Court Opinion

ID: 2967881
Source: CourtListenerOpinion
Date Created: 2015-09-22 03:40:07.934688+00
Date Added: 2024-06-11T12:46:21.235222
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
               FOR THE FOURTH CIRCUIT

S. WALLACE EDWARDS & SONS,            
INCORPORATED,
                Plaintiff-Appellee,
                v.                               No. 02-1885
THE CINCINNATI INSURANCE COMPANY,
an Ohio Corporation,
               Defendant-Appellant.
                                      
S. WALLACE EDWARDS & SONS,            
INCORPORATED,
                Plaintiff-Appellee,
                v.                               No. 02-1928
THE CINCINNATI INSURANCE COMPANY,
an Ohio Corporation,
               Defendant-Appellant.
                                      
          Appeals from the United States District Court
        for the Eastern District of Virginia, at Richmond.
           Richard L. Williams, Senior District Judge.
                           (CA-02-99)

                        Argued: May 6, 2003

                     Decided: December 24, 2003

       Before WIDENER and MICHAEL, Circuit Judges,
and Frank W. BULLOCK, Jr., United States District Judge for the
    Middle District of North Carolina, sitting by designation.
2           EDWARDS & SONS v. CINCINNATI INSURANCE CO.
Affirmed by published opinion. Judge Widener wrote the opinion, in
which Judge Bullock concurred. Judge Michael wrote an opinion con-
curring in part and dissenting in part.

                             COUNSEL

ARGUED: Calvin Wooding Fowler, Jr., WILLIAMS MULLEN,
P.C., Richmond, Virginia, for Appellant. Scott James Golightly, HIR-
SCHLER FLEISCHER, P.C., Richmond, Virginia, for Appellee. ON
BRIEF: Theodore J. Edlich, IV, Jonathan S. Campbell, WILLIAMS
MULLEN, P.C., Richmond, Virginia, for Appellant.

                              OPINION

WIDENER, Circuit Judge:

   Defendant Cincinnati Insurance Company appeals two of the
orders making up the judgment of the district court: (1) a July 19,
2002 order granting partial summary judgment in favor of plaintiff S.
Wallace Edwards & Sons, Inc. on its claims for breach of contract and
declaratory judgment in the amount of $155,441.41; and (2) an
August 15, 2002 order granting the plaintiff’s motion to amend and
awarding prejudgment interest in the amount of $11,191.78. The
defendant contends that the district court erred in granting summary
judgment because the plaintiff failed to set forth any objective evi-
dence that the product was damaged under the terms of the insurance
policy and that the plaintiff cannot maintain the breach of contract
claim because it failed to adhere to a two-year period of limitation set
forth in the insurance policy. For the reasons set forth below, we
affirm the judgment of the district court.

                                   I.

   S. Wallace Edwards & Sons, Inc. (Edwards) is a wholesale seller
of Virginia ham, bacon, and sausage. In September of 1999, Edwards
had over 70,000 pounds of ham product stored in cold storage at
Richmond Cold Storage in Smithfield, Virginia. On September 30, an
             EDWARDS & SONS v. CINCINNATI INSURANCE CO.                  3
employee at the storage facility cracked a refrigerant line with a fork-
lift, causing the release of anhydrous ammonia vapor within the stor-
age facility. Following this incident, Edwards made a claim under its
commercial property policy,1 which defendant Cincinnati Insurance
Company (Cincinnati Insurance) had issued to Edwards & Sons for
April 1, 1998 through April 1, 2001. The claim alleged damage to its
property due to the ham products’ exposure to the ammonia. In addi-
tion to filing the claim, Edwards collected samples of the exposed
product and contacted Microbac Laboratories, Inc. (Microbac), to test
the product and determine the extent of the ammonia damage.

   Cincinnati Insurance sent an adjuster to visit the cold storage facil-
ity and inspect the ham that had been exposed. The adjuster stated
that he detected the smell of ammonia in the product, and at the direc-
tion of his supervisor requested additional evidence of the damage.
The additional evidence requested and sent to the insurance company
consisted of: (1) a large loss notice to Cincinnati Insurance; (2) a
statement from the forklift driver or other witness; (3) a copy of the
sales contract to the wholesale dealer establishing the sale price; (4)
certification from the FDA that the meat is contaminated and cannot
be sold;2 (5) Proof of Loss for claim check subject to Edwards &
Sons’ $1,000.00 deductible; and (6) proceed with subrogation against
wrongdoer.

