PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

S. WALLACE EDWARDS & SONS, 

INCORPORATED,

Plaintiff-Appellee,

v.  No. 02-1885

THE CINCINNATI INSURANCE COMPANY,

an Ohio Corporation,

Defendant-Appellant. 

S. WALLACE EDWARDS & SONS, 

INCORPORATED,

Plaintiff-Appellee,

v.  No. 02-1928

THE CINCINNATI INSURANCE COMPANY,

an Ohio Corporation,

Defendant-Appellant. 

Appeals from the United States District Court

for the Eastern District of Virginia, at Richmond.

Richard L. Williams, Senior District Judge.

(CA-02-99)

Argued: May 6, 2003

Decided: December 24, 2003

Before WIDENER and MICHAEL, Circuit Judges,

and Frank W. BULLOCK, Jr., United States District Judge for the

Middle District of North Carolina, sitting by designation.
Affirmed by published opinion. Judge Widener wrote the opinion, in

which Judge Bullock concurred. Judge Michael wrote an opinion concurring in part and dissenting in part. 

COUNSEL

ARGUED: Calvin Wooding Fowler, Jr., WILLIAMS MULLEN,

P.C., Richmond, Virginia, for Appellant. Scott James Golightly, HIRSCHLER FLEISCHER, P.C., Richmond, Virginia, for Appellee. ON

BRIEF: Theodore J. Edlich, IV, Jonathan S. Campbell, WILLIAMS

MULLEN, P.C., Richmond, Virginia, for Appellant. 

OPINION

WIDENER, Circuit Judge: 

Defendant Cincinnati Insurance Company appeals two of the

orders making up the judgment of the district court: (1) a July 19,

2002 order granting partial summary judgment in favor of plaintiff S.

Wallace Edwards & Sons, Inc. on its claims for breach of contract and

declaratory judgment in the amount of $155,441.41; and (2) an

August 15, 2002 order granting the plaintiff’s motion to amend and

awarding prejudgment interest in the amount of $11,191.78. The

defendant contends that the district court erred in granting summary

judgment because the plaintiff failed to set forth any objective evidence that the product was damaged under the terms of the insurance

policy and that the plaintiff cannot maintain the breach of contract

claim because it failed to adhere to a two-year period of limitation set

forth in the insurance policy. For the reasons set forth below, we

affirm the judgment of the district court. 

I.

S. Wallace Edwards & Sons, Inc. (Edwards) is a wholesale seller

of Virginia ham, bacon, and sausage. In September of 1999, Edwards

had over 70,000 pounds of ham product stored in cold storage at

Richmond Cold Storage in Smithfield, Virginia. On September 30, an

2 EDWARDS & SONS v. CINCINNATI INSURANCE CO.
employee at the storage facility cracked a refrigerant line with a forklift, causing the release of anhydrous ammonia vapor within the storage facility. Following this incident, Edwards made a claim under its

commercial property policy,1 which defendant Cincinnati Insurance

Company (Cincinnati Insurance) had issued to Edwards & Sons for

April 1, 1998 through April 1, 2001. The claim alleged damage to its

property due to the ham products’ exposure to the ammonia. In addition to filing the claim, Edwards collected samples of the exposed

product and contacted Microbac Laboratories, Inc. (Microbac), to test

the product and determine the extent of the ammonia damage. 

Cincinnati Insurance sent an adjuster to visit the cold storage facility and inspect the ham that had been exposed. The adjuster stated

that he detected the smell of ammonia in the product, and at the direction of his supervisor requested additional evidence of the damage.

The additional evidence requested and sent to the insurance company

consisted of: (1) a large loss notice to Cincinnati Insurance; (2) a

statement from the forklift driver or other witness; (3) a copy of the

sales contract to the wholesale dealer establishing the sale price; (4)

certification from the FDA that the meat is contaminated and cannot

be sold;2 (5) Proof of Loss for claim check subject to Edwards &

Sons’ $1,000.00 deductible; and (6) proceed with subrogation against

wrongdoer. 

While Edwards was waiting for the results of the tests from Microbac, the storage facility agreed to repackage the ham products.

