Opinion ID: 2674882
Heading Depth: 2
Heading Rank: 2

Heading: Grant of Summary Judgment Against Pyramid’s

Text: Claims In its complaint, Pyramid alleges that Hartford breached its insurance contract and the implied covenant of good faith and fair dealing by: (1) failing properly to investigate and then improperly denying Pyramid’s claim for an alleged loss of inventory, including refusing to test the inventory; (2) failing properly to respond to the building restoration claim, including making a “low-ball” estimate for damage that was one-fourteenth of the value ultimately paid by Hartford and unreasonably delaying final payment on the restoration claim; and (3) refusing to pay for an alleged business interruption. Pyramid appeals the district court’s grant of summary judgment in favor of Hartford and against both of Pyramid’s claims.
A party is entitled to summary judgment if the “movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The moving party has the burden of establishing the absence of a genuine dispute of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In this diversity action, the substantive law governing Pyramid’s breach of contract claim is California law. See Neely v. St. Paul Fire & Marine Ins., 584 F.2d 341, 345 (9th Cir. 1978). Whether evidence on a particular issue is sufficient to raise a question of fact for the jury, however, is PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 19 governed by federal law. Id. The federal test is whether a “reasonable jury viewing the summary judgment record could find by a preponderance of the evidence that the plaintiff is entitled to a favorable verdict.” Narayan v. EGL, Inc., 616 F.3d 895, 899 (9th Cir. 2010) (citation omitted). The judge is not to weigh the evidence, draw legitimate inferences, or make credibility determinations. Id. “The evidence of the non-movant is to be believed and all justifiable inferences drawn in his favor.” Id. (citation and quotation marks omitted). 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. “Where conflicting inferences may be drawn from the facts, the case must go to the jury.” Munger v. City of Glasgow Police Dep’t, 227 F.3d 1082, 1087 (9th Cir. 2000) (citation and quotation marks omitted).
Pyramid argues that Hartford breached the insurance contract by both failing properly to investigate and denying Pyramid’s claim under the Policy for loss of inventory. Under the Policy, the burden is on Pyramid to initiate and support its claim. See 1231 Euclid Homeowners Ass’n v. State Farm Ins. & Cas. Co., 37 Cal. Rptr. 3d 795, 802 (Cal. Ct. App. 2006). To succeed on its breach of contract claim, Pyramid must establish a contract, Pyramid’s performance or excuse for nonperformance, Hartford’s breach, and resulting damages to Pyramid. Abdelhamid v. Fire Ins. Exch., 106 Cal. Rptr. 3d 26, 32–33 (Cal. Ct. App. 2010). The disputed issues in this case are whether Pyramid suffered damage to any of its inventory and, if so, whether that damage was caused by the flood. 20 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS
It is undisputed that at least some of Pyramid’s inventory had visible corrosion, tarnish, or discoloration. Hartford’s expert Dr. Kumar identified visible corrosion, tarnish, or discoloration on more than 40% of the items he tested. Pyramid quarantined more than 250,000 items as showing visible signs of corrosion, tarnish, or discoloration. Dr. Kumar testified that corrosion constituted actual physical damage. Thus, at least some of Pyramid’s inventory had actual, physical damage. When there is actual, physical damage, then the diminution of market value may be a proper measure of damages. See State Farm Fire & Cas. Co. v. Superior Court, 264 Cal. Rptr. 269, 274–75 (Cal. Ct. App. 1989) (diminution of value is not a cause of a loss but a measure of damages). The parties dispute whether visible corrosion, tarnish, or discoloration of a part is sufficient to constitute a “failure” under “military standards” of suitability. Dr. Kumar determined that only two out of the 147 parts failed under that standard, whereas Pytlewski noted that under the Department of Defense Test Method Standards of Microcircuits visible corrosion is included as a failure criterion. Whether visible corrosion constitutes a “failure” of a part under military standards is a factual dispute for the jury to resolve. In addition, and even more importantly, regardless of this dispute over whether visible corrosion, tarnish, or discoloration constitutes a failure under military standards, two of the 374 parts (0.535 percent) actually tested by Dr. Kumar failed, even under Dr. Kumar’s standards. Extrapolating this failure percentage to 52 million parts is evidence of at least some failure (approximately 278,200 