to buy energy of washington in connection with its cedar hills facility in maple valley washington a facility that processed landfill gases into renewable natural gas methane that was then sold the puget  energy it was a very good situation a green situation that was being accommodated by this facility for that coverage bioenergy of washington paid two hundred twenty one thousand dollars in annual premiums sixty percent of which was allocated to the cedar hills facility the district court here aired in preempt early resolving multiple questions of fact regarding the general property loss provisions in the policy as well as the boiler and machinery endorsement in the policy we asked the court to reverse the district court's decision in that regard now i'm going to focus this morning on those issues the issue of the general insurance property insurance and the boiler machinery endorsement and leave to the briefs the other issues that we have raised with respect to f r c p thirty seven and some of the other issues in the case unless the court has specific questions regarding any of those issues let me let me say first i guess to washington law regarding the interpretation of insurance policies washington lock governs here in washington applies a very pro insured set of interpretive standards with respect to insurance contract in this case the district court misapplied many of those favorable interpretive principles that are associated with the interpretation of insurance policies in washington let's start first with the all risk exclusion looking first at the insuring clause ace covered all risk of loss or damage from an external source the term external source is undefined in the policy that the district court here concluded erroneous li that the entire nitrogen rejection unit the entirety of the system was a single unitary system as opposed to insurance which is the standard in washington and when you have an undefined term like this use it's popular ordinary regular meaning so what we mean by an external source here in dickson the key case on which we rel from the washington state supreme court you had a circumstance where a crane broke down there was a defect in a well but the crane broke down as it was attempting to pull an h beam out of the earth and the earth had fallen making that you know process more difficult for the for the crane to accomplish that was an external source that's the key case on external sources contrast that with a circumstance like a yk problem in the port of seattle case where it is internal to the system here it's absolutely undisputed in this case the king county has a contract with bio energy of washington king county has the ability to completely cut off the landfill gas going to the system they can do that at any time at any point that choose to do so that's an excerpt of record for twenty four twenty nine if that's the case from the plain ordinary common understanding of the term how can the gas be something internal to the system if someone else can cut it off and i ask you this there's always a risk of trying to oversimplify things and so tell me if i've done that are we really just called upon to figure out whether the the thing that caused the loss here was really just an internally defective component of the system namely that what is that basket thing called the diffuser best refuse or basket thank you because i think you would concede that if in fact that basket had been defectively manufactured and that's what caused the failure and led to all the problems i assumed then you would say that no there would not be an external cause for the loss is that right no i don't think we'd say that at all your honor because we have to start first with the insuring clause and in washington it's a two step process look to the insuring clause that defect is an exclusion look to the exclusion they argue a surrogate is it's not an external clause because because it's all part of a single system as i've mentioned king county could cut off this so called internal caused of the problem but more to the point why in the world would bioenergy of washington in genco by this coverage knowing the nature of the system if gas coming into the system was always excluded it would it would render illusory the coverage there's a there's a facetious statement in injustice kneels an opinion or of you you cite both sides cite standard structures structural steel as an important case right yes in that case the banks to a large extent the formalistic view of even under plain meaning of what external source is because if you take it literally it means unless a lightning bolt hits the system or a plane falls out of the sky there's no coverage so the courts start to look at hand external causes as a as the case as a sort of partnership with fortuitous ness correct and to me when you go down the path of trying to create this sort of artificial construct of externality based upon where the gas comes from where the air comes from where the steel comes from you go down a path t doesn't make any sense and you know maybe it's just dealing with the sort of tension between the art of an insurance policy in reading and in plain meaning but you're really there when you get all wrist policy to  ensure everything except things that for reasons of public policy and other specific reasons should not be covered in here and the facts wear and tear those sorts of things but if you limit it to just well you know the gas is internal to the system it's not it's an outside input it's an external source to the system we have a burden of overcoming first of all that the insuring clause applies we would agree with you that you know you look at you look at an all wrist policy as all wrist minus specific exclusions that are there for public policy reasons and we can get to the exclusions in a minute but we overcome that external external source problem that the district court identif because this was an external source the gas came from someone else it was under the control of someone else it was an external source of harm and it was in effect in this particular set of circumstances like a sledgehammer hitting the system causing the system to fail now if we get to the exclusions as the court is talking about you have questions of