Opinion ID: 4387386
Heading Depth: 2
Heading Rank: 3

Heading: Whether Ingenco’s Losses Resulted From an

Text: “External Cause”
Ingenco’s all risks policy, issued by Ace, insured against “all risks of direct physical loss or damage occurring . . . from any external cause.” Ingenco asserts, somewhat inconsistently, that “gas flow-induced vibrations,” the “pressure from the process gas,” and the “undiffused, high velocity landfill gas” were “external” causes of Ingenco’s adsorbent bead losses. Ace argues that, as the district court concluded, the unmediated stream of landfill gas that destroyed V32’s adsorbent beads does not qualify as an “external” force, and that Ingenco’s losses are therefore not covered by the all risks policy. 7 Ingenco did not appeal the district court’s conclusion that Ingenco failed to comply with the policy’s notice provision. 20 INGENCO HOLDINGS V. ACE AMER. INS. CO. There is no dispute about the generally applicable principles of insurance policy interpretation. Policies should be construed as a whole and given the type of sensible construction that an average insurance purchaser would give. Kitsap Cty. v. Allstate Ins. Co., 136 Wash. 2d 567, 575 (1998). Undefined terms must be given their “plain, ordinary, and popular meaning,” and any ambiguities should be construed against the insurer. Id. at 576. The policy does not define the term “external cause.” Ingenco argues, briefly, that under the plain and ordinary meaning of “external,” landfill gas that originated outside the Ingenco facility was, by definition, not internal to the covered facility and, thus, qualifies as an “external” force. Although that argument has some appeal, Ingenco also contends, without explaining why any meaning other than the plain meaning should apply, that, in the absence of a definition of “external cause” in the policy, courts may look to judicial interpretations of that phrase, including the district court’s decision in Standard Structural Steel Co. v. Bethlehem Steel Corp., 597 F. Supp. 164, 193 (D. Conn. 1984).8 Both parties cite the Standard Structural Steel court’s explanation that, in the context of an all risks policy such as that at issue here, “a 8 In some cases, conflicting dictionary and industry (or judiciallycrafted) meanings may create ambiguities that can only be resolved, if at all, through extrinsic evidence. See Queen City Farms, Inc. v. Cent. Nat. Ins. Co. of Omaha, 126 Wash. 2d 50, 83 (1994). Here, although Ingenco argues both that the plain meaning of “external cause” should apply and that the Standard Structural Steel-type definition applies, Ingenco does not contend that there is any ambiguity in the term “external cause.” See also Enron Oil Trading & Transp. Co. v. Walbrook Ins. Co., 132 F.3d 526, 530 (9th Cir. 1997) (looking to other provisions of insurance contract to determine that parties intended industry usage, rather than the plain meaning, of a term). INGENCO HOLDINGS V. ACE AMER. INS. CO. 21 cause is external if damage which arises from it does not result wholly from an inherent defect in the subject matter or from the inherent deficient qualities, nature and properties of the subject matter.”9 Standard Structural Steel, 597 F. Supp. at 193 (internal quotation marks omitted). Other courts, including the district court here, have applied essentially this same definition of “external cause.” See, e.g., Delta Nat. Gas Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pennsylvania, No. CIV.A. 11-57-KSF, 2011 WL 2007706, at  (E.D. Ky. May 23, 2011).