Edwards agreed, and the repackaging took place on February 10,

2000. Samples of the repackaged product were also sent to Microbac

1Edwards & Sons notified its insurance agent of the ammonia incident

on October 7, 1999, and the agent contacted Cincinnati Insurance shortly

thereafter. 

2The email relaying this information requested certification from the

FDA, but it is not clear from the record whether this would be regulated

by the FDA or the USDA. The plaintiff stated in its brief that the USDA

is the agency that regulates meat products. Upon contacting the USDA

for information, the plaintiff was informed that, per regulations, the meat

packer had the responsibility for assuring that the product was safe for

human consumption and the USDA remained neutral until the product

had been released into commerce. 

EDWARDS & SONS v. CINCINNATI INSURANCE CO. 3
for testing. Following the repackaging, on March 9, 2000, Cincinnati

Insurance sent a letter to Edwards & Sons informing them that "there

was nothing wrong with the ham as repackaged," and that the case

was being "removed from active status." 

Meanwhile, Microbac informed Edwards & Sons by letter on

March 13, 2000 that it was unable to find any regulatory guidelines

for the limit of ammonia in pork, other than adulteration. Thus,

Microbac stated that it had arrived at its conclusion by using a reference in an FDA International Association of Refrigerated Warehouses

Manual that set forth the guidelines for ammonia contamination of

food products. These guidelines indicated that the ammoniacal nitrogen level in meat products normally does not exceed .15 percent and

none of the plaintiff’s samples had tested above .10 percent. In addition, Microbac noted that there was an ammonia odor while at the

refrigerant site, but the analyst did not notice any odor while at the

laboratory. There was also mention in the March 13, 2000 letter of

some brown areas observed on the meat, which was assessed as probable effects from being frozen. In a later letter sent March 16, 2000,

however, Microbac retracted its earlier statement and concluded that

it was unable to determine the cause of the brown areas. 

Due to Edwards’ uncertainty about the safety of the product and

Microbac’s indeterminate analysis, Edwards finally decided to discard

the product in April of 2001 as a total loss. 

Over one year after receiving the Microbac results, and more than

two years after notification of the loss, on October 11, 2001, Cincinnati Insurance sent the plaintiff a letter advising Edwards that after a

review of the Microbac analyses, the on-sight evaluation, and the fact

that the "USDA ha[d] not determined that the product [wa]s unsafe

for human consumption," there was insufficient evidence to determine

that the product was damaged from exposure to ammonia. Accordingly, Cincinnati Insurance denied the claim on the basis that

Edwards & Sons had not shown any damage. 

Edwards filed this action on January 22, 2002, in the Circuit Court

of Surry County, Virginia. The complaint asserted three claims. First,

Edwards sought a declaratory judgment that the defendant has an

obligation under the policy to pay the claim because the ammonia

4 EDWARDS & SONS v. CINCINNATI INSURANCE CO.
exposure had caused damage to Edwards & Sons’ product. Second,

Edwards & Sons alleged a breach of contract claim against Cincinnati

Insurance. Lastly, Edwards asserted that Cincinnati Insurance was

acting in bad faith in denying the coverage. Cincinnati Insurance

removed the case to federal district court on February 19, 2002. On

that same day, Cincinnati Insurance filed in state court its answer and

grounds of defense to Edwards & Sons’ original complaint. 

Once the case was removed, Edwards filed a motion for partial

summary judgment, asserting that there was no genuine issue of material fact regarding the claim for declaratory judgment and breach of

contract claim (counts I and II). It reserved the bad faith claim (count

III) for trial. In response, Cincinnati Insurance filed a motion for summary judgment as to all claims, contending in its accompanying memorandum that there was no damage to the ham products and thus it

was not obligated to pay under the policy; that Edwards & Sons could

not maintain the breach of contract claim because, inter alia, it was

filed beyond the two-year limitations period required under the policy;3

and that it did not act in bad faith in denying the claim. 

On July 19, 2002, the district court granted summary judgment in

favor of Edwards & Sons on its claims for a declaratory judgment and

for breach of contract, but granted summary judgment for Cincinnati

Insurance as to the claim of bad faith. On August 1, 2002, Edwards

& Sons filed a motion to amend its judgment to include an award of

prejudgment interest which was granted by the district court in the

amount of $11,191.78. 

