Court reverses KAAPA's $4 million property damage award

By Matt Soberg | November 10, 2011

On Nov. 3, the 8th U.S. Circuit Court of Appeals reversed a $4 million award to KAAPA Ethanol LLC from Affiliated FM Insurance Co. for property damage to tanks used for ethanol production. The appellate court remanded the matter for a new trial following its determination that the federal district court gave improper jury instructions, thereby committing reversible error.

“Soon after KAAPA began production, the ethanol production and storage tanks began to lean, their foundations began showing visible signs of distress, and their supporting concrete walls sunk into the ground,” according to the decision. KAAPA originally initiated the suit against Affiliated, with whom KAAPA carried an “all risk” property damage insurance policy, after the company denied claims for repairs and business losses. The policy covered all risks of direct or physical damage to insured property including collapse of a building or structure.   

The federal district court awarded KAAPA nearly $4 million for losses caused by collapse of the tanks, however, denied claims for business losses. Both parties appealed and must retry the case following the appellate decision.

The appeal turned on the definition of the word “collapse” as applied by Nebraska law. Over the objection of Affiliated, the district court failed to require KAAPA to prove imminent tank collapse in accordance with Nebraska’s material impairment standard. The appellate court disagreed and demanded a new a trial.

The KAAPA plant consisted of nine cylindrical stainless steel tanks including a 980,000 gallon beerwell tank, three 730,000 gallon fermenter tanks and five process liquid tanks.  At trial, several witnesses testified about damage to the tanks, which included unusual movement, shifting and noncompliance with API load tolerances in 2004. KAAPA retained Karges-Faulconbridge Inc. to address the problems. The company implemented a comprehensive year-long plan to repair all nine tanks while the plant continued operation, according to the decision.