Opinion ID: 2674882
Heading Depth: 3
Heading Rank: 2

Heading: Pyramid’s Claim of Loss of Inventory

Text: 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.