F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

P YR A M I D T E C H

N O L O G I E S , I

N C ., Plaintiff-Appellant
,

A L L I E D P UB L I C A D J

U S T E R S , I

N C .; D O U G L A S W

. S C H R

O E D E R , L ien Claimant / F ormer Attorney for Plaintiff Py

ramid Technolog ies, Inc.,

Claimants
,

v

.

H A R T F O R D C A S U A L T Y I N S U R A N C E C O M P A N Y , I ndiana corporation, Defendant-Appellee

. N o. 11-56304

D.C. No. 8:08-cv-00367- AHS-RNB

OPI NI ON

Appeal from the United States District Court for the Central District of California Alicemarie H. Stotler, District J udg e, Presiding

Arg ued and Submitted April 11, 2013—Pasadena, California

F iled May

19, 2014

B efore: J ohnnie B

. Rawlinson and J ay S. B y bee, Circuit J udg es, and Michael H. Simon, District J udg e. *

* T h e Ho n o rab le Mich ael H. Sim o n , Un i ted States District J u d g e f o r th e District o f

Oreg o n , sittin g b y

d esig n atio n

.P Y R A M I D T E C H

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. A L L I E D P UB L I C A D J U S T E R S 2

Opinion by J udg e Simon; D issent by

J u dg e Rawlinson

SUMMARY * *

Expert Testim o ny

The panel affirmed in part and reversed in part the district court’s summary judg ment entered in favor of an insurer in a diversity insurance coverag e action, and remanded f or a trial.

The panel held that the d istrict court e rred by n o t allowing

a jury to r e s o lve contested but otherwise admissible ex pert testimony

. T he district cour t further held that the district

cour t e r red in g ranting summary judg ment ag ainst the insured’s claims because g enuine issues of material fact

ex i s ted as to whether the insurer breached its contract with the insured and breached the implied c ovenant of g ood faith. The panel al s o held that to the ex tent such claims were premised on the insured’s business interruption the o r y , no material issues of fact ex isted, and the d ist r i c t c o urt d id not

err in g ranting summary judg ment ag ainst that theory o f liability

.

J udg e Rawlinson dissented b e c ause she did not ag ree that the district court abused its discretion in ruling that the proposed ex pert testimony of the insured’s ex perts should be

ex c luded. J udg e Rawlinson also d i s ag reed that summary

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co urt. It h as b eenp rep ared b y

co urt staf

f f o r th e co n v en i en ce o f

th e read er.P Y R A M I D T E C H

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. A L L I E D P UB L I C A D J U S T E R S 3

j udg ment was improperly g ranted, a nd would a ffirm t h e district court’s judg ment in its entirety

.

COUNSEL

Herbert Dodell (arg

ued), The Dodell L aw Co r p o r ation, W o odland Hills, California, for Plaintiff-Appellant.

Miriam A. Vog el (arg

ued), David F

. McDowell and Purvi G

. Patel, Morrison & F oerster, L L P, L os Ang eles, California, for Defendant-Appellee.

OP INION

SI MON, District J udg e :

After a flood occurred in the w arehouse of a business that purchased and resold electronic parts, a dispute arose b etween the b u s i ness a

nd its insurer. The insured sued, alleg ing

ex p ress breach of contract and b reach of the implied covenant of g ood faith. The insurer moved f or s u m m a ry judg ment. W ithout holdi n g a D aubert h earing
, 1 the district court

ex c luded the insured’s ex p ert witnesses and g ranted summary judg ment to the insurer, finding insufficient evidence that the flood caused damag e to the insured’s inventory

. B ecause the d i s t rict court a

bused its discretion by not allowing a jury t o resolve contested but otherwise a dmissible ex pert testimony
, we reverse and remand for trial.

1 Da u b ert v. Merrell Do w Ph arm., In c. , 5 0 9 U.S. 5 7 9 (1 9 9 3 ).P Y R A M I D T E C H

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F ACTS

Py ramid Technolog ie s , I nc. (“Py r amid”) purchased an insurance p olicy (the “Policy ”) from Hartford Casu a l t y I nsurance Company (“Hartford”). The Policy provides
coverag e limits of $1 million for building replacement costs, $5.5 million f

or business personal property rep l a c e m e n t c osts, and $3 million for lost b u s iness income and additional

ex p enses due to the interruption of business o perations. T o trig g er c o v e r ag e for b uilding or business personal property replacement costs, the Policy requires damag e to property o r its direct phy sical loss.

Py ramid purc h a s e d and r esold electronic parts, many o f which w ere o ut-of-date or not state-of-the-art. I t did n o t test the inventory unless requir ed t o d o so by a c ustomer o r prospec t i v e c ustomer. Py

ramid stored its inventory on shelves in a warehouse that did not have air conditioning or humidity control. Py

ramid had a

pprox imately 52 m illion items in its warehouse at the time of the flood.

I n the morning hours of Aug ust 1 1
, 2 0 05, Py r amid employ e es a

rrived at work to find the warehouse and c ertain other building locations flooded w i th one to two inches o f
water. A lthoug h the flood water did not reach the shelves on which inventory items were located, several e m p loy ees saw visible c ondensati o n on packag es in the lower three to four shelves. ServPr o, a professional c leanup company , performed cleanup operations from Aug ust 11 throug h Aug ust 16, 2005.

After discovering t

h e f l o o d
, P y ramid was c oncerned about the humidity level in t he warehouse and the condensation found o n its packag es. Py ramid asked Hartford to tes t t h e inventory

. Hartford’s ex p ert, Peter Helms from B elfor USAP Y R A M I D T E C H

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Technical Services, visited the site after cleanup and, rely ing

on humidity tests conducted a f ter most of the water had been removed and dryin g e q u i p ment had been in place for more than 24 hours, determined th a t t h e humidity did not reach a level that could have caused damag e to any of the inventory

. Hartford refused to test the inventory
, which would h ave cost

more than $13 million to test every item. Hartford based its decision larg ely o n Helms’ conclusion that the inventory was not damag ed by the flood.

W h i le Hartford was v isiting the site after the flood, a potential Py

ramid customer, W MS Gaming
, I nc. (“W MS”),

was conducting a q u a l i ty control site visit before approving Py ramid as a parts supplier. T he Hartford representative told this po t ential customer that the water intrusion was “no big deal” and that Hartford would not test the parts. The customer replied that the flood was a “bi g d e al” to W MS. Shortly thereafter, W MS declined to approve Py ramid a s a parts supplier.

One mon th after the flood, Py ramid hired Allied Public Adjusters, I n c. to assist in pursuing an i n s u rance c laim. Py r a m i d also hired its own e x pert, David Spieg el, to determine what the humidity levels w ere at the time o f the
water intrusion. Spieg el opined that the humidity level in the warehouse rose to more t h an 90% and that the conditions caused by the flood ex ceeded the protection le v els of the moisture-proof packag ing

. During routine invent o ry c hecks after the flood, Py

r amid employ ees quarantined more than 250,000 items, looking for visible sig ns of corrosion, tarnish,

or discoloration. I n Aug u st 2007, Hartford fina lly ag reed to conduct limited testing of a small subset of parts identified b y Py ramid as beingdamag ed.P Y R A M I D T E C H

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Hartford retained Dr. Arum Kumar of SEAL L aboratories
to conduct tests on 3 7 4 items out of Py ramid’s inventory

. These parts were selected by Py ramid as ex hibiting sig ns o f
water damag e. Dr. Kumar determined that 147 of those items

ex h ibited corrosion, tar n i sh, or discoloration. Dr. Kumar conducted additional tests on those 1 47 items. He f ound that
two parts failed the additional testing
, and they were deemed unsuitabl e for commercial applications. Dr. Kumar stated that corrosion, tarnish, and d iscoloration are alway s ca u s e d b y moisture, but he concluded that the A ug ust 11, 2 005 flood

was not the cause of the corro s i o n d a m a g e to the parts he

ex amined.