  While Edwards was waiting for the results of the tests from Micro-
bac, the storage facility agreed to repackage the ham products.
Edwards agreed, and the repackaging took place on February 10,
2000. Samples of the repackaged product were also sent to Microbac
  1
     Edwards & Sons notified its insurance agent of the ammonia incident
on October 7, 1999, and the agent contacted Cincinnati Insurance shortly
thereafter.
   2
     The email relaying this information requested certification from the
FDA, but it is not clear from the record whether this would be regulated
by the FDA or the USDA. The plaintiff stated in its brief that the USDA
is the agency that regulates meat products. Upon contacting the USDA
for information, the plaintiff was informed that, per regulations, the meat
packer had the responsibility for assuring that the product was safe for
human consumption and the USDA remained neutral until the product
had been released into commerce.
4           EDWARDS & SONS v. CINCINNATI INSURANCE CO.
for testing. Following the repackaging, on March 9, 2000, Cincinnati
Insurance sent a letter to Edwards & Sons informing them that "there
was nothing wrong with the ham as repackaged," and that the case
was being "removed from active status."

   Meanwhile, Microbac informed Edwards & Sons by letter on
March 13, 2000 that it was unable to find any regulatory guidelines
for the limit of ammonia in pork, other than adulteration. Thus,
Microbac stated that it had arrived at its conclusion by using a refer-
ence in an FDA International Association of Refrigerated Warehouses
Manual that set forth the guidelines for ammonia contamination of
food products. These guidelines indicated that the ammoniacal nitro-
gen level in meat products normally does not exceed .15 percent and
none of the plaintiff’s samples had tested above .10 percent. In addi-
tion, Microbac noted that there was an ammonia odor while at the
refrigerant site, but the analyst did not notice any odor while at the
laboratory. There was also mention in the March 13, 2000 letter of
some brown areas observed on the meat, which was assessed as prob-
able effects from being frozen. In a later letter sent March 16, 2000,
however, Microbac retracted its earlier statement and concluded that
it was unable to determine the cause of the brown areas.

   Due to Edwards’ uncertainty about the safety of the product and
Microbac’s indeterminate analysis, Edwards finally decided to discard
the product in April of 2001 as a total loss.

   Over one year after receiving the Microbac results, and more than
two years after notification of the loss, on October 11, 2001, Cincin-
nati Insurance sent the plaintiff a letter advising Edwards that after a
review of the Microbac analyses, the on-sight evaluation, and the fact
that the "USDA ha[d] not determined that the product [wa]s unsafe
for human consumption," there was insufficient evidence to determine
that the product was damaged from exposure to ammonia. Accord-
ingly, Cincinnati Insurance denied the claim on the basis that
Edwards & Sons had not shown any damage.

   Edwards filed this action on January 22, 2002, in the Circuit Court
of Surry County, Virginia. The complaint asserted three claims. First,
Edwards sought a declaratory judgment that the defendant has an
obligation under the policy to pay the claim because the ammonia
            EDWARDS & SONS v. CINCINNATI INSURANCE CO.                 5
exposure had caused damage to Edwards & Sons’ product. Second,
Edwards & Sons alleged a breach of contract claim against Cincinnati
Insurance. Lastly, Edwards asserted that Cincinnati Insurance was
acting in bad faith in denying the coverage. Cincinnati Insurance
removed the case to federal district court on February 19, 2002. On
that same day, Cincinnati Insurance filed in state court its answer and
grounds of defense to Edwards & Sons’ original complaint.

   Once the case was removed, Edwards filed a motion for partial
summary judgment, asserting that there was no genuine issue of mate-
rial fact regarding the claim for declaratory judgment and breach of
contract claim (counts I and II). It reserved the bad faith claim (count
III) for trial. In response, Cincinnati Insurance filed a motion for sum-
mary judgment as to all claims, contending in its accompanying mem-
orandum that there was no damage to the ham products and thus it
was not obligated to pay under the policy; that Edwards & Sons could
not maintain the breach of contract claim because, inter alia, it was
filed beyond the two-year limitations period required under the policy;3
and that it did not act in bad faith in denying the claim.