The parties hew closely to the Standard Structural Steel definition of external cause and argue at length about whether the V32 diffuser basket and the adsorbent media were “inherently defective.” The parties’ arguments largely ignore, however, the concept of “fortuity,” which operates “as a sort of partnership” with the external cause requirement.10 Standard Structural Steel, 597 F. Supp. at 191–92; see also 9 The Standard Structural Steel court also stated that all risks insurance policies implicitly require an external cause, even if the language of the policy is not so limited. Standard Structural Steel, 597 F. Supp. at 192. Thus, as the Standard Structural Steel court explained, “[t]he label ‘all risk’ is essentially a misnomer. All risk policies are not ‘all loss’ policies; all risk policies . . . contain express written exclusions and implied exceptions which have been developed by the courts over the years.” Standard Structural Steel, 597 F. Supp. at 192 (internal quotation and citation omitted). 10 Ingenco does refer to fortuity in passing in its opening brief and somewhat more extensively in its reply but, at least in part, does so in reference to flow-induced vibrations rather than the stream of incoming landfill gas. Ace does not refer to fortuity at all, but raises arguments that fit within the fortuity framework. 22 INGENCO HOLDINGS V. ACE AMER. INS. CO. Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440, 1446 (3d Cir. 1996) (citing “the generally accepted principle that every ‘all risk’ contract of insurance contains an unnamed exclusion—the loss must be fortuitous in nature.” (internal quotation omitted)); Underwriters Subscribing to Lloyd’s Ins. Cert. No. 80520 v. Magi, Inc., 790 F. Supp. 1043, 1046 (E.D. Wash. 1991) (“Regardless of its express terms, every all-risk policy contains an unnamed exclusion—the loss must be fortuitous in nature.” (internal quotation and citation omitted)). Indeed, some courts have used the word “fortuitous” as an alternative to “external cause.” See, e.g., Dow Chem. Co. v. Royal Indem. Co., 635 F.2d 379, 386, (5th Cir. 1981) (stating, in reference to an all risks policy using the term “external cause,” that “recovery under an all-risk policy will be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.”).11 The Washington Supreme Court has not addressed the concept of fortuity as it relates to all risks insurance policies. It is our task, therefore, to predict how the Washington Supreme Court would decide the issue. Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir. 1986). In so doing, we may look to other courts’ decisions for guidance, as well as to treatises, restatements, and other data. Id.; Astaire v. Best Film & Video Corp., 116 F.3d 1297, 1300 (9th Cir. 1997), amended, 136 F.3d 1208 (9th Cir. 1998). 11 As discussed below, other courts have emphasized the centrality of fortuity over externality in the modern view of all risks policies, holding that because the critical factor is the role of chance, external causation cannot be read into all risks policies, and that even intrinsically caused fortuitous events may be covered under an all risks policy. See City of Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38, 48 at n.9 (2d Cir. 2003) (collecting cases). INGENCO HOLDINGS V. ACE AMER. INS. CO. 23 Courts, often drawing upon the Restatement of Contracts, have typically defined a fortuitous event as one that is dependent upon chance, taking into account the knowledge of the parties.12 See, e.g., Compagnie des Bauxites de Guinee v. Ins. Co. of N. Am., 724 F.2d 369, 372 (3d Cir. 1983); Magi, Inc., 790 F. Supp. at 1047–48 (collecting cases). Courts have further concluded that a fortuity inquiry should look to, among other things, whether a particular loss was certain to occur, the parties’ perception of risk at the time the policy issued, and whether the loss could reasonably have been foreseen.13 Magi, Inc., 790 F. Supp. at 1048; Churchill v. Factory Mut. Ins. Co., 234 F. Supp. 2d 1182, 1188 (W.D. Wash. 2002); Frank Coluccio Const. Co. v. King Cty., 136 Wash. App. 751, 768 (2007). We conclude that the Washington Supreme Court would adopt a definition of fortuity consistent with this trend.14 With this concept of fortuity in mind, we turn to the facts of this case. Here, the fortuity analysis is complicated somewhat by Ingenco’s inconsistent references to both “flow 12 According the Restatement of Contracts, “[a] fortuitous event . . . is an event which[,] so far as the parties to the contract are aware, is dependent on chance. It may be beyond the power of any human being to bring the event to pass; it may be within the control of third persons; it may even be a past event, as the loss of a vessel, provided that the fact is unknown to the parties. The event may be positive or negative—an occurrence or a failure to occur.” Restatement (First) of Contracts § 291 (1932). 13 The Magi, Inc. court determined that the Washington Supreme Court would adopt a similar definition. Magi, Inc., 790 F.Supp. at 1048. 