Cincinnati Insurance appeals the money judgments against it.

There is no issue on appeal of bad faith in the denial of coverage by

Cincinnati. There is also no issue on appeal as to the amount of damage if any should be awarded. Cincinnati Insurance takes the position

that no damages at all are authorized. 

3Under paragraph D of the Commercial Property Conditions, the policy states, "No one may bring a legal action against us under this Coverage Part unless: 1. There has been full compliance with all of the terms

of this Coverage Part; and 2. The action is brought within 2 years after

the date on which the direct physical loss or damage occurred." 

EDWARDS & SONS v. CINCINNATI INSURANCE CO. 5
We review the district court’s grant of summary judgment de novo.

See Bass v. E.I. DuPont de Nemours & Co., 324 F.3d 761, 766 (4th

Cir. 2003). Summary judgment is warranted when there are no material facts in dispute and the moving party is entitled to judgment as

a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322

(1986). The non-moving party has the burden of showing that a genuine dispute exists. See Matsushita Elec. Indus. Co. v. Zenith Radio

Corp., 475 U.S. 574, 586-87 (1986). 

II.

The principal contention of Cincinnati Insurance on appeal is that

the district court should have applied a provision of the insurance policy contained as a Commercial Property Condition, numbered D,

which is that:

No one may bring a legal action against us under this Coverage Part unless: . . . 

2. The action is brought within 2 years after the date on

which the direct physical loss or damage occurred. 

It is agreed that the direct physical loss or damage occurred on September 30, 1999 and that this case was filed in the Circuit Court of

Surry County, Virginia, on January 22, 2002. So more than two years

had elapsed between the date of the damage and the filing of the suit.

The district court held that the time "limitation in the contract

becomes the functional equivalency of a code section, and therefore

is entitled to the protection that it gets under the Virginia statute." The

district court applied "the statute of limitations that applies under Virginia law [and] is five years. See Virginia Code Section 8.01-246 and

243." Virginia Code § 8.01-235 provides in part that "[t]he objection

that an action is not commenced within the limitation period prescribed by law can only be raised as an affirmative defense specifically set forth in a responsive pleading." 

Although Cincinnati Insurance had filed its grounds of defense in

the Circuit Court of Surry County, obviously just prior to removal of

6 EDWARDS & SONS v. CINCINNATI INSURANCE CO.
the case, the grounds of defense did not contain any plea or ground

of defense that the action had not been commenced, following the

terms of the policy, within two years after the date on which the direct

physical loss or damage occurred. The district court correctly held

that the contractual limitation was an affirmative defense and because

it had not been raised in the grounds of defense filed by Cincinnati

Insurance, it had been waived by the failure to raise it as an affirmative defense in its responsive pleading. 

The district court also held that Cincinnati Insurance had waived

the two-year limitation provision in the contract "by its conduct in

responding to Edwards’ claim." 

We agree with the result obtained by the district court, but for a

somewhat different reason. See SEC v. Chenery, 318 U.S. 80, 88

(1943). 

The district court’s equating the contractual limitation to a statute

of limitations was not authorized under Virginia law. In two cases the

Virginia court has held that statutory and contractual limitations are

different. See Massie v. Blue Cross and Blue Shield, 500 S.E.2d 509

(Va. 1998), and Board of Supervisors of Fairfax County v. Sampson,

369 S.E.2d 178 (Va. 1988). The Supreme Court has held in Guaranty

Trust Co. v. York, 326 U.S. 99 (1945), that a federal court, adjudicating a state-created right solely because the diversity of citizenship of

the parties, is obliged to apply the statute of limitations which would

be applied by a state court, which the district court related in this case

is five years. But applying the Virginia statute of limitations under the

rule of Guaranty Trust Co. would have no application here because

in Virginia, as Sampson and Massie have held, contractual and statutory limitations are not the same under Virginia law. 