Py ramid hired two a dditional ex perts, Del Mortenson a nd Ken Py tlewski, to evaluate the validity of Dr. Kumar’s report. Mortenson questioned Dr. Ku m a r’s opinion on the g rounds that Dr. Kumar u sed “military ” s tandards of suitability instead of “commercial” standards. Py tlewski challeng ed other opinions of Dr. Kumar’s, includin g his opinions that
any corrosion caused by the flood would ne c es s ar ily have been uniform and that visible corrosion is not a failure criteria under military standards. Py tlews k i a lso noted the internal inconsistency in Dr. Kumar’s report b etwee n his statement that the cause of the moisture-rel a t e d c orrosion cannot be determined and his c o nclusion that the flood was not the

cause of any

moisture-related damag e. Py tlewski testified at

a deposition that in his opinio n , some of the c orrosion to Py ramid’s inventory occurred a s a result of the hig h humidity caused by the Aug ust 11, 2005 flood.

B y May 2010, a

pprox imately 17 million of Py ramid’s 52 million p arts in inventory at the time of t h e f l o od had been sold, a nd approx imately 3 5 million parts remained inP Y R A M I D T E C H

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Py ramid’s inventory

. I n October 2010, Py ramid sold most o f its remaining inventory

at a distress sale price of $125,000.

P ROCEDURAL BACK G R OUND

Py ramid filed this civil action in California state co u rt. Hartford r emoved the lawsuit to federal court. On March 21, 2011, Hartford moved for summary judg ment. I n opposition
to Hartford’s m o tion, Py

ramid offered the e x pert reports o f Spieg el, Mortenson, and Py tlewski, among other evidence. I n reply to Py

ramid’s opposition, Hartford a rg ued that the ex pert reports of Spieg el, Mortenson, and Py tlewski, and much o f the testimony of T ony Mavusi, the president of Py ramid, was inadmissible. The d i strict court did not hold a Daubert hearing

.

The district court also did not hold o ra l a rg ument on Hartford’s motion for summary judg ment. I nstead, on J une 1, 2011, the district court g ranted summary judg ment in favor o f Hartford, sustained many of Hartford’s obj e c tions to the testimony of Mavusi, and ex cluded the ex pert reports o f Spieg el, Mortenson, and Py tl e w s k i. The district court

ex c luded the reports o f Mortenson and Py tlewski as b e i ng “illeg ible,” and th e court ex cluded the Spieg el report on the
g rounds that Spie ge l w a s n ot a qualified ex pert and that his report was n o t based on sufficient facts or data and was not the product of reliable principles and methods.

Py ramid moved for r e consideration and submitted enlarg ed and more leg ible versions of the M o rtenson a nd Py tlew s k i reports. The district court accepted the enlarg ed
rep o rts as sufficiently readable, but then ex cluded them a s unreliable and not based on sufficient facts or data

. The district c o urt a lso concluded that even if these reports wereP Y R A M I D T E C H

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admissible, they fail to r aise a g enuine d ispute of material fact because they do not sufficiently address causation. The district court denied Py

ramid’s motion for reconsideration.

STANDARD OF REVIEW

W e review a district court’s order g ranting summary judg me n t de novo

. Ford v. City of Y akima
, 706 F .3d 1188, 1192 (9th C i r

. 2013) ( per curiam). W e review evidentiary ruling s f or a buse of d i s c re t ion and reverse if the ex ercise o f discret i o n i s both e rroneous and p rejudicial. Nev. Dep’t of Corr. v. Greene
, 6 4 8 F. 3 d 1014, 1018 (9th Cir. 2011). W e review underlying f

actual determ i nations for clear error. United States v. Lukasho v , 694 F .3d 1107, 1114 (9th Cir. 2012).

D ISCUSSION

A. Exclusion of

P yram id’s Expert Witnesses

1. Legal Standards

Rule 702 of the F ederal Rules of Evidence p rovides that

ex p ert opinion evidenc e i s admissible if: (1) the witness is

s u f ficiently qualified as an ex pert by knowledg e, skill,

e xp e r i e n c e , training
, or education; (2) the scientific, technical,

o r other specializ ed knowledg e will help the trier of fact t o understand t h e evidence or to determine a fact in issue; (3) the testimony is based o n s u f f i c ient facts or data; (4) the testimony is the product of r eliable principles and m e thods; and (5) the ex pert has reliably a pplied the relevant principles and methods to the facts of the case. F ed. R. Evid. 702.P Y R A M I D T E C H

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Under Daubert
, 5 0 9 U.S. at 579, a nd its prog eny , including Daubert v. Merrell Dow Pharm., I nc. , 43 F .3d 1311 (9th Cir. 1995), a district court’s inquiry into a dmissibility “ is

a flex ible one.” Alaska Rent-A-Car, Inc. v. Avis Budget Grp., Inc.
, 738 F

. 3d 960, 9 69 (9th Cir. 2013) (citation omitted),
cert. denied
, 134 S. Ct. 644 (2013). I n evaluating p roffered

ex p ert testimony
, the trial court is “a g atekee p e r , n ot a fact finder.” Primiano v. Cook
, 598 F .3d 558, 565 (9th Cir. 2 010) (citation and quotation marks omitted).

“[ T] he trial co u r t must a ssure that the ex pert testimony ‘both rests on a reliable foundation a nd is relevant to the task
at hand.’” Id. at 564 (quoting D a u b er t , 509 U.S. at 597). “Ex pert opin i o n testimony is relevant if the knowledg e underlying it has a valid connection to the pertinent inquiry

. And it is reliable if the k

nowledg e underlying it has a reliable basis in the knowledg e a n d ex perienc e o f the relevant discipline.” Id. at 565 (citation and quotation marks omitted). “Shaky but admissible evidence is to b e attacked by cross

ex amination, contrary evidence, and att e n t i on to the burden of proof, not ex clusion.” Id. at 564 ( ci t a t ion omitted). The judg e is “supposed to screen t he jury from unreliable

nonsense opinions, but not ex clude o pinions merely because they are impeachable.” Alaska Rent-A-Car , 738 F

. 3d at 969. Simply put, “ [ t] he district court is not tasked with deciding whether the ex pert is rig ht or wrong , just w hether his testimony has substance such th a t i t w o uld be helpful to a jury .” Id. at 969–70.

L ike the test for admissibility in g eneral
, t h e test o f reliability is also flex ible. Estate of Barabin v. AstenJohnson, Inc.
, 740 F

. 3 d 4 5 7
, 4 63 (9th Cir. 2014) (en banc). T o determine reliability
, the Supreme Court has sug g ested several factors: “1) whether a theory o r technique ca n beP Y R A M I D T E C H

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tested; 2 ) whether it has been subjec t e d t o peer review a nd publication; 3) the known or potential e r ror rate of the theory

or technique; and 4) whether th e t h eo ry or technique enjoy s g eneral acceptance w ithin the relevan t s c i entific community

. ” Id. (quoting United S

tat es v. Hankey
, 203 F .3d 1 1 60, 1167 (9th Cir. 2000)); see also Primiano
, 598 F .3d at 564. These factors a re “mean t t o b e helpful, not d efinitive, and the trial
court h as d iscretion to d e cide how to test an e x pert’s reliability as well as whether the testimony is reliable, based

on the parti c u l a r circumstances o f the particular case.” Primiano
, 5 98 F. 3 d at 564 (citations and quotation marks omitted); see also Barabin , 740 F

. 3d at 463. The test “is not the correctness of the ex pert’s conclusions but the soundness of his methodolog y ,” and w hen an ex pert meets the threshold establi s hed by Rule 7 02, the ex p ert may testify and the fact finder decides how much w e i gh t to g ive that testimony

. Primiano , 598 F .3d at 564–65.

After an ex pert establishes admissibili t y to the judg e’s satisfaction, challeng es that g o to the weig ht of the evidence

are within the province of a fact f inder, not a trial court judg e

. A district court should not make c r edibility determinations that are reserved for the jury

.

2. Spiegel

Spieg el is a certi f

ied restorer with the National I n stitute of Disaster Res t o r a tion. He is also a c ertified: (1) master restorer and w ater, fire and odor control journey man with the I nstitute of Inspection, Cleaning
, and Restoration; (2) indoor environmentalist an d m old remediator with the I ndoor Air Quality Association; and (3) L evel I thermog rapher with the I n frared Training Center. Spieg el is also a g eneral a nd specialty licensed contractor with the state of California andP Y R A M I D T E C H

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has 38 y ears of ex perience in property da m a ge repair a nd

more than 15 y ears of ex perience in construction defect investig ation.

I n two conclusory sentences and without analy sis o r

ex p lanation, the distr i c t court h eld that Spieg el was not a qualified ex p ert “on the scientific, technical, or specializ ed data o n which he purports to o pine” and that his opinion
reg arding relative humidity w as not based on sufficient facts

or data and was not the product of r e liable prin ci p l e s a nd methods. The district court abused its discretion i n reaching these conclusions.