fact that abound i mean quite frankly this is a battle of experts you have our experts o c e that say it's sudden unexpected it's a major disaster that happened you have their experts that disagree now one of their experts didn't understand that the media was not in the basket the media's in the whole vessel of this twenty foot tall device that that does the purification process but be that as it may it was a a distinct difference between the experts on this question of whether these these exclusions apply wear and tear you know the defect in the in the in the system all of that all of that were they were up for grabs they were distinct differences between the experts on those points because i maybe you can help me out here seem to me you inconsistently referred to both quotes it caused the vibration in this unique set of circumstances in such a fashion as the basket failed that's the set of circumstances we're talking about but it was the it was the influx of this high velocity landfill gas that was the efficient proximate cause and it's an important point when we get to the additional question on these exclusions of the ensuing loss provision they argue they try to argue that the basket itself was the was the cause of the problem the gas was the cause of the problem it's an external source even if there was wear and tear or defect or what have you under the ensuing loss provision is the washington supreme court has has a as interpreted that concept and vision one there's an exception to the exclusion in coverage applies because the initial precipitating event the influx of this high velocity gas was the reason the system had the failure point your theory was that the gas created harmonics which  led to a breakdown in the harmonics because every system has to be engineered all differently even when you have engineering specs that you design a system in relation to that you can't anticipate every possible thing that might happen and that's why and the conclusion of our experts was that it was in fact this event that caused it it's question of fact for the trier of fact not so that is why does not honor stand then why if there was some inherent manufacturing defect in the basket and that caused the thing the fail i don't understand why you think then there would be coverage under the as an external cause because all of the experts your honor said the basket wasn't defective it couldn't handle the circumstances which as you just hang on i asked you a hypothetical question in which the cause of the baskets failure was an inherent manufacturing defect had nothing to do with anything you guys did wrong it was just whoever you bought the thing from it just didn't manufactured properly right and i was asking in that scenario are you still arguing that you have coverage out that's all i was trying to figure out and you said oh yeah i know even in that scenario we would have coverage or not that seems inconsistent with the dialogue just said no you haven't you have coverage under the ensuing loss provision your honor and that's the exception exception to the exclusion as the ensuing loss provision has been has been understood in washington law it is an exception to the exclusion for things like what the wear and tear and the last doesn't occur on the date that the diffuser basket fails it's much later and it's actually due to other issues that occurred with the operation of the system right so it's not like there was some that's why i don't i don't think you your saved by the ensuing loss provision that's why i've been focusing mainly on the insuring clause so again just forget about the last revision you're still saying that you would deem the gas to be an external cause of the loss even if the thing that caused the diffuser basket to fail was an inherent manufacturing defect well it would be the efficient proximate cause under washington law washington law recognizes this concept of efficient proximate cause not talking about concept we're talking about external causes defined in a policy right well it's not a tort cause it's not a tort concept in washington law your honor it's a it's a factor that's looked upon for insurance purposes the fission proximate cause is the basis for coverage here in the efficient proximate cause is the influx of the high velocity gas not notwithstanding the fact that there's wear and tear not withstanding whether there's defect there that's exactly what the principle of ensuing loss provides for that you can have the percipient eating cause you can have these other factors that might not be covered but if the initial precipitating cause results in coverage under the ensuing loss provision you get coverage my point here is this the insuring cause a question of fact as to coverage is it from an external source we say absolutely so is there a code is there a preclusion under the exclusions to the policy no question of fact there according to all the experts is there is there coverage as a matter of law or no coverage as a matter of law it's a question of fact under washington law this whole train of causation we get coverage under the ensuing loss provision therefore we prevail under those circumstances as well the trial court jumped the gun here and in resolving the issues that are factually intense as a matter of law let me turn to the boiler in exclusion the boiler machinery coverage for a moment this is a distinct indorsement in the policy that provides for coverage of an object breaks down as a result of an accident and of course the policy has a completely circular definition of where constitutes an accident an accident is something that sudden an accidental well it's kind of leaves us around in a strange circle washington courts under these boiler and machinery indorsements have interpreted the concept of sudden an accidental to mean unexpected and unintended from the standpoint of the named insured that's the upshot of the anderson and middleton case that we cited to the court by way of additional authority so from that standpoint was this law something that was unexpected from the standpoint of bioenergy washington absolutely was it something that was intended by bioenergy of washington absolutely not there's nothing in the record the documents any of that the o c e report is