The district court’s alternate reasons for its decision are next examined. The district court decided that the two-year contractual limitation had been waived by "failing to raise it as an affirmative defense

in its responsive pleading and by its conduct in responding to

Edwards’ claim." Federal Rules of Civil Procedure 8(c) provides in

pertinent part that:

EDWARDS & SONS v. CINCINNATI INSURANCE CO. 7
In pleading to a preceding pleading, a party shall set forth

affirmatively [among other things] . . . any other matter constituting an avoidance or affirmative defense. 

And the Federal Rules of Civil Procedure govern. Granny Goose

Foods v. Teamsters, 415 U.S. 423, 437 (1974). This is agreed to by

Cincinnati Insurance. Br. p.38-39. 

We are of opinion that a defense urged by an insurance company

of such a breach of a provision of the policy by an insured is an affirmative defense under Rule 8(c). Wright and Miller, Federal Practice

and Procedure § 1271 (5th Ed. 1994) (noting decisions in United

States Courts of Appeal for the Fifth, Eighth and Tenth Circuits);

Appleman, Insurance Law and Practice (Berdal ed.) §§ 11976 and

12014 (1980) (noting state decisions in Massachusetts, Arkansas,

Maine, Texas and Missouri). In Caterpillar Overseas S.A. v. Marine

Transport, Inc., 900 F.2d 714 (4th Cir. 1990), a case under the Carriage of Goods By Sea Act, we held that a contractual limitation of

liability required the pleading of such a defense under Rule 8(c) and

that when all the facts were apparent to the parties, as here, "Such a

record would support a waiver of any possible failure to plead," 800

F.2d at 825 n.7, but waiver was not decided when the district court

treated any such requirement as waived. 800 F.2d at 825. In Brinkley

v. Harbour Recreation Club, 180 F.3d 598 (4th Cir. 1999), a Title VII

and Equal Pay Act case, we held that a statutory defense of a "factor

other than sex defense" under the Equal Pay Act is an affirmative

defense which must be pleaded under Rule 8(c) which may result in

waiver. Such waiver, however, should not be effective unless the failure to plead resulted in unfair surprise or prejudice. Brinkley, 180

F.3d at 612-13. 

In the case at hand, we are of opinion that the affirmative defense

of a two-year limitation on bringing suit was an affirmative defense

which should have been asserted under Rule 8(c) and that the decision

of the district court, that it had been waived, was not error. We note

that the district court not only correctly characterized the two-year

limitation as an affirmative defense but also based its decision on Cincinnati’s "conduct in responding to Edwards’ claim." That conduct

included the following: Cincinnati Insurance was notified of the loss

only a few days after the leaking ammonia was discovered. For some

8 EDWARDS & SONS v. CINCINNATI INSURANCE CO.
two years it negotiated with Edwards with respect to the amount of

the loss, engaged in discovery, attended depositions of witnesses, and

examined the reports of proposed witnesses with respect to that loss.

Cincinnati Insurance never denied liability on the claim until October

11, 2001, some 11 days after the two-year limitation period of the policy had expired. Although the two-year defense was available to Cincinnati Insurance at the time, the letter denying liability to Edwards

relied on the contention of the insurance company that there was no

damage, it never mentioned the two-year limitation. In a nutshell, the

letter states, "There is still insufficient evidence to determine that this

product was damaged from exposure to ammonia." Although the twoyear period had expired when Cincinnati Insurance filed its grounds

of defense on February 19, 2002, the grounds of defense did not mention the two-year limitation period as a defense. Although the twoyear period had expired on September 30, 2001, on April 11, 2002 the

case was even set for trial on July 26, 2002, and the two-year period

had not then been mentioned. The two-year period was never mentioned until Cincinnati filed its motion for summary judgment and

response to Edwards’ motion for summary judgment on June 28,

2002, which was the first time the two-year defense was mentioned

by the insurance company. 