   On July 19, 2002, the district court granted summary judgment in
favor of Edwards & Sons on its claims for a declaratory judgment and
for breach of contract, but granted summary judgment for Cincinnati
Insurance as to the claim of bad faith. On August 1, 2002, Edwards
& Sons filed a motion to amend its judgment to include an award of
prejudgment interest which was granted by the district court in the
amount of $11,191.78.

   Cincinnati Insurance appeals the money judgments against it.
There is no issue on appeal of bad faith in the denial of coverage by
Cincinnati. There is also no issue on appeal as to the amount of dam-
age if any should be awarded. Cincinnati Insurance takes the position
that no damages at all are authorized.
  3
   Under paragraph D of the Commercial Property Conditions, the pol-
icy states, "No one may bring a legal action against us under this Cover-
age Part unless: 1. There has been full compliance with all of the terms
of this Coverage Part; and 2. The action is brought within 2 years after
the date on which the direct physical loss or damage occurred."
6            EDWARDS & SONS v. CINCINNATI INSURANCE CO.
   We review the district court’s grant of summary judgment de novo.
See Bass v. E.I. DuPont de Nemours & Co., 324 F.3d 761, 766 (4th
Cir. 2003). Summary judgment is warranted when there are no mate-
rial facts in dispute and the moving party is entitled to judgment as
a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986). The non-moving party has the burden of showing that a genu-
ine dispute exists. See Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 586-87 (1986).

                                    II.

   The principal contention of Cincinnati Insurance on appeal is that
the district court should have applied a provision of the insurance pol-
icy contained as a Commercial Property Condition, numbered D,
which is that:

     No one may bring a legal action against us under this Cover-
     age Part unless: . . .

     2. The action is brought within 2 years after the date on
     which the direct physical loss or damage occurred.

  It is agreed that the direct physical loss or damage occurred on Sep-
tember 30, 1999 and that this case was filed in the Circuit Court of
Surry County, Virginia, on January 22, 2002. So more than two years
had elapsed between the date of the damage and the filing of the suit.

   The district court held that the time "limitation in the contract
becomes the functional equivalency of a code section, and therefore
is entitled to the protection that it gets under the Virginia statute." The
district court applied "the statute of limitations that applies under Vir-
ginia law [and] is five years. See Virginia Code Section 8.01-246 and
243." Virginia Code § 8.01-235 provides in part that "[t]he objection
that an action is not commenced within the limitation period pre-
scribed by law can only be raised as an affirmative defense specifi-
cally set forth in a responsive pleading."

   Although Cincinnati Insurance had filed its grounds of defense in
the Circuit Court of Surry County, obviously just prior to removal of
            EDWARDS & SONS v. CINCINNATI INSURANCE CO.                  7
the case, the grounds of defense did not contain any plea or ground
of defense that the action had not been commenced, following the
terms of the policy, within two years after the date on which the direct
physical loss or damage occurred. The district court correctly held
that the contractual limitation was an affirmative defense and because
it had not been raised in the grounds of defense filed by Cincinnati
Insurance, it had been waived by the failure to raise it as an affirma-
tive defense in its responsive pleading.

   The district court also held that Cincinnati Insurance had waived
the two-year limitation provision in the contract "by its conduct in
responding to Edwards’ claim."

  We agree with the result obtained by the district court, but for a
somewhat different reason. See SEC v. Chenery, 318 U.S. 80, 88
(1943).

   The district court’s equating the contractual limitation to a statute
of limitations was not authorized under Virginia law. In two cases the
Virginia court has held that statutory and contractual limitations are
different. See Massie v. Blue Cross and Blue Shield, 500 S.E.2d 509
(Va. 1998), and Board of Supervisors of Fairfax County v. Sampson,
369 S.E.2d 178 (Va. 1988). The Supreme Court has held in Guaranty
Trust Co. v. York, 326 U.S. 99 (1945), that a federal court, adjudicat-
ing a state-created right solely because the diversity of citizenship of
the parties, is obliged to apply the statute of limitations which would
be applied by a state court, which the district court related in this case
is five years. But applying the Virginia statute of limitations under the
rule of Guaranty Trust Co. would have no application here because
in Virginia, as Sampson and Massie have held, contractual and statu-
tory limitations are not the same under Virginia law.