Spieg el used weather dat a f r o m the time of the incident, thermo-hyg rometer and infrared data, and ambient condition data to opine on the level of humidity in the warehouse at the
t i m e of the flood. As noted, Spieg el is a certif i e d thermog r apher, c ertified indoor e nvironmental i s t, c ertified
master r estorer, certified water contro l journey man, a nd certified mold remediator, with decades o f ex perience. This

ex p ertise and ex perience is relevant t o the issues on which Spieg el opined. B ecause the district court provided no

ex p lanation or analy sis for rejecting these qualifications, the district court abused its discretion in summarily d etermining that Spieg el was n ot q

ualified as an ex pert. S

e e Barabin
, 740 F. 3d at 4 64 (holding the district court “failed to a ssume its role as g atekeeper” when it ex cluded ex pert testimony for “dubious credentials” w ithout conducting a Daubert h earing

or assessing ex p ert’s finding s). Spieg el’s many relevant certifications and decades of relevant ex perience render him qualified to issue his ex pert opinion.

I n addition, in p r eparing h is report Spieg el conducted two site vi s i t s to Py

ramid’s warehouse, interviewed severalP Y R A M I D T E C H

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P y r am id employ ees who saw the water intrusion and i t s immediate aftermath, reviewed ServPro’s ambient condition measurements, and recorded his own ambient data during his visits, including data f

r o m a 5 :30 a .m. visit desig ned to compare the difference in i n d o o r and outdoor conditions when the warehouse was closed and locked (as it was during
t h e flood). Spieg el a lso took dig ital photog raphs a n d electronic thermo-hyg romete r reading s, performed infrared i m a gi n g, r e v i e w e d w ww. we a t h e ru n d e r gr o u n d

. c o m t o determine t h e w eather conditions at a nearby airport at the time of the flood, and reviewed the H elms report. These facts and d ata constitute a sufficient basis for Spieg el’s ex pert report.

Althoug h not discussed by the d istrict court, Spieg el relies

on more f acts and data in reaching his ex pert conclusions than did Hartford’s ex pert witness. Hartford’s ex pert Helms spent approx imately two hours c o n ducting a v isual inspection o f the warehouse but did n o t t ak e a ny measurements, thermog r aphic r eading s, infrared imag es, or o th e r data. Althoug h Helms contacted ServPro for its reading s, H elms did not learn the locations from w hich ServPro obtained its reading s, what ServPro did t o g e t its reading s, or what kind of detection machine ServPro used. T he day a f t e r h is twohour site visit, Helms completed his report and concluded that based on the humidity levels measure d by ServPro, no damag e occurred to the components in question.

Spieg el also adequately ex plained his methodolog y in reaching his o pinion. Spieg el described ho w t h e data he collected and reviewed helped him d etermine the conditions of the w arehouse at the time o f the e v ent and at the time o f ServPro’s measurements (which were relied on by Helms to determine that n o damag e from humidity could haveP Y R A M I D T E C H

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occurred). Unlike Helms, however, Spieg el to o k into consideration the fact that the wa r e h o u s e doors were closed and locked durin g t h e flood but open during ServPro’s measurements, and Spie g el calculated and considered the difference between the indoor and outdoor conditions during his 5:30 a.m. visit. S p ieg el applied that difference to the weather data at the nearby a irport on the nig ht o f the incident
to ex trapolate the indoor conditions on the nig ht of the flood. Spieg el also used the infrared temperature readin gs o f the packag es on the shelves in c o mparison to the air temperature taken during his visit to determine the likely te m p e ra t u re o f the packag es on the nig ht of the incident.

T he record shows that the knowledg e underly i n g Spieg el’s report “has a reliable basis in the knowledge a nd

ex p e rience o f the relevant discipline,” rendering his report reliable. Primiano
, 598 F .3d at 565 ( citation a n d quotation marks omitted). The r ecord also shows that Spieg el’s reliance

o n t h e n e a rb y a i r

p o r t w e a t h e r i n f

o r m a t i o n f

r o m www.weatherunderg

round.com is acceptable in the industry
, for Helms testified that he relied on t he same data. Spieg el also ex plai n ed h o w he applied the data to r each his conclusions and how Helms f ailed to rely on proper data to

r each his conclusion. In short, Spieg el’s principles a n d methods were reliable and his repor t i s not one o f the “unreliable nonsense opinions” that should be screened from

use. A laska Rent-A

- C

a r , 738 F .3d at 969. Thus, the district court abused its discretion in ex c luding this evidence.

Ex cluding the Spieg el report was both erroneous a nd prejudicial. Spieg el’s ex pert report provides e v i d ence that: (1) the Helms r eport relied on improper data to c onclude that

no damag e was caused b y humidity following the flood; (2) dur i n g t h e flood, the humidity ex ceeded 90% and wasP Y R A M I D T E C H

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a bove the dew point; (3) the applicable standards f o r

m o i s ture-proof packag ing require a o ne-y ear shelf life a n d humidity below 90% to prevent f ailure; (4) the vast majority of the p arts stored in moisture-proof p ackag ing wa s w ell bey ond the one-y ear warranty protection; and (5) the conditions d

uring the flood “without question” p ut the affected moisture-proof packag es ou tside the packing standards. T hus, as Spieg el opines, the humidi t y a nd condensation c aused by the f lood may h ave compromised the packag ing and possibly the co m ponents themselves. This is admissible evidence f

r om which causation and damag e reasonably may be i nferred. Althoug h Spieg el did not say with c e r t a i nty that the humidity from the flood c aused damag e to Py

ramid’s inventory
, a jury could reasonably infer causation f

rom Spieg e l ’s report a nd Py ramid’s other evidence. I t is not necessary for Spieg el’s report to establish
every e lement of Py

ramid’s claim in order for it to be admissible in evidence. See Primiano
, 598 F

. 3 d a t 564 (“Reliable ex pert testimony need o nly be r e l e v ant, and need
not establish every element that the plaintiff m u s t p r ove, in order to be admissible.”) (citation omitted).

I f Spieg el’s report had been admitted, the district court would have been required to view it in the ligh t m o st favorable to Py

ramid when considering Hartford’s motion for
summary judg ment. B ecause the report could assist a trier o f fact in inferring that the flood caused suffic i ently hig h humidity to d amag e Py

ramid’s parts and that Helms’ contrary conclusion was not reliable, the e x clusion of Spieg el’s report is prejudicial to Py

ramid. See Messick v. Novarti s Pharm. Corp.
, No. 13-15433, 2 014 W L 1 3 28182, at *3–5 ( 9 t h Cir. Apr. 4, 2014) (reversi ng g rant of summary judg ment where

ex p ert’s testimony
, which would have c reated a g enuine issueP Y R A M I D T E C H

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of material fact, wa s ex cluded because it was erroneously deemed unreliable and irrelevant).

3. P ytlew ski

The district court also ex cluded the Py tlew s ki report under Rule 702, stating that it was not the product of reliable principles and methods, and under Rule 701, 2 stating that the report does not ex plain how the o pinions are rationally based

on the p erce p t i o n s o f the witness. B ecause Py tlewski was proffered as a

n ex pert witness, however, only R u le 702 applies.

Py tlewski w as r e tained to review and comment on the report prepared by H artford’s ex p ert Dr. Kumar o f SEAL L aboratories. The district court ap p ears to have accepted Py tlewski as a qualified ex pert, ex c luding his report sol ely based on reliability

. The district c o u rt concluded that Py tlewski’s report was not the product of reliable pri n c i ples and methods.

