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