Under such circumstances, we are of opinion and hold that the

decision of the district court, that the two-year defense had been

waived, was not erroneous. Under the facts of this case, if that

defense were not waived, Cincinnati Insurance, by its inaction and

persistence that there had been no damage, would simply escape liability. Whether the actions of Cincinnati Insurance were by inadvertence or design, the result does not differ. Edwards was taken by

unfair surprise and prejudiced by the delayed assertion of the twoyear limitation as a defense.4

4The district court held that Cincinnati waived the two-year limitation

of action in the insurance policy. It stated "Cincinnati has waived the

two-year limitation provision, both by failing to raise it as an affirmative

defense in its responsive pleading and by its conduct in responding to

Edwards’ claim." J.A., Vol. I, p. 150. 

The grounds of defense filed by Cincinnati in the state court just prior

to removal did not rely on the two-year limitation. Under the facts of this

EDWARDS & SONS v. CINCINNATI INSURANCE CO. 9
III.

The last argument we consider is the contention of Cincinnati

Insurance that there was no evidence that the ammonia rendered the

meat products damaged. In the most general terms, it argues that the

ham products were not adulterated because the evidence would show

the meat was not injurious to health. 

The policy provides in the building and personal property coverage

form that:

We will pay for direct physical loss of or damage to Covered Property in the premises described. 

The policy does not define damage, and the district court gave the

policy language its plain and ordinary meaning of "impairment of the

usefulness or value of person or property; or harm." It rejected an

case and under Virginia law, that would have been a waiver of the notice

provision of the policy. Lumbermen’s Mutual Casualty Co. v. Hodge,

135 S.E.2d 187 (Va. 1964). But under Erie Railroad and Fed. R. Civ. P.

81(c), the federal rules apply to "actions removed to the United States

District Courts from the state courts and govern procedure after

removal." Thus, while the filing of the grounds of defense in the state

court may be governed by state law, the actions of Cincinnati in not

bringing the policy defense to the attention of the court or the plaintiff

until after the case was set for trial is governed by federal law. In that

respect, Rule 8(c) requires that such defense "shall be set forth affirmatively," which was never done until Cincinnati’s motion for summary

judgment was filed and trial was imminent. We do not hold that Rules

8(c) and 81(c) require the inclusion of the policy defense in the grounds

of defense filed in the state court, but we do hold that the failure of Cincinnati to comply with the substantive provisions of Rule 8(c) is appropriately considered in deciding the effect of the failure to include the

policy defense in either the grounds of defense, or in any of the various

papers filed with the district court prior to the motion for summary judgment, or in any of the communications made to the plaintiff. Rule 8(c)

prevents just such inaction from reaping the benefit of notice timely

given under the rules of court. 

10 EDWARDS & SONS v. CINCINNATI INSURANCE CO.
argument of Cincinnati Insurance that the ham had to be classified as

adulterated under USDA regulations relating to meat products. 

It relied upon the undisputed facts that the meat was exposed "to

very high levels of anhydrous ammonia gas, which is described as

both poisonous and toxic"; that the ham was not hermetically packaged; that the ammonia had permeated into the meat; that the exposure caused an odor of ammonia about the meat; and that a

discoloration reduced the quality of the meat. The insurance adjuster

for Cincinnati Insurance testified in his deposition that some three

weeks after the exposure there was still an odor of ammonia in the

rooms where the ham involved was stored. Even if most of the laboratory tests of the meat, many of which showed ammonia content, did

not show a content high enough to be actually dangerous to human

health, one of the samples showed an ammonia content of 938 parts

per million, while the danger point was 870. The district court found

that the exposure to ammonia caused an odor and discoloration that

reduced the quality of the product whether or not it may not have

been directly injurious to health or adulterated under the regulations.

We are of opinion the district court was correct in its construction

of the policy and in its view of the evidence. The evidence the district

court relied on, and we have related, is not subject to contradiction,

and even if the argument of Cincinnati Insurance is that Edwards

destroyed too much of the ham rather than examining it piece by

piece to see which was discolored and which smelled of ammonia, we

do not believe, and are of opinion, that no duty of minimizing damages would require Edwards to so segregate the thousands of pieces

of ham involved when there was a very real chance of risk to human

health in selling the product for human consumption. 