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 21 parts). There is also evidence in the record that some customers returned a few parts because of corrosion. The failure of some parts and the return of other parts are evidence from which a jury reasonably could infer that Pyramid was harmed by the presence of corrosion on at least some of its inventory. Additionally, if the inventory items were damaged by the flood, which Hartford admits was a covered event, the inability to sell the items due to the physical damage, regardless of whether those items would fail a Department of Defense test under military standards, would constitute a covered loss. See, e.g., MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27, 37 (2010) (“In modern [insurance] policies, ‘physical loss or damage’ is typically the trigger for coverage. Clearly, this threshold is met when an item of tangible property has been ‘physically altered’ by perils such as fire or water.” (citation omitted)); see also Allstate Ins. Co. v. Smith, 929 F.2d 447, 450 (9th Cir. 1991) (describing an “easy to imagine” situation where a “leaky roof could lead to water damage to [someone’s] property. Presumably, water damage would be an ensuing loss covered by the policy but repairing the roof would not be covered.”); Meridian Textiles, Inc. v. Indem. Ins. Co. of N. Am., No. CV 06-4766 CAS, 2008 WL 3009889 at, –6 (C.D. Cal. Mar. 20, 2008) (yarn that was water-damaged, had a tangible change such as odor, mold or mildew, or had a detectable change such that the yarn was likely to develop odor, mold or mildew and was, therefore, unable to be sold, is a covered loss); Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civ. 98-1134-HU, 1999 WL 619100 at, –6 (D. Or. Aug. 4, 1999) (fabric with mold, odor, or with increased microbial counts that will develop mold or odor and unable to be sold, is a covered loss). Drawing all reasonable 22 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS inferences in favor of Pyramid, a reasonable fact finder could find that some of the inventory items had moisture-related damage that diminished their market value. That diminution in market value is a recoverable measure of damages. See State Farm, 264 Cal. Rptr. at 274–75. Because there are at least some parts that have actual physical damage and some parts that failed testing or were returned by customers, there is evidence from which a jury could determine that Pyramid suffered harm to its inventory. The fact that some, but not all, of the inventory was damaged does not support the granting of summary judgment against Pyramid’s loss of inventory claim. Determining the amount of harm suffered is for the jury.
Hartford argues that Pyramid failed to produce any evidence that the components’ corrosion, tarnish, or discoloration was caused by the flood of August 11, 2005, as opposed to the age of the parts, the lack of climate control in the warehouse, or other potential causes. Because California provides the substantive law in this case, we follow California’s law on causation in an insurance coverage claim. Under California law, the “efficient proximate cause” doctrine is “the preferred method for resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.” Julian v. Hartford Underwriters Ins. Co., 110 P.3d 903, 906 (Cal. 2005) (citations omitted); see also Brown v. Mid-Century Ins. Co. 156 Cal. Rptr. 3d 56, 67 (Cal. Ct. App. 2013) (noting that “the efficient proximate cause doctrine applies when a loss is caused by a combination PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 23 of a covered and specifically excluded risks”) (citation and quotation marks omitted). The “‘efficient proximate cause’ of a loss is the predominant, or most important cause of a loss.” Julain, 110 P.3d at 907 (citation omitted). Coverage would not exist “if the covered risk was simply a remote cause of the loss” or if an excluded risk was the efficient proximate cause of the loss. Id; see also California Ins. Code. § 530 (“An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.”). “If more than one peril contributes to a loss, the question which is the efficient proximate cause generally is a factual matter for the jury to resolve.” Julian v. Hartford Underwriters Ins. Co., 123 Cal. Rptr. 2d 767, 770 (Cal. Ct. App. 2002), review granted and opinion superseded sub nom. Julian v. Hartford Underwriters, 57 P.3d 362 (Cal. 2002), and aff’d, 35 Cal. 4th 747, 110 P.3d 903 (2005); see also Garvey v. State Farm Fire & Cas. Co., 770 P.2d 704, 714 (Cal. 1989) (en banc) (“Coverage should be determined by a jury under an efficient proximate cause analysis.”). The evidence in the record, including both the Spiegel report and the testimony by employees that they saw condensation on the packaging of the parts stored on