14 Multiple district courts within this circuit have made similar predictions. See, e.g., Magi, Inc., 790 F.Supp. at 104; Kilroy Indus. v. United Pac. Ins. Co., 608 F. Supp. 847, 858 (C.D. Cal. 1985). 24 INGENCO HOLDINGS V. ACE AMER. INS. CO. induced vibrations” and “the process gas” as the cause of its losses, as discussed above. Were the inquiry focused on the fortuity of “the process gas,” Ingenco could not possibly succeed, as it is undisputed that all parties fully expected the stream of landfill gas to enter the Cedar Hills facility and, as Ingenco concedes, the incoming stream of gas never exceeded expected tolerances. The focus of our fortuity analysis, however, is not on the fortuity of the process gas or some other cause, but rather on whether Ingenco’s loss was fortuitous. There is no evidence in the record that the failure of the diffuser basket cover plate straps, or the subsequent obliteration of the adsorbent media, was inevitable. Nor is there any evidence in the record that either party had reason to believe, at the time the policy issued, that the diffuser basket cover would fail under normal gas pressures, or that the adsorbent media would ever be exposed to an unmediated stream of high pressure gas. Lastly, Ingenco’s expert opined that the resonant vibrations in the metal straps were not, and could not have been, reasonably foreseen. See Magi, Inc., 790 F. Supp. at 1047–48; see also City of Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38, 49 (2d Cir. 2003) (recounting Third Circuit’s conclusion in Compagnie Des Bauxites that “while in hindsight [] structural defects might appear inevitable, [the court] had to credit the insured’s statements that it had no knowledge of the design defects and that the loss was therefore fortuitous,” and explaining that “an intrinsically caused loss may be just as unexpected as an extrinsically caused one.”). Thus, it appears that Ingenco’s loss was indeed fortuitous, or that there is, at the very least, a triable issue of fact regarding the issue. INGENCO HOLDINGS V. ACE AMER. INS. CO. 25
A determination that a particular loss is fortuitous could obviate the need to examine whether that loss was caused by an external force. Although the policy language here undoubtedly applies only to losses resulting from an “external cause,” some courts, interpreting nearly identical policy language, have held that an insured need only demonstrate that a fortuitous loss has occurred, notwithstanding “external cause” policy language. See, e.g., Atl. Lines Ltd. v. Am. Motorists Ins. Co., 547 F.2d 11, 12 (2d Cir. 1976). The Fifth Circuit addressed one such situation, explaining: As has been recognized in other circuits, it would appear that all risks insurance arose for the very purpose of protecting the insured in those cases where difficulties of logical explanation or some mystery surround the (loss of or damage to) property. It would seem to be inconsistent with the broad protective purposes of “all risks” insurance to impose on the insured . . . the burden of proving the precise cause of the loss or damage. It is not surprising, therefore, that courts which have considered claims under insurance policies with essentially the same insuring language as the policy before us have consistently refused to require the insured to demonstrate that the loss or damage was occasioned by an external cause. We similarly refuse to impose such a burden in this case. 26 INGENCO HOLDINGS V. ACE AMER. INS. CO. Morrison Grain Co. v. Utica Mut. Ins. Co., 632 F.2d 424, 430 (5th Cir. 1980). Although we find this reasoning persuasive, the Washington Supreme Court has not spoken on the issue. We need not predict, however, whether the Washington Supreme Court would read “external cause” policy language to require an insured to make a separate showing of external causation. Even assuming that the Washington Supreme Court would, unlike the Morrison Grain court, require an insured to show not only a fortuitous loss, but also an “external cause” in the all risks context, and would adopt the Standard Structural Steel definition of “external cause” as dependent on whether resulting damage arises “wholly from an inherent defect in the subject matter,” there nevertheless remains a triable issue of fact here.15 Standard Structural Steel, 597 F. Supp. at 191. As an initial matter, the district court appears to have conflated, or at the very least applied, two different definitions of “external cause.” To the extent that the district court concluded that “the incoming landfill gas was necessary and internal to the gas purification system,” it appears to have applied a plain and ordinary meaning of “external.” Whether it did so correctly is debatable. On the one hand, landfill gas was certainly essential to the operation of the Cedar Hills facility. At the same time, however, landfill gas was not an 15 Although we refrain from concluding that the Washington Supreme Court would follow a Morrison Grain-like approach, neither do we suggest that the