinghouse Insurance Issues=09

I have reviewed the insurance policy and selected correspondence relating t=
o the "wet turbine" issue with Westinghouse. Westinghouse has provided est=
imates to repair the wet turbine for approximately 5.9 million and to repla=
ce it for approximately 3.4 million. The adjusters for the insurance compa=
ny have advised in correspondence dated April 25, 2001 that their investiga=
tion is ongoing and that Enron should conduct itself as a "prudent uninsure=
d" pending a complete investigation of the claim. The adjusters have also =
stated that Underwriter's liability will be limited to the reasonable costs=
of repairs directly caused by the contact of the turbine unit with sea wat=
er. The adjusters have indicated that additional damage, such as rusting, =
resulted from a failure to protect the turbine unit following the initial d=
amage caused by the sea water.

Enron is concerned that the replacement cost of the "wet turbine" (approxim=
ately 3.4 million) will increase if Enron chooses to delay replacing the un=
it until the insurance company completes its investigation. Enron has also=
asked whether the adjuster's statement that Enron should act as a "prudent=
uninsured" requires Enron to replace the unit now at the lower cost. It i=
s my understanding that Enron does not currently have a project in which it=
could place the turbine. It is also my understanding the Enron does not k=
now whether the repair or replacement cost is likely to increase should Enr=
on delay repairing or replacing the turbine unit until after the insurance =
company has completed its investigation.

Section 19.2.1 of the Purchase Contract between Enron and Westinghouse requ=
ires Enron to maintain cargo insurance to insure "Equipment against loss or=
damage arising from customary 'all-risk' marine perils . . ." Section 19.=
2.1 also states that the cargo policy must specify Westinghouse as an addit=
ional insured. Although the policy I have reviewed does not specifically n=
ame Westinghouse as an additional insured, I am told by Enron representativ=
es that Westinghouse was in fact properly named as an additional insured on=
the policy.

The policy itself contains several clauses that are important to this analy=
sis. The Duty of Assured Clause states:

It is the duty of the Insured and their Agents, in all cases, to take such =
measures as may be reasonable for the purpose of averting or minimizing a l=
oss and to ensure that all rights against carriers, bailees or third partie=
s are properly preserved and exercised.

The policy also contains a Time for Suit Clause which provides in part:

No suit or action on this Policy, for the recovery of any claim, shall be s=
ustainable in any Court of Law or Equity unless the Insured shall have full=
y complied with all the terms and conditions of this Policy, nor unless com=
menced within twelve months next after the happening of the loss . . . .

The policy is silent on the specific issue of what happens in the event tha=
t repair or replacement costs increase over time. The policy also does not=
specifically define a "prudent uninsured." Under New York law, however, t=
he measure of the duty that is placed on an uninsured owner in this context=
is that action which a prudent uninsured owner would take under similar ci=
rcumstances. See Intermondale Trading Co. v. North River Ins. Co. of New Y=
ork, 100 F. Supp. 128, 132 (S.D.N.Y. 1951). Additionally, the Duty of Assu=
red Clause set forth above sets forth a similar "reasonableness" standard f=
or the conduct of the named Insureds under the policy. Thus, the "prudent =
uninsured" advisory given by the adjuster is a real standard which Enron mu=
st consider in making its determination of whether to replace the "wet turb=
ine." Furthermore, the insurance company's ongoing investigation will not =
operate permit an inference of waiver of a contractual limitations period w=
hen the insurer advises the insured to act as a prudent uninsured. See Iss=
a v. Reliance Ins. Co. of New York, 683 F. Supp. 82, 83 (S.D.N.Y. 1988). T=
hus, Enron should pay careful attention to the Time for Suit Clause which r=
equires that a suit be brought against the Insurer within one year from the=
date of loss, in this case sometime in July of 2001.

In light of the policy provisions and the "prudent uninsured" standard, the=
question becomes whether it is "prudent" for Enron to replace the turbine =
unit now for 3.4 million or wait until such time as Enron has a use for the=
unit or until the Insurer agrees to provide full coverage. It is possible=
that the adjuster will agree with Westinghouse that the unit was a total l=
oss on the date the initial damage occurred. However, in view of the adjus=
ter's April correspondence, it is a possibility that the Insurer will maint=
ain that subsequent damage, such as rusting, occurred as a result of Enron =
and Westinghouse's failure to protect the unit after the initial sea water =
damage. In that case, the coverage could be less than the full replacement=
value.

Enron's decision to pay for a replacement unit now also requires considerat=
ion of the disputes between Enron and Westinghouse regarding delivery and r=
isk of loss. Based on our previous analysis of the delivery issues, Enron =
has a plausible legal position that Westinghouse should bear the cost to re=
place or repair the damaged unit. As an additional insured under the polic=
y and in light of its own legal position, Westinghouse must also conduct it=
self in a reasonable manner. Why is it any more prudent for Enron to pay t=
o replace the unit now and fight with the insurance company for full covera=
ge then it is for Westinghouse to do the same thing? If either party absor=
bed the cost of the replacement unit now, that party would look first to th=
e Insurer for full coverage and failing that would seek to recover the unin=
sured portion of the replacement from the other party. This will not chang=
e whether the cost to replace the unit goes up or down. Further, Westingho=
use has control of whether the repair and replacement costs go up or down. =
If Enron chooses not to pay to replace the unit now and the cost goes up, =
Westinghouse would be opening itself up to a larger claim in the event that=
the Insurer did not cover the full replacement cost.

Finally, it does not appear at this time that Enron is required to purchase=
the replacement unit now under the "prudent uninsured" standard. First, E=
nron has a good faith position that Westinghouse is obligated to replace th=
e unit because risk of loss had not passed to Enron at the time the unit wa=
s damaged. Second, it is our understanding from discussions with Enron rep=
resentatives that Enron has no reason to believe that the replacement cost =
will in fact go up over time. Thus, Enron has no reason to believe that pu=
rchasing the replacement unit now will minimize the loss as required by the=
Duty of Assured Clause. Third, Enron does not currently have a project in=
which it can place the unit. When and if Enron did have a project for the=
unit, it would seem prudent to go ahead and purchase the replacement at th=
at time.

Based on the above analysis, Enron can make a compelling argument that it h=
as acted prudently and in accordance with the Purchase Contract and the Pol=
icy. Enron should note, however, that the "prudent uninsured" standard wil=
l ultimately be determined by the trier of fact. Thus, it is ultimately a =
business decision for Enron whether to go ahead and replace the unit now. =
Additionally, Enron may wish to consider filing a declaratory judgment acti=
on or other claim against Westinghouse, the Insurer or both to determine wh=
o will bear the ultimate responsibility with respect to repair and replacem=
ent of the damaged unit.

I trust this e-mail is responsive to your request. If you would like a mor=
e detailed analysis in memo form please let me know.

TFAH