An ex pert opi n i on is reliable “if the knowledg e underly i n g i t has a reliable basis in the knowledg e a nd

ex p erience of the relevant d iscipl i n e

. ” Alaska Rent-A-Car
, 738 F .3d at 969 (quoting P rimiano
, 598 F .3d at 565). Py tlewski’s o p i n ions are based on h is k nowledg e a

nd

ex p erience as a pr o fessional eng ineer a nd metallurg ist. F o r

2 Fed

. R

. Ev id

. 7 0 1 p ro v id es: “ If a w itn ess is n ot testif y in g as an ex p ert, testim o ny in th e f

o rm o f an o pin i o n is l im ited to o n e th at is: (a) ratio n ally b ased o n t h e w itn ess’ s p ercep tio n ; (b ) h elp f u l to clearly un d erstan d in g th e

w itn ess’ s testim o ny o r t o d eterm i n in g a f act in issu e; an d (c) n o t b ased on scien t if ic, tech n ical, o r o t h er sp ecialized k n o w l ed g e w ith in th e sco p e of Ru le 7 0 2 .”P Y R A M I D T E C H

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ex ample, Py

tlewski c ountered Dr. Kumar’s statement that the damag e to Py

ramid’s inventory could not h ave b e en c aused by the flood bec a u s e the c o r rosion was not uniform b y

ex p laining that metal ex posed to moisture would not ox idiz e uniformly

. T his opinion is within the knowled g e a n d

ex p erience of a metallurg ist. See, e .g. , Stilwell v. Smith & Nephew, Inc.
, 482 F .3d 1187, 1 192–93 (9th Cir. 2 007) (holding admissible metallurg ist’s ex pert testimony that nails

were poor l y manufactured and could h ave been desig ned to last long er); W

hite v. F ord Mo t o r Co.
, 312 F .3d 9 98, 1008 (9th Cir. 2002) opinion amended on denial of reh’g
, 335 F .3d 833 (9th Cir. 2003) (describing metallurg ist’s testimony that

w as “well within his metallurg ical ex pertise” w h en he “identified wear o n the r atchet w heel of the brake that showed repeated tip-on-ti p e n g ag ement r ather than the proper eng ag ement”); see a lso 6 Am. J u r

. Trials 555 ( describing

common use of ex pert metallurg ists to describe, among other thing s, c auses and effects of corrosion). The “reliability ” test is flex ible a

nd should be applied based on the circumstances of the case. Given the subject matter a n d ty pe of opinions that Py tlewski rendered and his knowle dg e and e x perience, Py tlewski’s opinion is reliab le. See Messick
, 2 014 W L 1328182, at *3.

The ex clusion o f Py

tlewski’s report is prejudicial because his report provides e v i d e nce from which a fact finder could disreg ard the opinion of D r

. K u m a r and reasonably infer damag es and causation relatin g t o the flood. F urther, Py tlewski’s d eposition testimony links the flood as at least a partial cause of the damag e to Py ramid’s inventory

. Thus, the district court abused its discr e t i o n in ex cluding Py tlewski’s

ex p ert report and testimony

.P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 17

4. Mortenson

The district cou r t also ex c luded the Mortenson report under Rule 702, stating it was not reliable, and under Rule 703, 3 stating it was not based on facts or data kno w n to Mortenson. Mortenson opi n ed that it was improper for Har t f o rd ’ s ex pert Dr. Kumar to use military standards o f suitability instead of commercial standards in testing the selected parts from Py

ramid’s inventory

. Mortenson testified at deposition, however, that he did not know what standards should have been u sed and that h e i s n o t a w a re of the
g overning commercial standards because that is not his field of ex pertise. Thus, Mortenson’s testimony that Dr. Kumar should not have used military standards a nd should have used commercial standards was not based on facts or data known
to Mortenson and is inadmissible under Rule 703. Additionally
, Mortenson’s testimony is not reliab l e because he did not have the knowledg e or ex perience required under Rule 702 to permit him to g ive ex pert test i mony in this
matter. The ex clusion o f Mortenson’s re p ort by the district
court was not an abuse of discretion. See Kumho Tire Co. v

. Carmichael
, 526 U.S. 137, 153–54 (1999) (holding trial court did not abuse its discretion to ex clude ex pert testimony on g rounds that ex pert’s methodolog y in analy z ing relevant data

was unreliable, even thoug h the ex pert was qualified, where

3 Fed . R. Ev id . 7 0 3 p ro v id es: “ A n ex p ert m ay

b ase ano p in i o n

o n f acts

o r d ata in th e case th at th e ex p ert h as b een m ad e aw are o f o r perso n ally

o b serv ed

. If ex

p erts in t h e p articu lar f

ield w o u ld reaso n ab ly rely o n th ose k in d s o f f acts o r d ata in f

o rm i n g an o p i n io n o n

th e su b j ect, t h ey n eed n o t b e ad m issib le f

o r th e o p in io n to be ad m i tted

. B u t if th e f acts o r d ata w ou ld

o th erw i se b e in ad m issib le, th e p ro p o n en t of t h e o p in io n m ay disclo se th em to th e j ury o n ly i f th eir p ro b a t i ve v a l u e in h elp in g th e j ury ev alu ate th e

o p in io n su b stan t ially

o u tw eig h s th eir p rej u d icial ef f ect.”P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 18

there w as no evidence that other ex p erts in the industry used the ex pert’s particular approach).

B. G rant of Sum m a r y Judgm ent Against P yram id’s Claim s

I n i t s complaint, Py

ramid a lleg es that Hartford b reached its insurance c ontract and the implied covenant of g ood faith and fair dealing by : (1) failing prop erly to investig ate a nd then improperly denying Py ramid’s c laim for a

n alleg ed loss of inventory
, including refusing to test the inventory ; (2) f a i l i n g properly to respond to the building restoration claim, including maki n g a “low-ball” estimate for damag e that was o ne-fourt e e n t h of the value ultimately paid b y Hartford and unreasona

b l y delay ing final pay

ment on the restoration claim; and ( 3) r efusing t o p a y for an alleg ed business interruption. Py ramid appeals the district court’s
g rant of summary

judg ment in favor of Hartford and ag ainst both of Py

r amid’s claims.

1. Legal Standards

A party is entitled t o s u m mary judg ment if the “movant shows that there is no g enuine dispute as to any material fact and the movant is e ntitl e d to judg ment as a matter of law.” F ed. R. Civ. P. 56(a). The moving party has t h e b u rd en o f establishing the absence o f a g enuine dispute of material fact. Celotex Corp. v. Catrett
, 477 U.S. 317, 323 (1986).

I n this diversity action, the substantive l aw g overning Py ramid’s b reach o f contract claim is California l a w. See Neely v

. St. Paul Fire & Marine Ins.
, 5 84 F .2d 341, 345 (9th Cir. 1978). W hether e v idence on a particular issue is sufficient to raise a question of fact f or the jury
, however, isP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 19

go v e r n e d b y federal law. Id. The federal test is whether a “reasonable jury v iewing the summary judg ment record could find by a preponderance of the evidence that the plaintiff is entitled to a favorabl e v e r dict.” Narayan v. EGL, Inc.
, 616 F .3d 895, 899 ( 9 th C i r

. 2 010) (citation o mitted). The judg e i s n o t to weig h the e v idence, draw leg itimate inf e r ences, or make c redibility determinations. Id. “The evidence o f the non-movant is to be believed a n d a l l ju s t ifiable inferences d

rawn in his favor.” Id. (citation a nd quotation marks omit ted). An inference is justifiable if it is rational or reasonable—it does not need to be the most likely

or most persuasive inference. Id. The inferences must have a sufficient evidentiary basis. Neely
, 584 F .2d at 345–46. “W h e re conflicting inferences may be drawn from the facts, the case must g o to the jur y

. ” Munger v. City of Glasgow Police Dep’t
, 2 27 F .3d 1082, 1087 (9th Cir. 2000) ( c i t a t ion and quotation marks omitted).

2. P yram id’s Claim of

Loss of Inventory

P y r amid argues that Hartford breached the insuran c e contract by b oth failing properl y t o investig ate and denying Py ramid’s claim under the Policy for loss of inventory

. Under the Policy
, the burden is on Py r amid to initiate and support its claim. See 1231 Euclid Homeowners Ass’n v. State F arm Ins. & Cas. Co.
, 37 Cal. Rp tr. 3d 795, 802 (Cal. Ct. App. 2006). To succ e e d o n its breach of contract claim, Py ramid must establish a contract, Py

ramid’s performance or e x c u se for nonperformance, Hartford’s breach, a n d resulting damag es to Py ramid. A bdelhamid v. Fire Ins. Exch.
, 106 Cal. Rptr. 3d 26, 32–33 (Cal. Ct. App. 2010). The disputed issues in this case

are whether Py

ramid suffered damag e to any of its inventory and, if so, whether that damag e was caused by the flood.P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 20

a. Dam ages

I t is undisputed that at least some of Py r amid’s inventory ha d v i sible corrosion, tarnish, or discoloration. Hartford’s

ex p ert Dr. Kumar identified visible corrosion, tarnis h
, o r discolorat i o n on more than 40% of the items he tested. Py ramid q uarantin ed more than 250,000 items a s showing visible sig ns of corrosion, tarnish, or discolorat ion. Dr. Kumar testified that corrosion constituted actual p hy sical damag e. T hus, at least some of Py ramid’s inventory h ad

ac t u a l, p hy sical damag e. When there is a ctual, phy sical damag e, then the diminution of market value may be a proper

m e a sure of damag e s. See State F arm Fire & Cas. Co. v

. Superior Court
, 264 Cal. Rptr. 26 9
, 2 7 4–75 (Cal. Ct. App. 1989) (diminution of value is not a cause of a loss but a measure of damag es).