   The district court’s alternate reasons for its decision are next exam-
ined. The district court decided that the two-year contractual limita-
tion had been waived by "failing to raise it as an affirmative defense
in its responsive pleading and by its conduct in responding to
Edwards’ claim." Federal Rules of Civil Procedure 8(c) provides in
pertinent part that:
8           EDWARDS & SONS v. CINCINNATI INSURANCE CO.
    In pleading to a preceding pleading, a party shall set forth
    affirmatively [among other things] . . . any other matter con-
    stituting an avoidance or affirmative defense.

And the Federal Rules of Civil Procedure govern. Granny Goose
Foods v. Teamsters, 415 U.S. 423, 437 (1974). This is agreed to by
Cincinnati Insurance. Br. p.38-39.

   We are of opinion that a defense urged by an insurance company
of such a breach of a provision of the policy by an insured is an affir-
mative defense under Rule 8(c). Wright and Miller, Federal Practice
and Procedure § 1271 (5th Ed. 1994) (noting decisions in United
States Courts of Appeal for the Fifth, Eighth and Tenth Circuits);
Appleman, Insurance Law and Practice (Berdal ed.) §§ 11976 and
12014 (1980) (noting state decisions in Massachusetts, Arkansas,
Maine, Texas and Missouri). In Caterpillar Overseas S.A. v. Marine
Transport, Inc., 900 F.2d 714 (4th Cir. 1990), a case under the Car-
riage of Goods By Sea Act, we held that a contractual limitation of
liability required the pleading of such a defense under Rule 8(c) and
that when all the facts were apparent to the parties, as here, "Such a
record would support a waiver of any possible failure to plead," 800
F.2d at 825 n.7, but waiver was not decided when the district court
treated any such requirement as waived. 800 F.2d at 825. In Brinkley
v. Harbour Recreation Club, 180 F.3d 598 (4th Cir. 1999), a Title VII
and Equal Pay Act case, we held that a statutory defense of a "factor
other than sex defense" under the Equal Pay Act is an affirmative
defense which must be pleaded under Rule 8(c) which may result in
waiver. Such waiver, however, should not be effective unless the fail-
ure to plead resulted in unfair surprise or prejudice. Brinkley, 180
F.3d at 612-13.

   In the case at hand, we are of opinion that the affirmative defense
of a two-year limitation on bringing suit was an affirmative defense
which should have been asserted under Rule 8(c) and that the decision
of the district court, that it had been waived, was not error. We note
that the district court not only correctly characterized the two-year
limitation as an affirmative defense but also based its decision on Cin-
cinnati’s "conduct in responding to Edwards’ claim." That conduct
included the following: Cincinnati Insurance was notified of the loss
only a few days after the leaking ammonia was discovered. For some
             EDWARDS & SONS v. CINCINNATI INSURANCE CO.                   9
two years it negotiated with Edwards with respect to the amount of
the loss, engaged in discovery, attended depositions of witnesses, and
examined the reports of proposed witnesses with respect to that loss.
Cincinnati Insurance never denied liability on the claim until October
11, 2001, some 11 days after the two-year limitation period of the pol-
icy had expired. Although the two-year defense was available to Cin-
cinnati Insurance at the time, the letter denying liability to Edwards
relied on the contention of the insurance company that there was no
damage, it never mentioned the two-year limitation. In a nutshell, the
letter states, "There is still insufficient evidence to determine that this
product was damaged from exposure to ammonia." Although the two-
year period had expired when Cincinnati Insurance filed its grounds
of defense on February 19, 2002, the grounds of defense did not men-
tion the two-year limitation period as a defense. Although the two-
year period had expired on September 30, 2001, on April 11, 2002 the
case was even set for trial on July 26, 2002, and the two-year period
had not then been mentioned. The two-year period was never men-
tioned until Cincinnati filed its motion for summary judgment and
response to Edwards’ motion for summary judgment on June 28,
2002, which was the first time the two-year defense was mentioned
by the insurance company.