specific in this regard in saying it was a sudden and unexpected loss excerpt of a record two seventeen to one thousand nine hundred ninety four seven ninety six the only on the only contrary position that's offered by ace here is they offer up their exclusion for wear and tear there is no specific design defect exclusion for the boiler and machinery endorsement and similar fact questions apply with respect to whether or not it was wear and tear or whether it was something that was absolutely sudden and unexpected from the standpoint of this named insured the fact that o c e concluded that the loss was something that was occasioned by sudden and unexpected circumstances i think precludes the notion that the court the district court could conclude as a matter of law that wear and tear precluded coverage under these circumstances the upshot of the argument here your honour's is this this is a coverage case under washington law with very very clear cut principles interpretation of favor insureds this is a circumstance that that is a abounds with questions of fact coming from different different experts looking at these very complex issues the trial court here jumped the gun in determining as a matter of law that there was no coverage under the general all that wrist provision in the policy or under the terms of the  machinery indorsement in the case and for these reasons we asked that the court reverse and allow the trier of fact or a jury to resolve these questions as it should thank you very much thank you counsel hear from your opponent thank you your honor and maid please the court i'm anti meant whiskey with my colleague give me a cite for ace i want to discuss three issues the two that my colleague discuss to discuss the general ensuring agreement external cause the boiler and machinery endorsement also the late notice issue which i think cuts across both issues and maybe the most straightforward issue actually in the case but since most of the discussion has been about the the ensuring i think it's useful to just go back and look at it before you get to any exclusions in suing loss or any of that the first question under the ensuring agreement is whether the damage was from an external cause not external sources my colleague said so the question isn't whether you know the but for cause or one of the but for causes comes from outside of the property which i think is their argument the question is whether it's an external legal cause that term is well understood in the law and in particular the question the way the facts present themselves here several cases such as port of seattle in the wash and court of appeal and the g t e case in the third circuit both of which dealt with yk type problems but also used analogies from physical property damage those cases stand for the proposition that when the property damage results from exposure to the very conditions to which the property is supposed to be exposed that is not an external cause that the legal cause is some problem internal to the property so for for example  cases use one is a car whose tires blowout when it was driving ten miles an hour you can say that a but for cause of the tires blowing out is the road but the road is not a legal external cause the cause is internal with some problem with the tires the same the other example that the court gave was a dam where the water rises to expected levels in the dam breaks the problems with the d m ok but doesn't i mean again i  admit that i may be trying to oversimplify things for my own benefit but i just think of it as this for some freak event that nobody could possibly have guarded against prevented design for tested whatever just merely the equipment of an act of god the set of circumstances that to make this this thing fail seems to me that that should count as an extra real cause and there would be coverage on the other hand if it were as you were just trying to describe just some like no this was the normal operation of this plant and for whatever reason wear and tear some defective part that's what caused this thing to fail then it seems to me there would be no coverage because you can say that it was external just as a as an awkward term but that's how i would think of it and if i say basically agree with that but but the key here is that what you're the thing that has to be normal or expected or whatever is the conditions to which the property is exposed not the way that the property reacts to those conditions right here there are experts position is gas came into the diffuser basket came into the vessel it hit the diffuser basket the gas the cave in was everybody agrees coming in a normal operating but there because if nothing different was going on in terms of how the thing was running right then i mean why didn't this happened you know a year ago  presumably at least as i understand there are experts that happen on this occasion just because of some freak combination of circumstances that caused the i don't know the physics know it to the contrary your honor i think i think there are i mean we're only talking about their expert here because we're not usually we're not trying to create a midden issue of material fact they're experts position is that gas came the diffuser basket was exposed over i think between one and two years to continue it was continuous exposure to incoming landfill gas everybody agrees that landfill gas was coming in a normal within normal operating parameters what happened was first after a long time the the welding that held the plate the bottom plate of the diffuser basket to the cylinder came undone i don't think their expert explains why that happened but it happened then think the structure does explain why well i thought it was it was like the you know sort of wine glass the vibration right right but as i understand their expert report and that may be but i don't think that's right i think the way i understand i understand you dispute that but that's the problem you know i'm not disputing i'm just trying to understand what their expert says it doesn't it doesn't matter for purposes of this i thought with their expert said was that the welding broke then the straps were the only thing  holding the bottom plate on and at that point the straps started vibrating at a