The parties dispute whether visible corrosion, tarnish, or discolorati o n o f a part is sufficient to constitute a “failure” under “military standa rds” of suitability

. Dr. Kumar determined that only two out of the 147 parts failed under that standard, whereas Py

tlewski noted that under the Department of Defense Test Method Standards of Microc i rcuits visible corrosion is includ e d a s a failure criterion. W hether visible corrosion constitutes a “ f ailure” o f a part under military standards is a factual dispute for the jury to resolve.

I n a ddition, and even more importantly
, reg ardless of this dispute over whether visible corrosion, tarnish, o r discoloration constitutes a failure un d e r military standards,
two of the 374 parts ( 0.535 p ercent) actually t es t e d b y Dr. Kumar failed, even under Dr. Kumar’ s s tandards. Ex trapolating this failure percentag e t o 52 million parts is evidence of at least some fa i l ure (approx imately 278,200P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 21

parts). There is also e videnc e i n the record that some customers returned a f

ew p a r ts because of co rrosion. The failure of some p a r t s a nd the return of other p arts a re evidence from w hich a jury reasonably could infer that Py ramid was harmed by the presence of corrosion on at least some of its inventory

. Additionally
, if the inventory items were damag ed by the flood, which Hart ford admits was a covered event, the inability to sell the items due to the phy sical dama g e , reg ardless of whether those items would fail a Department o f Defense test under military sta ndards, would constitute a covered loss. See, e.g. , MRI Healthcare Ctr. of Glendale, Inc.

v. State Farm G en. Ins. Co. , 115 Cal. Rptr. 3d 27, 37 (2010) (“In modern [ insurance] policies, ‘ phy sical loss or d a m age’ is ty pically the trig g er for coverag e. Clearly
, this threshold is
met when an item of tang ible property has b een ‘phy sically altered’ by perils suc h a s fire or water.” (citation omitted));

see also Allstate Ins. Co. v. Smith
, 929 F .2d 447, 450 ( 9th Cir. 1991) (describing an “easy to imag ine” sit u at ion where a “leaky roof could lead to water damag e to [ someone’s] property

. Pres u mably
, water damag e would be an ensuing loss c overed by the policy but repairing the roof would not be covered.”); Meridian T

e xt i les, Inc. v. Indem. Ins. Co. of N. Am.
, No. C V 0 6

- 4766 CAS, 2008 W L 3009889 at, *4–6 (C.D. Cal. Mar. 2 0, 2008) (y arn that was water-damag ed, h ad

a tang i b l e c h a n ge such as odor, mold or mildew, or h ad a detectable chang e such that th e y a r n was likely to develop odor, mold o r m i ldew and was, therefore, unable to b e sold, is a covered loss); Columbiaknit, Inc. v. Affiliated F M Ins. Co.
, No. Civ. 98-1134-HU, 1999 W L 619100 at, * 5 –6 (D. Or. Aug

. 4, 1999) (fabric w i t h m o ld, odor, or w ith increased microbial counts that will develop mold or odor and unable
to be sold, is a c o vered loss). Drawing all reasonableP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 22

inferences in favor of Py

ramid, a reasonable fact finder could f i n d that some of the inventory items had moisture-relat e d damag e that diminished their market value. That diminution in market value is a recoverable measure o f damag e s

. See State Farm
, 264 Cal. Rptr. at 274–75.

B e cause there are a t least some parts that have actual phy sical damag e and some parts that failed testing o r were returned by customers, there is evidence from whi ch a jury could d etermine that Py

ramid suffered harm to its inventory

. The f act that some, but not all, of the inventory was d amag ed does not support the g r anting o f summary judg ment ag ainst Py ramid’s loss of inventory clai m

. Determining the amount of harm suffered is for the jury

.

b. Causation

Hartford argues that P y r amid f ailed to produce any evidence th a t the c omponents’ corrosion, tarnish, o r discoloration was caused by the flood o f Aug ust 11, 2005, a s opposed to the ag e of the parts, the lack o f climate control in the warehouse, or o ther p otential causes. B ecause California provides the substantive law in this case, w e f ollow California’s law on causation in an insurance coverag e c laim.

Under California law, the “efficient prox imate cause” doctrine is “the p r ef

e rred method for resolving first party insurance disputes involving losses caused by multiple risks

o r p e r ils, at least one of which is covered by insurance a n d

one of which is not.” Julian v

. Ha rtford Underwriters Ins. Co.
, 1 1 0 P.3d 903, 906 (Cal. 2 005) (citations omitted); see also Brown v. Mid-Century Ins. Co. 156 Cal. Rptr. 3 d 56, 67 (Cal. Ct. App. 2013) (not i n g t h at “the efficient prox imate

cause doctrine applies when a loss is caused by a combinationP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 23

of a c overed and s p ec ifically e x cluded risks”) ( citation a nd quotation marks omitted).

The “‘efficient prox imate c ause’ of a loss i s the predominant, or most important cause of a loss.” Jula i n , 110 P.3d at 907 (citation omitted). Coverag e would not ex ist “if the covered risk was simply a remote cause of the loss” o r if an ex cluded risk was the efficient prox i m ate cause of the loss. Id ; see also California I ns. Code. § 530 ( “An insurer is liable f or a loss of w hich a p eril insured ag ain s t was the
prox imate c ause, althoug h a pe r i l n o t contemplated by the
contract may have been a remote cause of the loss; but he is
not liable for a l o s s o f which the peril insured ag ainst was only a r e mote c ause.”). “I f more than o ne peril contributes to

a loss, the q

uestion w hich is the efficient prox imate c a u s e g enerally is a factual matter for the jury to resolve.” Julian v

. Hartford Underwriters Ins. Co.
, 123 Cal. Rp t r

. 2d 767, 770 (Cal. Ct. App. 2 002), review granted and opinion superseded sub nom. J

ulian v. Hartford Underwriters
, 57 P.3d 3 62 (Cal. 2002), and aff’d
, 35 Cal. 4th 7 47, 110 P.3d 903 (2005); see also Garvey v

. State Farm Fire & Cas. Co.
, 77 0 P

. 2 d 704, 714 ( Cal. 1989) (en banc) (“Coverag e should be determined by a jury under an efficient prox imate cause analy sis.”).

The evidence in the record, includi n g b o th the Spieg el report and t h e t estimony by employ ees that they saw condensation on the packag ing of the parts stored on the lower shelves, supports a n inference that the humidity reached a hig h enoug h level during the f l o od to cause sig nificant condensation on the packag ing of the parts kept on the lower three or four shelves. There is also evidence that althoug h Py

r amid’s moisture-sensitive i n v entory was g enerally stored in moist u r e

- p roof packag ing
, most of that packag ing was either unsealed o r had been compromised b yP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 24

ag e or the hig h humidity levels, allo w ing moisture to reach the components. Py

ramid’s employ ees testified that many o f the moisture-proof p ackag e s were unsealed and some of those had been folded down and h eld closed only with a paperclip. The Spieg e l report noted that the vast majority of Py ramid’s moisture-proof packag e s w e re much older than the industry standard packag ing shelf-life recommendation of 12 months and that the moisture-proof packag e standards require lower than dew-point humidity

. Thus, there is evidence from which

a jury could i n fer that moisture from the flood may have

r e a c hed moistur e -s e n s i t i v e co m p o n e n t s b ec a u s e t h e packag ing w as not fully sealed, f ailed from age , o r failed because the humidity caused by the flood reached above the dew point.