In this respect, the witness Krut was prepared to testify that the disposition of all of the ham exposed to ammonia was the way the Hazardous Analysis Critical Control point system of the USDA is

supposed to work. If the ham, having been exposed to anhydrous

ammonia, had been introduced into commerce by Edwards, in his

opinion the USDA would have tagged the product and recommended

that Edwards recall it. Krut is the Executive Director of the American

Association of Meat Processors and has worked with the USDA’s

Food, Safety and Inspection Service and in various other aspects of

the meat industry. 

EDWARDS & SONS v. CINCINNATI INSURANCE CO. 11
The judgment of the district court is accordingly 

AFFIRMED.

MICHAEL, Circuit Judge, concurring in part and dissenting in part:

The Cincinnati Insurance Company issued a commercial property

policy to S. Wallace Edwards & Sons, Inc., a wholesaler of ham products. The insurance company agreed to "pay for direct physical loss

or damage to Covered Property." Edwards seeks payment of $155,000

for discarded ham that it claims was damaged by exposure to ammonia gas in a cold storage facility when a refrigerant line was cracked

by a forklift. I concur in part II of the majority’s opinion, which holds

that the insurance company waived its defense under the policy provision that requires the insured to bring an action for coverage within

two years of the damage. I respectfully dissent, however, from part

III of the majority’s opinion because I believe there is a genuine issue

of material fact about whether the ham was damaged by the ammonia

gas. This factual dispute precludes the award of summary judgment

to Edwards, the insured. See Celotex Corp. v. Catrett, 477 U.S. 317,

322 (1986); Fed. R. Civ. P. 56(e). 

The majority points to evidence proffered by Edwards that indicates the ham was damaged by ammonia gas. The problem is that the

insurance company proffers evidence, which I will summarize, that

goes the other way. An employee of Richmond Cold Storage, where

the ham was stored, conducted litmus tests on the ham on two occasions, just after the accident and later during repackaging; neither set

of tests showed any ammonia contamination to the ham. J.A. 395,

398-403, 418-22. Edwards engaged Microbac Laboratories, Inc., an

independent laboratory, to evaluate the ham. In Microbac’s first analysis of the ham, each of three samples had an ammonia content of less

than 0.10 percent, well within the range the International Association

of Refrigerated Warehouses considers acceptable. J.A. 252, 255, 276.

David Danis, Microbac’s laboratory director who supervised the testing of the three samples, said that the ammonia levels in the samples

"were all at insignificant levels when compared to the control ham

hock." J.A. 287. In Microbac’s second analysis of seventeen samples,

sixteen had ammonia levels within the range that typically occurs in

nature. J.A. 247-49, 381-83. One sample had a higher than normal

12 EDWARDS & SONS v. CINCINNATI INSURANCE CO.
ammonia content, but an expert explained that the ham’s age could

have caused the heightened ammonia level. J.A. 382-83. Barbara

Starks, a Microbac employee, performed smell and visual tests on the

ham samples. Starks did not detect the smell of ammonia about the

ham. J.A. 281. Starks did note that the ham was discolored in places,

that is, it had brown areas. Id. Starks acknowledged that she did not

know how ammonia exposure affected the appearance of ham, but she

said that the "brown areas were similar to the appearance of product

that had been frozen for some time." Id.

Microbac, the laboratory chosen by Edwards to test the ham, consistently concluded that the ham was not tainted by the ammonia

exposure. Microbac’s initial report to Edwards stated that "testing

verified that no ammonia residue was present" and that "the meat

evaluated falls within acceptable ammonia guidelines for food products." J.A. 252. A second version of the report, which Microbac

claims it produced in response to pressure from an Edwards

employee, J.A. 255, stated that Microbac could not determine the

cause of the brown areas, but it still concluded that the ham was

"within acceptable ammonia guidelines for food products." J.A. 253.

Both reports stated that Microbac’s analyst did not detect an ammonia

odor about the ham. J.A. 252-53. 

The evidence proffered in the summary judgment proceedings

makes clear that a court cannot decide on summary judgment which

side is right in this case. There is a genuine factual dispute about

whether the ham was damaged by the ammonia leak. I would therefore vacate the award of summary judgment to Edwards and remand

the case for trial.

EDWARDS & SONS v. CINCINNATI INSURANCE CO. 13