court would adopt the Standard Structural Steel court’s view of external causation. To the contrary, although the Washington Supreme Court has not addressed the precise issue, it has, in the all risks context, suggested that an external cause can exist even in circumstances involving latent defects. See Dickson v. U.S. Fid. & Guar. Co., 77 Wash. 2d 785, 793–94 (1970). INGENCO HOLDINGS V. ACE AMER. INS. CO. 27 essential component of the facility or of the machinery itself, which existed before the first inflow of gas was ever piped in.16 Furthermore, although the landfill gas indisputably “arose” from outside the insured facility, whether it “acted” internally or externally depends on whether the borders of the insured subject matter begin at the property line or at the edge of the pressure vessel.17 These conflicts are difficult to resolve on the record before us, and perhaps, more than anything, illustrate the advantages of avoiding the “external cause” question altogether. See Morrison Grain, 632 F.2d at 430. The district court also, however, applied the Standard Structural Steel definition of “external cause,” concluding that because there was an inherent problem in the gas purification system, “the landfill gas was not an external cause.” See Standard Structural Steel, 597 F. Supp. at 193. The district court based that conclusion on its determination that because the purification system, and in particular the diffuser basket, was (1) designed to withstand landfill gas and (2) failed to do so, it must have suffered from an inherent defect. This logic, which Ace essentially reiterates on appeal, is difficult to square, particularly in the all 16 Indeed, King County, which controls the Cedar Hills landfill, has the ability to completely shut down the inflow of gas. 17 Ingenco’s argument that the object of the insurance claim, which in this case is limited to the diffuser beads, defines the physical borders relevant to an externality inquiry is not persuasive. Although Ingenco argues that Ace’s characterization of the subject matter of the policy is so comprehensive as to render any damage “internal,” Ingenco’s characterization is no less extreme, being so fine-grained as to render virtually any damage to any particular component, such as adsorbent beads, “external.” 28 INGENCO HOLDINGS V. ACE AMER. INS. CO. risks context. Although, in general, system failures of any kind can conceivably result from an inherent defect, so too might failures occur for some other, justifiably unexpected reason. See, e.g., City of Burlington, 332 F.3d at 49 (“[I]n hindsight[, ] structural defects might appear inevitable, . . . [but] an intrinsically caused loss may be just as unexpected as an extrinsically caused one.”); Morrison Grain, 632 F.2d at 430 (“[A]ll risks insurance arose for the very purpose of protecting the insured in those cases where difficulties of logical explanation or some mystery surround the (loss of or damage to) property.”). Even putting that logic aside, the district court’s conclusion that an inherent defect, and therefore an internal cause, was responsible for Ingenco’s losses fails to account for material evidence and, indeed, is inconsistent with the district court’s own determinations. The district court stated that the V32 diffuser basket was “not necessarily defective,” and acknowledged that Ingenco presented “some evidence that the [diffuser] basket may not have been defectively designed.” This observation is impossible to reconcile with the district court’s conclusion on summary judgment that an inherent defect nevertheless existed. Ingenco’s expert opined not only that resonant vibrations caused the V32 shield failure, but also that such failure was rare, that the vibrations were unforeseeable and, perhaps for that reason, that the relevant design codes do not require testing for resonant vibrations. Although Ace’s experts certainly disagree, that genuine dispute of fact is material to the questions whether (1) the gas purification system, or V32’s diffuser basket and its adsorbent beads, did, in fact, suffer from an inherent defect and (2) accordingly, whether the cause of Ingenco’s loss was internal or external. INGENCO HOLDINGS V. ACE AMER. INS. CO. 29 We therefore conclude that the district court’s grant of summary judgment to Ace on the question of whether Ingenco’s loss was the result of an “external cause” must be reversed. The district court, and to some extent, the parties, failed to consider the role of fortuity in all risks insurance disputes. There is, at least, a dispute of fact as to whether Ingenco’s loss here was fortuitous. We take no position at this juncture on the question whether the Washington Supreme Court would require a separate showing of external causation. Even assuming, however, that Ingenco must make such a showing, and even assuming that “external cause” is coterminous with “inherent defect,” there is a triable issue of fact as to whether Ingenco’s purification system, and/or its components, suffered from such a flaw.