Py tlewski, Py

ramid’s ex p ert metallurg ist, acknowledg ed in his r eport the difficulty in d etermini n g causation, but testified at a deposition that he believed that at least some o f the damag e was caused by the water intr u s i o n that occurred during the f

lood. Althoug h he c ould not state definitively that the water intrusion caused a ll o f the h arm, “[ l] ack o f c ertainty is n ot, for a qualified ex pert, the same thing as g uesswork.” Primiano
, 598 F .3d at 565. Additionally
, as discussed above, there is e vi dence supporting an inference that the condensation may

have breached the packag ing and reached the components. F urther, the fact that more than 250,000 items were q

uarantined because they showed visible sig ns o f moisture-related damag e after the floo d is evidence supporting an inference of causation.

The ex istence of material f actual issue s relating to causation is further evident in r eviewing the reports o f Hartford’s ex p erts. Althoug h Helms opined that the humidity caused b y the flood could not h ave caused any damag e toP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 25

Py ramid’s inventory
, t h e r e is evidence in the record from which a re a sonable fact finder could discredit H elms’ conclusion. Helms spent only two to three hours conducting

a visual inspection of Py ramid’s w arehouse and d id n o t conduct any tests, take any buildi ng measurements, o r otherwise investig ate the inventory

. I t took Helms o ne day to complete his report , and he relied ex clusively on ServPro’s readin gs a

nd assumed they were a c curate. Helms also does
not appear to have considere d t h at ServPro’s measurements

were taken m o r e than 24 hours after the drying operation beg an and with o pen warehouse doors or that the moistureproof p ackag ing wa s c o m p romised on many items. I t is the jury ’s province to determine h ow much weig ht, if any , to g ive the conclusions reached by Helms o r an y o f the ex perts at trial.

D r

. Kumar did not provide a definitive statement o n causation and g ave contradictory statements. His declaration and part o f his report state that the water intrusion did not

cause the corrosion f

ound in h is testing
, b ut his deposition testimony and another portion of his r e p o rt state that the

cause cannot be determined because it could have been the
water intrusion or it c o u ld have been ag e or some other

ex p osure to moisture. Under California’s efficient prox imate

cause doctrine, whether the damag e f ound by Dr. Kumar was caused by the flood or b y some other cause is an issue for the jury

. See Julian , 123 Cal. Rptr. 2d at 770.

Analy z ing the c ausal chain is “necess a rily speculative” and “[ c] hoosing b e t w een the speculations is o rdinarily a question for the trier of fact, w ho must determine the balance

o f probabilities.” S

hawmut Bank, N.A. v. Kress Assoc s

. , 33 F

. 3d 1477, 1496 (9th Cir. 1994) (citation omitted). This is
not a case where the party with t h e b u r d en of proof at trialP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 26

s ubmitted “no e vidence” from which causation could b e inferred, thereby requiring summ a r y judg ment. Id. at 1497–98. There is sufficient evidence in the record, drawing

a l l reasonable inferences in Py ramid’s f avor, from whi c h a reasonable jury “could find by a p reponderance of the

e v i d en ce that the plaintiff is entitled to a favorable verdict.” Narayan
, 616 F

. 3 d at 899 (citation omitted). W hethe r t h ose inferences should be drawn in f avor of Py

ramid a f ter

co n sidering and weig hing all o f the evidence is for a jury to d e cide. Thus, summary judg ment is inappropriate ag ai n s t Py ramid’s claim of loss of inventory

.

3. P yram id’s Claim of

Business Interruption

Py ramid submitted, wit h drew, re-submitted, and then modified its business interru p t ion claim. The only lost business currently claimed by Py ramid is from W MS, a potential customer. The burden is on Py ramid to initiate and support this c laim under the Policy

. S ee 1231 Euclid
, 37 Cal. Rptr. 3 d at 802. Thus, to defeat summary judg ment ag ainst its business interruption claim a g ainst Hartford, Py ramid must show that there are material factual issues about whether its loss of potential W MS business is a covered loss under the Policy

.

B u siness interruption is covered under the Policy
, throug h

an endorsement entitled “Gross Earning s” that deleted a nd replaced the Policy ’ s orig inal “B usiness I ncome” and “ Ex tra E x pense” provisions. The Gross Earning s endorsement provides:

W e will p a y f

o r the actual loss of B usiness I ncom e y ou sustain and the a ctual, necessary and reasonable Ex tra E x p ense y ou incur d ueP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 27

to the necessary interruption of y our business

“ o p e r a t i o n s ” d u r i n g t h e “ P e r i o d o f Restoration” due to the direct phy sical loss o f

o r direct phy sical damag e caused by or resulting f

rom a Covered Cause of L oss to property at “Scheduled Premises.”

Py ramid must, therefore, show that it actu a l l y lost business income from W MS because of the flood in order to prevail on its claim that Hartford breached the insurance c o n t r act b y failing to cover Py

ramid’s alleg ed business interruption.

Py ramid fails to show that there a re material issues of fact that it actu a l l y lost W MS business as a result of the flood. W h ether W MS would have contracted with Py ramid if there

was n o flood, and for what amo u n t , i s too speculative to support Py

ramid’s claim. Althoug h Carmine G r eco, the senior buy er at W MS, testified that h e had “committed” to buy at least $1 million dollars of inventory from Py ramid, he also ex plained that any purchase by W MS from Py ramid was subject to the approval o f WMS quality c o n t r o l people a nd subject to additional neg otiation. Py rami d a nd W MS, thus,

were still neg otiating and h a d not y et entered into a binding and enforceable contract.

Greco f urther testified that he and Py ramid had d iscussed
contract terms for only a few parts, althoug h he “anticipated”

more parts w ould be p urchased from Py ramid. He added that after learni n g o f the flood, he needed the inventory tested before he would consider purchasing any of it. He also stated that if the product had b een tested, he “ probably ” would have boug ht it.P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 28

W MS’s q

uality con trol manag er, Nick Savich, also participated in the site visit at Py r amid. Savich sent a letter to Py ramid a fter the visi t , s tating that W MS did not approve P y ramid as a supplier based o n water intrusion. Sa v i c h testified at deposition, however, that if he had known that Py ramid did not have humidity control in its warehouse, that fact alone would have disqualified Py r amid as a supplier.

To find for Py

ramid o n its c laim of business interruption,

a jury would need to speculat e that Savich would not have discovered the fact that the warehouse did not have humidity control, that W MS q

uality control people would have sig n ed off on Py ramid as a supplier, that Greco and Py r amid would have successfully neg otiated p ricing and other terms for many additional parts, and that G reco would have followed throug h with a larg e purchase. The record evidence does not support

– and the law does not p ermit – such speculation. See Neely
, 584 F .2d at 346 (“Part i e s a re e ntitled to have the determination of their rig hts r est on more t h a n speculation and g u esswork. H ere, the c onnection between the p roffered evidence and the conclusions is too t enuous to permit a jury
to make it.”). According ly
, we affirm the district court’s g rant of the motion for summary judg ment ag ainst Py ramid on the claim of business interruption.

4. P yram id’s Claim of

G ood F aith and F a ir Dealing

“T h e c o venant of g o od faith and fair dealing has ‘particular application’ to insurers because they are ‘invested with a discretionary power affecting t he rig hts of another.’” Amadeo v. Principal Mut. Life Ins. Co.
, 290 F .3d 1152, 1161 ( 9th Cir. 2002) ( quoting Carma Developers ( Cal.)

, I n c

. v. Marathon Dev. Cal., Inc.
, 826 P.2d 710, 726 (Cal. 19 9 2)). Under California law, to e s t ablish a breach o f the impliedP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 29

covenant o f g ood f

aith and fair d ealing
, “a plaintiff mus t

s h ow: (1) benefits due under the p olicy were withheld; a n d (2) the r eason for withholding b e n e f i ts was unreasonable o r without proper cause.” Guebara v. Allstate Ins. Co.
, 237 F .3d 987, 992 (9th Cir. 2001) ( c i t i ng Love v. Fire Ins. Exch.
, 271 Cal. Rptr. 2 4 6, 255 (Cal. Ct. App. 199 0 ) )

. The reasonableness of an insurer’s conduct is ordinarily a question of fact. Amadeo
, 290 F .3d at 1161.