the lower shelves, supports an inference that the humidity reached a high enough level during the flood to cause significant condensation on the packaging of the parts kept on the lower three or four shelves. There is also evidence that although Pyramid’s moisture-sensitive inventory was generally stored in moisture-proof packaging, most of that packaging was either unsealed or had been compromised by 24 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS age or the high humidity levels, allowing moisture to reach the components. Pyramid’s employees testified that many of the moisture-proof packages were unsealed and some of those had been folded down and held closed only with a paperclip. The Spiegel report noted that the vast majority of Pyramid’s moisture-proof packages were much older than the industry standard packaging shelf-life recommendation of 12 months and that the moisture-proof package standards require lower than dew-point humidity. Thus, there is evidence from which a jury could infer that moisture from the flood may have reached moisture-sensitive components because the packaging was not fully sealed, failed from age, or failed because the humidity caused by the flood reached above the dew point. Pytlewski, Pyramid’s expert metallurgist, acknowledged in his report the difficulty in determining causation, but testified at a deposition that he believed that at least some of the damage was caused by the water intrusion that occurred during the flood. Although he could not state definitively that the water intrusion caused all of the harm, “[l]ack of certainty is not, for a qualified expert, the same thing as guesswork.” Primiano, 598 F.3d at 565. Additionally, as discussed above, there is evidence supporting an inference that the condensation may have breached the packaging and reached the components. Further, the fact that more than 250,000 items were quarantined because they showed visible signs of moisture-related damage after the flood is evidence supporting an inference of causation. The existence of material factual issues relating to causation is further evident in reviewing the reports of Hartford’s experts. Although Helms opined that the humidity caused by the flood could not have caused any damage to PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 25 Pyramid’s inventory, there is evidence in the record from which a reasonable fact finder could discredit Helms’ conclusion. Helms spent only two to three hours conducting a visual inspection of Pyramid’s warehouse and did not conduct any tests, take any building measurements, or otherwise investigate the inventory. It took Helms one day to complete his report, and he relied exclusively on ServPro’s readings and assumed they were accurate. Helms also does not appear to have considered that ServPro’s measurements were taken more than 24 hours after the drying operation began and with open warehouse doors or that the moistureproof packaging was compromised on many items. It is the jury’s province to determine how much weight, if any, to give the conclusions reached by Helms or any of the experts at trial. Dr. Kumar did not provide a definitive statement on causation and gave contradictory statements. His declaration and part of his report state that the water intrusion did not cause the corrosion found in his testing, but his deposition testimony and another portion of his report state that the cause cannot be determined because it could have been the water intrusion or it could have been age or some other exposure to moisture. Under California’s efficient proximate cause doctrine, whether the damage found by Dr. Kumar was caused by the flood or by some other cause is an issue for the jury. See Julian, 123 Cal. Rptr. 2d at 770. Analyzing the causal chain is “necessarily speculative” and “[c]hoosing between the speculations is ordinarily a question for the trier of fact, who must determine the balance of probabilities.” Shawmut Bank, N.A. v. Kress Assocs., 33 F.3d 1477, 1496 (9th Cir. 1994) (citation omitted). This is not a case where the party with the burden of proof at trial 26 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS submitted “no evidence” from which causation could be inferred, thereby requiring summary judgment. Id. at 1497–98. There is sufficient evidence in the record, drawing all reasonable inferences in Pyramid’s favor, from which a reasonable jury “could find by a preponderance of the evidence that the plaintiff is entitled to a favorable verdict.” Narayan, 616 F.3d at 899 (citation omitted). Whether those inferences should be drawn in favor of Pyramid after considering and weighing all of the evidence is for a jury to decide. Thus, summary judgment is inappropriate against Pyramid’s claim of loss of inventory.