different frequency and over a period of a year or two after continuous vibration it's not like at the end of the day of course the break happened suddenly but that's not the question it was it was a year or two worth of vibration that caused you know fatigue and finally a break in the strap that is all of that is a problem with the internal to the basket right the gas is coming in just like it's supposed to come in it's the basket that's you know resonating in the way they say it was in this gone back to the whole internal external dichotomy when we've been sort of talking about you know sort of modern approach to these analysis is looking at fortuitous notice as a way of understanding what externality really means in the context of these policies so i think i talked about that concept and i was just sort of calling you on the fact that i think you're using external cause one way but a moment ago you agreed with my colleague that it's not strictly but it's got to be understood in the context of these types of policies as well and it's pretty you kinda the concept of fortuitous i don't think it's i don't think it's fortuitous in this because you know in all risk policy covers all risks and then what you're taught and then you look at the exclusions and all risk policy that only covers external causes like this policy again only covers what the law understands to be external causes which means a cause or which doesn't mean right damage that results only from exposure to conditions to which the property was in tended to be expose now there could be a fortuitous reason why the damage occurred in that case for example i don't know some kind of design defect or some other reason but isn't that mean that if you design a system to the best engineering specifications that you can and you use it in a way that it was designed to be used that any failure can never be insured under these policies no no not at all because if the if the property is exposed to conditions other than conditions to which it was meant to be exposed that would be an internal cause i mean you know lightning a rock storm  also its policy here is going to cover the lightning the meteorite the airplane falling on the pipe but if you have the best science you can and you design a pipe that every specification says is going to meet certain harmonic requirements and everything is going to be fine and you learn later because these things are not hundreds and hundreds of thousands of these made you learn later that there was some combination of there was some reason there was an anticipated that it failed that is not and insurable of and under this policy when when that's your was required that's your position so long as the failure was internal to the property then yes that's going to start even unanticipated no one could have done it the best engineers in the world worked on it everyone agreed it was to spec and built a pro israel insists that something happened the insured needs to i that's if all that happened was exposure to the conditions that the property was meant to be exposed to then yes i think as a matter of law just like the yk cases as a matter of law there were what about what about the harmonics issues i mean no one anticipated that it was under the boiler and machinery endorsement if you take their experts report as true because the definition of accident so a flaw and is not going to be covered even if there was no way to anticipate it because now we can look back on it and say well it must have been defective it just depends on what if the flaw is the kind of flaw that manifests based entirely on exposure to the conditions for the expected conditions for which the property was made then yes it's not an external cause i mean again that's the y basket was not necessarily defective then it went on to say to conclude then inherent defect none the less existed now come by within jane calls expert opinion there resident vibrations to cause the vare and that was a rare event why isn't there a disputed issue of fact i don't think there's i think what the district court was saying is i think that the court didn't need to decide whether there was some kind of negligent design that's what i think they were arguing in terms of when he said there's not necessarily a design defect that doesn't matter what matters is whether the legal cause was internal or external and under anything like that when you could you could insure for it it's just that this insuring agreement distinguishes between internal causes which are not covered in external causes which are and again just like yk problem and the other examples that cases like port of seattle and the case in the third circuit put forth the question in a case like this is whether the property damage occurred because of exposure to  expected conditions the conditions that it was meant to be exposed to if the answer if that's the only thing that results from which the damage resulted than that that is not an external cause now so i don't think i have the facts on the street i thought their expert was saying that the failure of this vast hit on the particular day was on the order of a catastrophic thing like it wasn't just a wear and tear over a years time but it was something happened i don't was on that particular day a very short time period yes that's they're relying on that statement that that's true but what the statement is is that when the break happened it was sub it right that's short when the break happened it was it's like you know if an axle over years is subject to wear and tear on a car when the wheels which we pop off that is sudden right that that's not what matters because because the definition of accident doesn't include wear and tear  but i did not tell you can help me with this i don't understand there are there are experts opinion to say that yeah the the failure was sudden as it always is you just said but what caused that actually was exposure to a particular frequency o vibration over a period of a year i think their expert their expert says that happened over one hundred one to two years continuous exposure to incoming landfill gas that caused vibrations that that weakened the materials and eventually you know their expert says suddenly broke but that last thing is irrelevant as