   Under such circumstances, we are of opinion and hold that the
decision of the district court, that the two-year defense had been
waived, was not erroneous. Under the facts of this case, if that
defense were not waived, Cincinnati Insurance, by its inaction and
persistence that there had been no damage, would simply escape lia-
bility. Whether the actions of Cincinnati Insurance were by inadver-
tence or design, the result does not differ. Edwards was taken by
unfair surprise and prejudiced by the delayed assertion of the two-
year limitation as a defense.4
  4
   The district court held that Cincinnati waived the two-year limitation
of action in the insurance policy. It stated "Cincinnati has waived the
two-year limitation provision, both by failing to raise it as an affirmative
defense in its responsive pleading and by its conduct in responding to
Edwards’ claim." J.A., Vol. I, p. 150.
   The grounds of defense filed by Cincinnati in the state court just prior
to removal did not rely on the two-year limitation. Under the facts of this
10           EDWARDS & SONS v. CINCINNATI INSURANCE CO.
                                    III.

   The last argument we consider is the contention of Cincinnati
Insurance that there was no evidence that the ammonia rendered the
meat products damaged. In the most general terms, it argues that the
ham products were not adulterated because the evidence would show
the meat was not injurious to health.

   The policy provides in the building and personal property coverage
form that:

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

The policy does not define damage, and the district court gave the
policy language its plain and ordinary meaning of "impairment of the
usefulness or value of person or property; or harm." It rejected an

case and under Virginia law, that would have been a waiver of the notice
provision of the policy. Lumbermen’s Mutual Casualty Co. v. Hodge,
135 S.E.2d 187 (Va. 1964). But under Erie Railroad and Fed. R. Civ. P.
81(c), the federal rules apply to "actions removed to the United States
District Courts from the state courts and govern procedure after
removal." Thus, while the filing of the grounds of defense in the state
court may be governed by state law, the actions of Cincinnati in not
bringing the policy defense to the attention of the court or the plaintiff
until after the case was set for trial is governed by federal law. In that
respect, Rule 8(c) requires that such defense "shall be set forth affirma-
tively," which was never done until Cincinnati’s motion for summary
judgment was filed and trial was imminent. We do not hold that Rules
8(c) and 81(c) require the inclusion of the policy defense in the grounds
of defense filed in the state court, but we do hold that the failure of Cin-
cinnati to comply with the substantive provisions of Rule 8(c) is appro-
priately considered in deciding the effect of the failure to include the
policy defense in either the grounds of defense, or in any of the various
papers filed with the district court prior to the motion for summary judg-
ment, or in any of the communications made to the plaintiff. Rule 8(c)
prevents just such inaction from reaping the benefit of notice timely
given under the rules of court.
            EDWARDS & SONS v. CINCINNATI INSURANCE CO.                 11
argument of Cincinnati Insurance that the ham had to be classified as
adulterated under USDA regulations relating to meat products.
   It relied upon the undisputed facts that the meat was exposed "to
very high levels of anhydrous ammonia gas, which is described as
both poisonous and toxic"; that the ham was not hermetically pack-
aged; that the ammonia had permeated into the meat; that the expo-
sure caused an odor of ammonia about the meat; and that a
discoloration reduced the quality of the meat. The insurance adjuster
for Cincinnati Insurance testified in his deposition that some three
weeks after the exposure there was still an odor of ammonia in the
rooms where the ham involved was stored. Even if most of the labora-
tory tests of the meat, many of which showed ammonia content, did
not show a content high enough to be actually dangerous to human
health, one of the samples showed an ammonia content of 938 parts
per million, while the danger point was 870. The district court found
that the exposure to ammonia caused an odor and discoloration that
reduced the quality of the product whether or not it may not have
been directly injurious to health or adulterated under the regulations.
   We are of opinion the district court was correct in its construction
of the policy and in its view of the evidence. The evidence the district
court relied on, and we have related, is not subject to contradiction,
and even if the argument of Cincinnati Insurance is that Edwards
destroyed too much of the ham rather than examining it piece by
piece to see which was discolored and which smelled of ammonia, we
do not believe, and are of opinion, that no duty of minimizing dam-
ages would require Edwards to so segregate the thousands of pieces
of ham involved when there was a very real chance of risk to human
health in selling the product for human consumption.
   In this respect, the witness Krut was prepared to testify that the dis-
position of all of the ham exposed to ammonia was the way the Haz-
ardous Analysis Critical Control point system of the USDA is
supposed to work. If the ham, having been exposed to anhydrous
ammonia, had been introduced into commerce by Edwards, in his
opinion the USDA would have tagged the product and recommended
that Edwards recall it. Krut is the Executive Director of the American
Association of Meat Processors and has worked with the USDA’s
Food, Safety and Inspection Service and in various other aspects of
the meat industry.
12            EDWARDS & SONS v. CINCINNATI INSURANCE CO.
     The judgment of the district court is accordingly
                                                           AFFIRMED.