Pyramid submitted, withdrew, re-submitted, and then modified its business interruption claim. The only lost business currently claimed by Pyramid is from WMS, a potential customer. The burden is on Pyramid to initiate and support this claim under the Policy. See 1231 Euclid, 37 Cal. Rptr. 3d at 802. Thus, to defeat summary judgment against its business interruption claim against Hartford, Pyramid must show that there are material factual issues about whether its loss of potential WMS business is a covered loss under the Policy. Business interruption is covered under the Policy, through an endorsement entitled “Gross Earnings” that deleted and replaced the Policy’s original “Business Income” and “Extra Expense” provisions. The Gross Earnings endorsement provides: We will pay for the actual loss of Business Income you sustain and the actual, necessary and reasonable Extra Expense you incur due PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 27 to the necessary interruption of your business “operations” during the “Period of Restoration” due to the direct physical loss of or direct physical damage caused by or resulting from a Covered Cause of Loss to property at “Scheduled Premises.” Pyramid must, therefore, show that it actually lost business income from WMS because of the flood in order to prevail on its claim that Hartford breached the insurance contract by failing to cover Pyramid’s alleged business interruption. Pyramid fails to show that there are material issues of fact that it actually lost WMS business as a result of the flood. Whether WMS would have contracted with Pyramid if there was no flood, and for what amount, is too speculative to support Pyramid’s claim. Although Carmine Greco, the senior buyer at WMS, testified that he had “committed” to buy at least $1 million dollars of inventory from Pyramid, he also explained that any purchase by WMS from Pyramid was subject to the approval of WMS quality control people and subject to additional negotiation. Pyramid and WMS, thus, were still negotiating and had not yet entered into a binding and enforceable contract. Greco further testified that he and Pyramid had discussed contract terms for only a few parts, although he “anticipated” more parts would be purchased from Pyramid. He added that after learning of the flood, he needed the inventory tested before he would consider purchasing any of it. He also stated that if the product had been tested, he “probably” would have bought it. 28 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS WMS’s quality control manager, Nick Savich, also participated in the site visit at Pyramid. Savich sent a letter to Pyramid after the visit, stating that WMS did not approve Pyramid as a supplier based on water intrusion. Savich testified at deposition, however, that if he had known that Pyramid did not have humidity control in its warehouse, that fact alone would have disqualified Pyramid as a supplier. To find for Pyramid on its claim of business interruption, a jury would need to speculate that Savich would not have discovered the fact that the warehouse did not have humidity control, that WMS quality control people would have signed off on Pyramid as a supplier, that Greco and Pyramid would have successfully negotiated pricing and other terms for many additional parts, and that Greco would have followed through with a large purchase. The record evidence does not support – and the law does not permit – such speculation. See Neely, 584 F.2d at 346 (“Parties are entitled to have the determination of their rights rest on more than speculation and guesswork. Here, the connection between the proffered evidence and the conclusions is too tenuous to permit a jury to make it.”). Accordingly, we affirm the district court’s grant of the motion for summary judgment against Pyramid on the claim of business interruption.
“The covenant of good faith and fair dealing has ‘particular application’ to insurers because they are ‘invested with a discretionary power affecting the rights of another.’” Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002) (quoting Carma Developers (Cal.), Inc. v. Marathon Dev. Cal., Inc., 826 P.2d 710, 726 (Cal. 1992)). Under California law, to establish a breach of the implied PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 29 covenant of good faith and fair dealing, “a plaintiff must show: (1) benefits due under the policy were withheld; and (2) the reason for withholding benefits was unreasonable or without proper cause.” Guebara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001) (citing Love v. Fire Ins. Exch., 271 Cal. Rptr. 246, 255 (Cal. Ct. App. 1990)). The reasonableness of an insurer’s conduct is ordinarily a question of fact. Amadeo, 290 F.3d at 1161. An insured’s claim of breach of the implied covenant of good faith and fair dealing may be dismissed on summary judgment if the defendant insurer can show that there was a “genuine dispute” as to liability. Guebara, 237 F.3d at 992. This genuine dispute doctrine should be applied on a case-bycase basis and does not protect allegedly biased investigations. Id. at 994, 996. Biased investigation claims include circumstances where: (1) the insurer misrepresents the nature of the investigatory proceedings; (2) the insurer’s employees lie during depositions or to an insured; (3) the insurer dishonestly selects experts; (4) the insurer’s experts were unreasonable; or (5) the insurer fails to conduct a thorough investigation. Id. at 996. Pyramid argues that Hartford breached the implied covenant of good faith and fair dealing by: (1) improperly refusing to test Pyramid’s inventory for more than two years and conducting inadequate testing; (2) denying coverage on Pyramid’s claim of inventory loss; (3) making a “low-ball” building restoration estimate and delaying payment on the agreed-upon supplemental building restoration amount for four months; and (4) conducting a biased investigation through dishonestly selecting unreasonable experts and an inadequate investigation. Hartford argues that it did not act unreasonably because there was a genuine dispute as to 30 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS coverage, its investigation was proper, its coverage denial was based on expert opinions, and it ultimately paid all of the building restoration amounts making any delay harmless. There is evidence in the record supporting an inference that Hartford acted unreasonably or with bias. Pyramid submitted testimony stating that a Hartford representative, while visiting Pyramid’s premises to assess damages, said that it is Pyramid’s job to try to collect under the insurance policy and Hartford’s job to make sure Pyramid does not collect. Pyramid also provided evidence that Hartford’s adjuster Todd Klingaman “downplayed” the flood damage during his site visit by comparing it to a “bucket of water” and suggesting to Pyramid that it did not need to tell its customers about it. Pyramid’s employees also testified that at the conclusion of Hartford’s site visit, before Helms had completed his report, Hartford jumped to an early conclusion that no damage had occurred and thus refused to test any inventory. Additionally, Hartford relied on Helms’ conclusion that humidity could not have caused damage, even though Helms conducted only a cursory investigation, relied on readings taken after the drying operation had largely concluded and under different conditions, and was not familiar with many of the electronic components or how moisture affected them.4 Moreover, Hartford did not test any 4 Although courts have found reliance on experts can trigger the genuine dispute doctrine, these cases generally involve multiple experts that are clearly independent. See, e.g., Guebara, 237 F.3d at 994–95 (holding that the conclusions of three independent investigators and suspicious conduct by the insured provide a sufficient basis for applying genuine dispute doctrine); Fraley v. Allstate Ins. Co., 97 Cal. Rptr. 2d 386, 391 (Cal. Ct. App. 2000) (“The ‘genuine dispute’ doctrine may be applied where the insurer denies a claim based on the opinions of experts.”); Phelps v. Provident Life & Accident Ins. Co., 60 F. Supp. 2d 1014, 1021 (C.D. Cal. PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 31 of Pyramid’s inventory until two years after the flood and only after Pyramid had engaged its own expert and after Helms supplemented his report to suggest testing a representative sample might be appropriate. Finally, Hartford’s initial estimate of building damage was very low, $6,640.34, and Hartford did not agree to additional sums for eight months and then delayed for another four months before paying the additional $88,480.01. To the extent a jury finds coverage was required for the inventory loss claim, this evidence further supports an inference that Hartford’s conduct was unreasonable and not entitled to protection under the genuine dispute doctrine. Further, the admitted portions of the declaration and report of Gene Irizarry, Pyramid’s insurance claim expert, support an inference that Hartford did not handle the claim in good faith. Irizarry opined that Hartford could not have reasonably concluded that Pyramid’s inventory was not damaged in the absence of any testing or investigation and should have conducted testing under the adjustment expense that accompanies every claim. Irizarry also concluded that Hartford was not responsive to the needs of Pyramid and failed to assist Pyramid as Hartford was obligated to do and that Hartford forced Pyramid to engage experts and conduct an investigation that should have been done by Hartford. Irizarry further stated that Hartford made an unreasonable, “low-ball” estimate for the building repairs and unreasonably delayed in investigating and finalizing the building restoration claim. 1999) (surveillance film and reports from three independent doctors gave rise to genuine dispute concerning whether insured was entitled to benefits). 32 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS Hartford also relied on Dr. Kumar’s report, issued two years after the flood, to deny Pyramid’s claim. An expert report alone, however, does not demonstrate a “genuine dispute.” See Guebera, 237 F.3d at 996. Further, even if Dr. Kumar’s report provides Hartford with a “genuine dispute” as of August 2007, the two-year delay and the lack of a thorough investigation during the time period between the August 2005 flood and the August 2007 Kumar report supports Pyramid’s claim for breach of the implied covenant of good faith and fair dealing. See, e.g., Amadeo, 290 F.3d at 1163 (good faith decisions based on an inadequate investigation can support a claim for breach of good faith and fair dealing) . “[W]hether an insurer’s denial of a claim is unreasonable is dependent upon the facts in each case. The issue remains a question of fact unless only one inference may be drawn from the evidence.” Paulfrey v. Blue Chip Stamps, 197 Cal. Rptr. 501, 504 (Cal. Ct. App. 1983) (emphasis in original) (citations omitted). Summary judgment cannot be granted under the genuine dispute doctrine in a bad faith claim unless “it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable—for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law.” Amadeo, 290 F.3d at 1161 (citation omitted). Pyramid produced evidence from which a reasonable jury could draw more than one inference concerning Hartford’s conduct. Thus, summary judgment against Pyramid’s claim for breach of the implied covenant of good faith is inappropriate.