a matter of law if if what caused it to break the process that led up to causing it to break was just the continued repeated exposure to normal conditions right that ended up causing vibrations and then a sudden break right that is wear and tear but you know i also wanted to discuss the notice issue because obviously that's an issue that cuts across both coverage questions i think there's very little dispute here that the there was a reportable loss on october first two thousand and ten there was nothing to report on that but that's a lot to her fifth this one day there was nothing to report that oh no i think there was i mean there the basket fell they problem taken care of that's what they thought no there was nothing to tell you all about because they weren't there was no they didn't want you to replace the basket the basket failed and thirty two thousand pounds of media were destroyed but they didn't have to pay for the replacement so there was no loss there's nothing for them to come to you and say hey we need you to pay for this it wasn't until the whole system crashed months later that's when they said now we are insured because lesser vision doesn't doesn't  require the insured to provide notice when they're asking for payment it asks it requires notice for every loss here under which means property damage right and so the question is when the price when we're going to notify you that we don't want you to pay for something  that makes no sense obviously they're going to come to you when they say we've suffered a loss we're out of pocket a bunch of money and we think you have to pay us for that if they're not out of pocket anything there's nothing to report to you all first of all they are out of they were out of pocket starting on october first if you look at their initial disclosures they are asking for damages starting on october first second of all if you look at their the actual notice letter that they sent in may you know the first line is the date of the loss october and ten right if you look at their complaint they say for example paragraph seventy five which is e r five sixty four they say all the loss all resulted from a single occurrence namely the accident of vessel the thirty two on or about october first two thousand and ten again in their complaint at paragraph fifty seven they say they're asking for ace the pay for the cedar hills incident on of october first two thousand and ten which continued there after and led to a second shutdown and for their losses there are there's no there might be for example a defense of a good faith belief in non coverage if they thought for example that the loss wouldn't clear the policies you know deductible amount of fifty thousand dollars short they don't argue anything like that obviously all they're saying is that there was a loss it was a cut it was a covered loss under their view at the time they knew it was a covered loss because the cost of just the shutdown of the plant was well above fifty thousand dollars but we just didn't want to tell our insurer we made a mistake we were allies that the loss that we knew we should have known was covered at the time was much bigger we found that out in march and so now we're going to give notice two hundred days after what the notice letter itself says was the date of the loss there is no case and they don't cite a single case that allows for a defense to notice when the only reason you didn't give notice was you knew that there was a loss of a size that would have been covered under the policy but you just know how big it was going to be let's assume though that washington law applies ok what's your response to the fact that it turned out your expert was it says he or she was able to basically do whatever needed to be done based on that is not what our expert says the question was you know you saw these photographs or the photographs sufficient to support your opinion well of course there's evidence to support the yes we can the opinion is i have recreated this accident through software right and my opinion is that this is how it happened but that's only because that's these are the only photographs where the only thing he had no expert would say yeah you know i don't i don't need to actually i would rather it's irrelevant to me whether i have the pictures or the actual damage property so that i could actually examine it i think it was your it wasn't your client's burden to show prejudice under washington law yeah and we and that's why i was didn't want to get you to get through so what was the prejudice given that your expertise was a prejudice is that the damaged property was disposed of right after the accident when they found out about it on october fifth which means that we could not examine it actually look at the metal and see what caused the loss both experts now are trying to recreate this accident in a vacuum based on the best information they had but you know for example the key trauma case out of washington makes clear that if the insurer doesn't actually isn't able to  examine the property to see what happened that is prejudice they cite cases where just the passage of time that you know doesn't count as prejudice under washington law and we don't argue otherwise but the passage of time is not the problem here the problem here is that if they had told us at the outset we could have been inspected and seen what happened to the actual property now i want to fight back on the proposition that washington law applies because i think everybody agrees here that section one eighty eight of the of the restatement applies and just taking a step back to the one eight of the restatement is about the most significant relationship of the state to the contract which means that at least on an issue per issue basis the same state's law is going to apply no matter where the actual you know property damage happened which means under their theory if one of the virginia plants broken the issue or you know there was a damage the virginia plan the issue was late notice washington law would apply that seems to me to be highly counter intuitive at the least and the reason it seems so strange is because all of the section one hundred eight factors are you know point it seems to me to virginia unambiguous you know the