A n insured’s claim of breach o f the implied covenant o f
g o od faith and fair dealing may be dismissed on summary judgm ent if the defendant insurer can show that there was a “g enuine dispute” a s to liability

. Guebara
, 237 F .3d at 992. This g e nuine d ispute doctrine should be applied on a case-by

case basis and does not protect alleg edly b iased in v e s tig ations. Id. at 994, 996. B iased investig ation c laims include circumstances where: (1) the insu r er misrepresents the nature of the investig atory proceeding s; (2) the insurer’s employ e es lie during depositions or to a n insured; (3) the insurer dishonestly selects ex perts; ( 4) the insurer’s ex perts

were unreasonable; or (5) the insurer fails t o c onduct a thoroug h investig ation. Id. at 996.

Py ramid argues that Hartford breached th e implied
covenant o f g ood faith and fair d e a ling by : (1) improperly refusing to test Py

ramid’s inventory

for more than two y ears and conducting inadequate testi n g; (2) denying coverag e on Py ramid’s claim of inventory l o s s; (3) making a “ low-ball” building restoration estimate and delay ing pay me nt on the
ag reed-upon supp l e m ental building restoration amount for four months; and (4) co nducting a biased investig ation throug h dishonestly selecting unreasonable ex perts a nd an inadequate invest i ga t i o n. Hartford argues that it did not act unreasonably because there was a g enuine dis pute as toP Y R A M I D T E C H

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. A L L I E D P UB L I C A D J U S T E R S 30

coverag e, its investig ation was prope r , its coverag e denial

was based o n ex pert opinions, and it u ltimately paid a ll of the building restoration amounts makingany delay harmless.

There is evidence in the re c o rd supporting an inference that Hartford acted unreasonably or w ith bias. Py r amid submitted testimony s t ating that a Hartford representative, while visiting Py

ramid’s premises to assess d amag es, said that it is Py

ramid’s job to try to collect under the insurance
p o l i c y a nd Hartford’s job to make sure Py ramid does n o t

co l lect. Py

ramid also provided evidence that Hartford’s adjuster Todd Kling aman “downplay ed” the flo o d d amag e during h is site visit by comparing it to a “bucket of water” and sug g e sting to Py

ramid that it did not ne e d to tell its
customers about it. Py

ramid’s e mploy ees also testified that at the conclusion of Hartford’s site v i s i t , before H elms h ad completed his report, Hartford jumped to an early conclusion that n o d amag e had occurred and thus r e f u s ed to test any i nv e n t o r y

. A d d itionally
, Hartford relied on Helms’ con c l u s i o n that humidity could not have caused damag e , eve n thoug h Helms conducted only a cursory investig ation, relied o n reading s taken after the dry i ng operation had larg ely concluded and under different conditi ons, and was not familiar with many of the e l e c t r o n ic c omponents o r h ow moisture a ffected them. 4 Moreover, Hartford did not test any

4 A lth o u g h co urts h av e f

o un d relian ce o n ex p erts can trig g er th e g en u in e d isp u te d o ctrin e, th ese cases g en erally in v o lv e m u ltip le ex p erts th at are clearly in dep en d ent. S

ee, e.g

. , Gu eb a ra , 23 7 F.3 d at 9 94

– 95 (h o ld in g th at th e co n clu sio n s of th ree in d ep en d en t in v estig ato rs an d su sp icio u s co n d u ct b y th e i n su r e d p r o v id e a su f f icien t b asis f

o r ap p ly in g g enu in e d isp u te d o ctrin e); Fra l ey v. Allsta te In s. Co

. , 9 7 Cal. Rp tr. 2 d3 8 6 , 3 91 (Cal. Ct. A p p. 20 0 0 ) (“ T h e ‘ g enu in e d isp u te’ d octrin e m ay b e ap plied w h ere th e in su rer den ies a cl aim b ased o n t h e o p in io n s o f ex p erts.”); Ph elp s v. Pro vid en t Life & Accid

en t In s. Co

. , 6 0 F

. Su

p p. 2d 1 0 14
, 1 02 1 (C.D. Cal.P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 31

o f P y ramid’s inventory until two y ears after the flood a n d only after P y

r amid had eng ag ed its own ex pert a nd a fter H elms supplemented h is r eport to sug g est testin g a

re p resentative sample mig h t b e appropriate. F inally
, Hartford’s initial estimate of building damag e was v ery low, $6,640.34, and Hartford did not ag ree to additional sums for eig ht months and then delay ed for another four months before
paying the additional $88,480.01. To the e x t ent a jury finds
coverag e wa s required for the inventory loss claim, this evidence further supports a n inference t h a t Hartford’s conduct was unreasonable and n ot e ntitled to protection under the g enuine dispute doctrine.

F urther, t h e admitted portions of the declaration a nd report of G ene I riz arry , Py ramid’s insuranc e c laim ex pert, support a n inference that Hartford did not handle the claim in
g ood faith. I riz arry opined that H a r tford could not have reasonably concluded that Py ramid’s inventory w a s not damag ed in the absence of any testing o r i n vestig ation a nd should have conducted testing under the adjustment e x pense that accompanies every claim. I riz arry also concluded that Ha r t f o r d was not responsive to the needs of Py ramid a nd failed to assist Py

ramid as H a r t f

o r d was oblig ated to d o a nd that H artford f

orced Py ramid to en gag e ex perts and conduct

a n investig ation that should have been done by Hartford. I riz arry further stat e d that Hartford made an unreasonable, “low-ball” estimate for the building r epairs and unreasonably delay e d in investig ating and f inaliz ing the building restoration claim.

1 9 9 9 ) (surv eillan ce f

ilm an d rep o rts f

ro m th ree in d ep en d en t d o cto rs g av e rise to g enu in e d isp u t e co n cern in g w h eth er i n su

red w as en titled to b en ef its).P Y R A M I D T E C H

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. A L L I E D P UB L I C A D J U S T E R S 32

Hartford also relied o n Dr. K u m ar ’s report, issued two y ears after the flood
, t o deny Py ramid’s claim. A n ex pert report alone, however, does not demonstrate a “ g enuine dispute.” See Guebera
, 237 F .3d at 996. F urther, even if Dr. Kumar’s report provides Hartford w ith a “g enuine dispute” a s of A ug ust 2 007, the two-y ear delay a nd the lack of a thoroug h investig ation during the time period between the Aug ust 2005 flood and the Aug ust 2007 Kumar report supports Py ramid’s claim for breach of the implied covenant of g ood f a i t h a nd fair dealing

. See, e.g. , Amadeo
, 290 F .3d at 1163 (g ood faith decisions based on a

n inadequate investig ation can support a claim for breach of g ood faith and fair dealing )

.
“[ W ] hether an insurer’s denial o f a claim is unreasonable is dependent upon the facts in each c ase. The issue remains a question of fact unless o nly one inference may be drawn from the evidence.” Paulfrey v. Blue Chip Stamps
, 1 97 Cal. Rptr. 5 0 1
, 504 ( Cal. Ct. App. 1983) (emphasis in orig inal) (citations omitted). Summary judg ment cann o t be g ranted under the g enuine dispute d octrine in a bad faith claim unless “it is undisputed or indisputable that the ba s i s f o r the insurer’s denial of benefits was reasonable—for ex ample, where e ven under the plaint i f f’s version of the f

acts there is

a g enuine issue a s t o t h e insurer’s liability under California law.” Amadeo , 290 F .3d at 1161 (citation omitted). Py r amid produced e vidence from which a reasonable jury c ould draw

more than one inference concerning Hartford’s c on d u c t

. Thus, summary judg ment ag ainst Py ramid’s claim for breach of the implied covenant of g o od faith is inappropriate.

CONCLUSION

The district court abused its d iscretion in ex cludin g t he

ex p ert evidence of David Spi e gel and K en Py tlewski. SuchP Y R A M I D T E C H

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. A L L I E D P UB L I C A D J U S T E R S 33

evidence is a dmis s i b le. The district court did not abuse its discretion in ex cluding the e x pert evidence of Del Mortenson. The district cou r t erred in g ranting summary judg ment ag ainst Py

ramid’s c laims because g enuine disputes o f material fact ex ist as to wh e t h e r Hartford breached its
contract w ith Py

ramid and breached the implied covenant o f
go o d faith. To the ex tent such claims are p remised o n Py ramid’s business interruption theory
, however, n o material issues of fac t e x ist, and the district court did not err in
g ranting summary

judg ment ag ainst that theory of liability

.

AF F IRMED IN P ART, R EVERSE D IN P ART, a nd REMANDED F OR TRIAL. The parties shall bear their o wn costs on appeal.