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

   The Cincinnati Insurance Company issued a commercial property
policy to S. Wallace Edwards & Sons, Inc., a wholesaler of ham prod-
ucts. The insurance company agreed to "pay for direct physical loss
or damage to Covered Property." Edwards seeks payment of $155,000
for discarded ham that it claims was damaged by exposure to ammo-
nia gas in a cold storage facility when a refrigerant line was cracked
by a forklift. I concur in part II of the majority’s opinion, which holds
that the insurance company waived its defense under the policy provi-
sion that requires the insured to bring an action for coverage within
two years of the damage. I respectfully dissent, however, from part
III of the majority’s opinion because I believe there is a genuine issue
of material fact about whether the ham was damaged by the ammonia
gas. This factual dispute precludes the award of summary judgment
to Edwards, the insured. See Celotex Corp. v. Catrett, 477 U.S. 317,
322 (1986); Fed. R. Civ. P. 56(e).

   The majority points to evidence proffered by Edwards that indi-
cates the ham was damaged by ammonia gas. The problem is that the
insurance company proffers evidence, which I will summarize, that
goes the other way. An employee of Richmond Cold Storage, where
the ham was stored, conducted litmus tests on the ham on two occa-
sions, just after the accident and later during repackaging; neither set
of tests showed any ammonia contamination to the ham. J.A. 395,
398-403, 418-22. Edwards engaged Microbac Laboratories, Inc., an
independent laboratory, to evaluate the ham. In Microbac’s first anal-
ysis of the ham, each of three samples had an ammonia content of less
than 0.10 percent, well within the range the International Association
of Refrigerated Warehouses considers acceptable. J.A. 252, 255, 276.
David Danis, Microbac’s laboratory director who supervised the test-
ing of the three samples, said that the ammonia levels in the samples
"were all at insignificant levels when compared to the control ham
hock." J.A. 287. In Microbac’s second analysis of seventeen samples,
sixteen had ammonia levels within the range that typically occurs in
nature. J.A. 247-49, 381-83. One sample had a higher than normal
            EDWARDS & SONS v. CINCINNATI INSURANCE CO.            13
ammonia content, but an expert explained that the ham’s age could
have caused the heightened ammonia level. J.A. 382-83. Barbara
Starks, a Microbac employee, performed smell and visual tests on the
ham samples. Starks did not detect the smell of ammonia about the
ham. J.A. 281. Starks did note that the ham was discolored in places,
that is, it had brown areas. Id. Starks acknowledged that she did not
know how ammonia exposure affected the appearance of ham, but she
said that the "brown areas were similar to the appearance of product
that had been frozen for some time." Id.

   Microbac, the laboratory chosen by Edwards to test the ham, con-
sistently concluded that the ham was not tainted by the ammonia
exposure. Microbac’s initial report to Edwards stated that "testing
verified that no ammonia residue was present" and that "the meat
evaluated falls within acceptable ammonia guidelines for food prod-
ucts." J.A. 252. A second version of the report, which Microbac
claims it produced in response to pressure from an Edwards
employee, J.A. 255, stated that Microbac could not determine the
cause of the brown areas, but it still concluded that the ham was
"within acceptable ammonia guidelines for food products." J.A. 253.
Both reports stated that Microbac’s analyst did not detect an ammonia
odor about the ham. J.A. 252-53.

   The evidence proffered in the summary judgment proceedings
makes clear that a court cannot decide on summary judgment which
side is right in this case. There is a genuine factual dispute about
whether the ham was damaged by the ammonia leak. I would there-
fore vacate the award of summary judgment to Edwards and remand
the case for trial.