contract ing took place the contract was negotiated if not completely in virginia at least predominantly in virginia even the addition of this plant which isn't the you know the relevant point because it's about the contract as a whole was first discussed by the parties at a meeting in virginia and in jingoes risk manager delegated the negotiating of that addition to those virginia  agent you know when when they discussed renewing the contract in two thousand and ten when cedar hills was had already been added it seems to me significant that they discussed that completely in virginia and toward virginia plants if they view this as a washington contract it seems to me that somebody would have at least thought about looking at the washington plant but nobody did and of course in genco which is the only party to the contract from their side as a virginia company they say b e w operates in washington but b w under their own pleadings is a virginia company it's an l l c with one member who is also at home in virginia so this is a completely  let me touch upon the choice of law issue in the question of an actual substantial prejudice under washington law first the district court applied choice of law principles appropriately applied when eighty eight of the restatement although of court did not explicitly call section six which is an overlay to one eighty eight of the restatement of the choice of law the court applied public policy factors in its decision and excerpts of record one eighty five as it should this facility is vitally important it's ironic that if you look back in washington case law the queen city farms cases cited to the court for example we're still talking about the cedar hills facility this is a facility that has been an issue for a long long time in terms of washington the hazard to washington in terms of its environmental impact and this renewable natural gas facility is vitally important as a condition of the contract between king county and bioenergy of washington there was a requirement that insurance be provided so this insurance issue is vitally important renewable natural gas is a vital aspect of washington public policy and it was one of the reasons the court put its thumb to so to speak on the scale in favor of applying washington law here you had i think also some circumstances involving the negotiation of a contract there was never a contact about this particular coverage for this washington site because there was a history that was discussed in the declaration of mr your early and also in mr drags declaration as well this is a c r one twenty two to one twenty six and one sixty eight to one seventy the part of the parties initially had builders all risk policy based on this facility they decided to add this facility to the master in genco policy as a matter of cost but the bottom line was there were no particular meetings in virginia about cedar hills it was always understood and expected by the parties that washington law would apply and the washington facility was being covered in terms of washington law for your question about actual substantial prejudice is right on i had the opportunity to actually represent the insurance carrier lloyd's of london in the port of longview case in that case it's a question of fact invariably under washington law about whether there's actual and substantial prejudice to the insurer we disagree that there was a untimely reporting of notice here but regardless of that it's a question of fact for the trier of fact on a an actual substantial notice in that case nineteen years elapsed without notice being given the witnesses died the port of the port of long view is key witnesses involving the pollution that was occurring on port property died and the port reconfigured the property  reconfigured the physical configuration of the property where the pollution was occurring you would think that that would constitute prejudice to the insurer is a matter of law under washington law no question of fact a court of appeals determined that review denied by the washington supreme court telling you how powerful the principle is that actual substantial prejudice is a question of fact under washington law with respect to the questions that the council argued you know it really comes down to the question i think you raised judge preggers and here if you understood as a average purchaser of insurance interpret ing external clause cause as you know an ordinary popular regular meaning of that term would good come to be  going to suggest this yes it's a matter that should be referred to the watch and supreme court because it seems like there's a lot of back and forth about what external cause means there's certainly evolving trends in other circuits about  the in a related miss between the sort of logical concept of fortuitous knows and whether external cause really means something external or or something very narrow as the carrier  suggested isn't it isn't this one of these things cases where we ought to say hey you know let's see what the washing supreme court has say because it's an important issue and we're struggling with the definition you could do that is you know it's certainly within your discretion to do that we don't think you need to do it if there's any ambiguity in the term external clause you construe the the the term against the insurer and a washington law you could you could have the washington supreme court say that certainly but external cause i think it's a well understood princip and let me leave leave you with this notion utterly unexpected this set of circumstances you had the castrator testimony at your three ninety one you had readers testimony at three fifty four three fifty nine and i would note that where there were dozens of these these vast fits that were sold by guild sixty at least that performed without incident this was an utterly unexpected set of circumstances and that was the genesis of the report of the our expert o c e at eight fifty seven it was sudden it was unforeseeable it was not something the designers could foresee all of these are questions of fact for the trier of fact and we believe the trial court should be reversed and of the circumstances thank you ok thank you very much counsel the case just argue will be submitted