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 -----

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

I have reviewed the insurance policy and selected correspondence relating to 
the "wet turbine" issue with Westinghouse.  Westinghouse has provided 
estimates to repair the wet turbine for approximately 5.9 million and to 
replace it for approximately 3.4 million.  The adjusters for the insurance 
company have advised in correspondence dated April 25, 2001 that their 
investigation is ongoing and that Enron should conduct itself as a "prudent 
uninsured" 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 
water.  The adjusters have indicated that additional damage, such as rusting, 
resulted from a failure to protect the turbine unit following the initial 
damage caused by the sea water.

Enron is concerned that the replacement cost of the "wet turbine" 
(approximately 3.4 million) will increase if Enron chooses to delay replacing 
the unit 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 is 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 know whether the repair or replacement cost is likely to increase should 
Enron 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 
requires 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 
additional insured.  Although the policy I have reviewed does not 
specifically name Westinghouse as an additional insured, I am told by Enron 
representatives 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 
analysis.  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 
loss and to ensure that all rights against carriers, bailees or third parties 
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 
sustainable in any Court of Law or Equity unless the Insured shall have fully 
complied with all the terms and conditions of this Policy, nor unless 
commenced within twelve months next after the happening of the loss . . . .

The policy is silent on the specific issue of what happens in the event that 
repair or replacement costs increase over time.  The policy also does not 
specifically define a "prudent uninsured."  Under New York law, however, the 
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 
circumstances.  See Intermondale Trading Co. v. North River Ins. Co. of New 
York, 100 F. Supp. 128, 132 (S.D.N.Y. 1951).  Additionally, the Duty of 
Assured Clause set forth above sets forth a similar "reasonableness" standard 
for the conduct of the named Insureds under the policy.  Thus, the "prudent 
uninsured" advisory given by the adjuster is a real standard which Enron must 
consider in making its determination of whether to replace the "wet 
turbine."  Furthermore, the insurance company's ongoing investigation will 
not operate permit an inference of waiver of a contractual limitations period 
when the insurer advises the insured to act as a prudent uninsured.  See Issa 
v. Reliance Ins. Co. of New York, 683 F. Supp. 82, 83 (S.D.N.Y. 1988).  Thus, 
Enron should pay careful attention to the Time for Suit Clause which requires 
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 loss 
on the date the initial damage occurred.  However, in view of the adjuster's 
April correspondence, it is a possibility that the Insurer will maintain 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 
consideration of the disputes between Enron and Westinghouse regarding 
delivery and risk of loss.  Based on our previous analysis of the delivery 
issues, Enron has a plausible legal position that Westinghouse should bear 
the cost to replace or repair the damaged unit.  As an additional insured 
under the policy and in light of its own legal position, Westinghouse must 
also conduct itself in a reasonable manner.  Why is it any more prudent for 
Enron to pay to replace the unit now and fight with the insurance company for 
full coverage then it is for Westinghouse to do the same thing?  If either 
party absorbed the cost of the replacement unit now, that party would look 
first to the Insurer for full coverage and failing that would seek to recover 
the uninsured portion of the replacement from the other party.  This will not 
change whether the cost to replace the unit goes up or down.  Further, 
Westinghouse 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, 
Enron has a good faith position that Westinghouse is obligated to replace the 
unit because risk of loss had not passed to Enron at the time the unit was 
damaged.  Second, it is our understanding from discussions with Enron 
representatives 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 
purchasing 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 that 
time.

Based on the above analysis, Enron can make a compelling argument that it has 
acted prudently and in accordance with the Purchase Contract and the Policy.  
Enron should note, however, that the "prudent uninsured" standard will 
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 action 
or other claim against Westinghouse, the Insurer or both to determine who 
will bear the ultimate responsibility with respect to repair and replacement 
of the damaged unit.

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

TFAH