RAW L I NSON, Circuit J udg e, dissenting :

I respectfully d i s s e n t because I do not ag ree that the district court abused its discretion in ruling that the proposed

ex p ert testimony of Plaintiff’s ex perts should be ex cluded. I also disag ree, in any event, that su m m a ry judg ment was improperly g ranted.

The central issue in this case was whether the inventory in Plaintiff’s warehouse was damag ed as a r e s u lt o f floodwaters that did not even reach the shelves on which inventory w as stored. Therefore, the only potential source o f da m a ge to the inventory was c ondensation. The critical question was whether that condensation ori gi n a t ed from the flood w aters or from some other source of humidity

. B ecause neither of the ex cluded ex perts opined a s to that criticalP Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 34

causati o n question, the district court acted w ithin its discretion when it ex cluded their testimony

.

W e review the district court’s d ecision to admit o r

ex c lude ex pert testimony for abuse o f discretion. See Estate of B arabin v. AstenJohnson, Inc
., 740 F .3d 457, 460 (9th Cir. 2014) (en banc). The district court is g iven “broad latitude” in performing this g atekeep ing function and no Daubert 1 hearing is required. Id

. at 4 6 3

. A d i strict c ourt abuses its discretion only if it uses a n incorrect leg a l standard or makes factual finding s that are “illog ical, implausible
, or without support in inferences that may b e d r a w n from facts in the record. . . .” United States v. Hinkson
, 585 F .3d 1247, 1262 ( 9 t h Cir. 2009) (en banc) (citation, footnote reference a n d internal quotation marks omitted). None of these judicial infractions was committed by the district court judg e

.

Admission or ex clusion of ex p ert opinion test i mony in federal courts is g overned b y Rule 702 of t h e Federal Rules of Evidence. That rule provides:

A witness who is qua l i f i e d as a n ex pert b y knowledg e, skil l, ex perience, training
, o r education may testify in the f o r m of an opinion or otherwise if:

(a) the ex pert’s scientific, te c hnical, or other
sp e c i aliz ed knowledg e w ill help the trier o f fact to understand the e vidence or to determine a fact in issue;

1 Da u b ert v. Merrell Do w Ph arm. In c ., 5 0 9 U.S. 5 7 9 (1 9 9 3 ).P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 35

(b) the testimony is based on sufficient facts or data;

(c) the testimony is t h e p r oduct of reliable principles and methods; and

( d) the ex pert has reliably applied t h e principles a nd methods to the facts of the

case.

At a minimum, the proffered testimony must be “relevant and reliable.” Barabin
, 740 F .3d at 463. To be relevant, the proffered evidence must “log ically advance a material aspect of the party ’s case.” Id . (citation omitted).

The district court rejected th e opinion testimony o f proffered ex pert Spieg el o n the basis tha t Spieg el was not “qualified a s a n e x p ert on the

. . . specializ e d data o n which he purports t o o p i n e.

. . .” This ruling by the district court

was not “i l l o g ical, implausible o r w ithout support in inferences that may be drawn from facts in the record.

. . . ” Hinkson
, 585 F .3d at 1262. I t is undispu ted that Spieg el

never inspected or tested t he inventory or its packag ing

. I n addition, Spieg el’s calculation of “ ambient air conditions in the warehouse” was performed in October, 2005, two months after the fl o o d
, utiliz ing weather information from www.weatherg

round.com for the J ohn W ay ne I nternat i o n al Airport se v e n miles away

. The district court acted w ell within its discretion in concluding that this less than scientific
process w as not “relevant and r eliable,” Barabin
, 740 F .3d at 463, e s p e c ially g iven that Spieg el never actually opined on the cause of the condensation.P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 36

Similarly
, the d i s t r i ct court ex cluded the opinion testimony of proffered ex

p e r t Py tlewski because he failed to

ex p lain “what principles and methods he uses to challeng e the

re p ort [ from Defendant’s ex pert] .” The district court noted that Py tlewski did not v i s i t t h e warehouse or c onduct any independent testing

. Py

tlewski also failed to link his o p inions
to the perceptions of the witnesses he interviewed. These ruling s were w ell within the discretion o f the trial judg e, a nd

we h ave no license to second-g uess. See Barabin
, 7 4 0 F .3d
at 462 (ex plaining that the evid e ntiary ruling s of the trial judg e “should not be re v e r s e d absent clear abuse o f discretion”).

Even if the ex p ert testimony should have been admitted,
any error in ex cluding the testimo n y w as harmless because neither proffered e x pert o pined that the floodwaters c aused damag e to Plaintiff’s inventory

. I n his report, Spieg el

ex p ressed “concerns, that the conden s a tion (water-films) observed on the packag ing may have co m p r o mised the packag ing and p ossibly the electronic component s within those packag es.” (emphasis added). Rather than opining definitively on causation, as opposed to “concerns,” Spieg el recommended that “a qualified electronic professional should perform independent te sting
, to evaluate if this inspector’s

concerns are justified.” Not o nly did Spieg el fail to opine on the ca u s a t ion issue, he all but admitted that he was not qualified to do so.

W h en aske d specifically about damag e to the inventory
, Py tlewski also hedg ed. To the question w hether the electronic components were damag ed by the f lood, Py tlewski responded:P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 37

I certainly think that some element of

c o r rosion occurred as a result of that hi gh humidity

. I d o n ’ t know that a ll of it did. I n fact, if it wa s on the shelf for a long time there’s g oing to be some element of ag ing a nd corrosion. Corrosion would occur as a result of the ag ing
, but I can ’ t tell from the in formation I had necessarily
, y ou know, which ones that applies to without even seeing them my self.

(Emphases added).

Py tlewski’s respo n s e failed to connect the f lood to any damag ed inventory

. H e even conceded that the corrosion he described coul d occur as a result of the inventory sitting on t h e s h elves for considerable leng ths of time. B y the end o f his statement, he admitted that h e “[ could not] tell f r om the information [he h ad] ” which items were corroded and which
were not.

Under California law, failure to rai s e a material issue o f fact reg arding causation is fatal to Plaintiff’s breach o f
contract cla i m a s well as its b ad faith claim. See MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. I ns ., 187 Cal. App. 4th 766, 779 (2010) (ex plain i ng that the covered property must be damag ed a nd the damag e m u st directly “occur by the action of the fortuitous event trig g ering
coverag e”); s e e a l

s o Guebara v. A llstate Ins. Co
., 2 37 F .3d 987, 992 (9th Cir. 2001) (“Under California law, a bad faith claim can be dismissed on summary judg ment if the defendant can show that there was a g enuine dispute a s to coverag e[ .] ”).P Y R A M I D T E C H

. V

. A L L I E D P UB L I C A D J U S T E R S 38

The majority opinion r e l i e s on the fact that some o f Plaintiff’s i n v entory display ed “corrosion, tarnish, o r discoloration.” Majority Opinion
, p. 20. B ut t hat say s nothing about the cause of the c orrosion, tarnish o r dis c oloration. After all, one of Plaintiff’s ex perts conceded that corrosion could o c c u r as a function of inventory sitting

on the shelves unus e d

. The best the majority can muster is “that the vast majority of [ Plaintiff’s] m o i s t ure-proof packag es were much older than the industry sta n d a r d packag ing shelf-life recommendation of 12 months and that th e moisture-proof p ackag e standards require lower than de w point humidity

. . . .” Id

. at 24. Glaring ly absent is any

r e f e r e nce to opinion testimony that any damag e to the inventory was directly caused by the f loodwa ters. See MRI Healthcare
, 187 Cal. App. 4th at 779. The m a j o r i ty faults Defendant’s ex pert for failing to disprove c a u sation. See Majority Opinion
, pp. 24–25. However, it was Plaintiff’s burden to raise a material issue of fact reg arding coverag e o f its claimed loss. See Oglio Ent’mt G roup, I n c. v. Hartford Cas. Ins. Co
., 200 Cal. App. 4th 573, 582 ( 2 011). Plaintiff failed to meet its burden, a nd the d i s t r i c t court properly entered summary judg ment in favor of Defendan t

. See Trishan Air, Inc. v. Federal Ins. Co

. , 635 F .3d 422, 434 (9th Cir. 2011).

I ag ree with the majority that the district c ourt properly

ex c luded Mortenson’s ex pert report and properly rejected Plaintiff’s business interruption claim. As discussed, I f ervently disag ree with the balance of the majority opini o n

. I w ould affirm the district court’s judg ment in its entirety

. I respectfully

dissent.