Court Opinion

ID: 2675243
Source: CourtListenerOpinion
Date Created: 2014-05-21 18:00:28.658907+00
Date Added: 2024-06-11T13:06:10.426343
License: Public Domain

FOR PUBLICATION

    UNITED STATES COURT OF APPEALS
         FOR THE NINTH CIRCUIT

 PYRAMID TECHNOLOGIES, INC.,                       No. 11-56304
               Plaintiff-Appellant,
                                                     D.C. No.
 ALLIED PUBLIC ADJUSTERS, INC.;                   8:08-cv-00367-
 DOUGLAS W. SCHROEDER, Lien                         AHS-RNB
 Claimant / Former Attorney for
 Plaintiff Pyramid Technologies, Inc.,                OPINION
                          Claimants,

                      v.

 HARTFORD CASUALTY INSURANCE
 COMPANY, Indiana corporation,
               Defendant-Appellee.

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

                    Argued and Submitted
             April 11, 2013—Pasadena, California

                       Filed May 19, 2014

  Before: Johnnie B. Rawlinson and Jay S. Bybee, Circuit
      Judges, and Michael H. Simon, District Judge.*

 *
   The Honorable Michael H. Simon, United States District Judge for the
District of Oregon, sitting by designation.
2        PYRAMID TECH. V. HARTFORD CAS. INS. CO.

                    Opinion by Judge Simon;
                   Dissent by Judge Rawlinson

                           SUMMARY**

                        Expert Testimony

    The panel affirmed in part and reversed in part the district
court’s summary judgment entered in favor of an insurer in a
diversity insurance coverage action, and remanded for a trial.

    The panel held that the district court erred by not allowing
a jury to resolve contested but otherwise admissible expert
testimony. The panel further held that the district court erred
in granting summary judgment against the insured’s claims
because genuine issues of material fact existed as to whether
the insurer breached its contract with the insured and
breached the implied covenant of good faith. The panel also
held that to the extent such claims were premised on the
insured’s business interruption theory, no material issues of
fact existed, and the district court did not err in granting
summary judgment against that theory of liability.

    Judge Rawlinson dissented because she did not agree that
the district court abused its discretion in ruling that the
proposed expert testimony of the insured’s experts should be
excluded. Judge Rawlinson also disagreed that summary
judgment was improperly granted, and would affirm the
district court’s judgment in its entirety.

  **
     This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
          PYRAMID TECH. V. HARTFORD CAS. INS. CO.                3

                             COUNSEL

Herbert Dodell (argued), The Dodell Law Corporation,
Woodland Hills, California, for Plaintiff-Appellant.

Miriam A. Vogel (argued), David F. McDowell and Purvi G.
Patel, Morrison & Foerster, LLP, Los Angeles, California, for
Defendant-Appellee.

                             OPINION

SIMON, District Judge:

    After a flood occurred in the warehouse of a business that
purchased and resold electronic parts, a dispute arose between
the business and its insurer. The insured sued, alleging
express breach of contract and breach of the implied covenant
of good faith. The insurer moved for summary judgment.
Without holding a Daubert hearing,1 the district court
excluded the insured’s expert witnesses and granted summary
judgment to the insurer, finding insufficient evidence that the
flood caused damage to the insured’s inventory. Because the
district court abused its discretion by not allowing a jury to
resolve contested but otherwise admissible expert testimony,
we reverse and remand for trial.

                               FACTS

    Pyramid Technologies, Inc. (“Pyramid”) purchased an
insurance policy (the “Policy”) from Hartford Casualty

 1
     Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).
4       PYRAMID TECH. V. HARTFORD CAS. INS. CO.

Insurance Company (“Hartford”). The Policy provides
coverage limits of $1 million for building replacement costs,
$5.5 million for business personal property replacement costs,
and $3 million for lost business income and additional
expenses due to the interruption of business operations. To
trigger coverage for building or business personal property
replacement costs, the Policy requires damage to property or
its direct physical loss.

    Pyramid purchased and resold electronic parts, many of
which were out-of-date or not state-of-the-art. It did not test
the inventory unless required to do so by a customer or
prospective customer. Pyramid stored its inventory on shelves
in a warehouse that did not have air conditioning or humidity
control. Pyramid had approximately 52 million items in its
warehouse at the time of the flood.

    In the morning hours of August 11, 2005, Pyramid
employees arrived at work to find the warehouse and certain
other building locations flooded with one to two inches of
water. Although the flood water did not reach the shelves on
which inventory items were located, several employees saw
visible condensation on packages in the lower three to four
shelves. ServPro, a professional cleanup company, performed
cleanup operations from August 11 through August 16, 2005.

    After discovering the flood, Pyramid was concerned about
the humidity level in the warehouse and the condensation
found on its packages. Pyramid asked Hartford to test the
inventory. Hartford’s expert, Peter Helms from Belfor USA
Technical Services, visited the site after cleanup and, relying
on humidity tests conducted after most of the water had been
removed and drying equipment had been in place for more
than 24 hours, determined that the humidity did not reach a
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.               5

level that could have caused damage to any of the inventory.
Hartford refused to test the inventory, which would have cost
more than $13 million to test every item. Hartford based its
decision largely on Helms’ conclusion that the inventory was
not damaged by the flood.

    While Hartford was visiting the site after the flood, a
potential Pyramid customer, WMS Gaming, Inc. (“WMS”),
was conducting a quality control site visit before approving
Pyramid as a parts supplier. The Hartford representative told
this potential 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 “big deal” to WMS. Shortly
thereafter, WMS declined to approve Pyramid as a parts
supplier.

    One month after the flood, Pyramid hired Allied Public
Adjusters, Inc. to assist in pursuing an insurance claim.
Pyramid also hired its own expert, David Spiegel, to
determine what the humidity levels were at the time of the
water intrusion. Spiegel opined that the humidity level in the
warehouse rose to more than 90% and that the conditions
caused by the flood exceeded the protection levels of the
moisture-proof packaging. During routine inventory checks
after the flood, Pyramid employees quarantined more than
250,000 items, looking for visible signs of corrosion, tarnish,
or discoloration. In August 2007, Hartford finally agreed to
conduct limited testing of a small subset of parts identified by
Pyramid as being damaged.

    Hartford retained Dr. Arum Kumar of SEAL Laboratories
to conduct tests on 374 items out of Pyramid’s inventory.
These parts were selected by Pyramid as exhibiting signs of
water damage. Dr. Kumar determined that 147 of those items
6       PYRAMID TECH. V. HARTFORD CAS. INS. CO.

exhibited corrosion, tarnish, or discoloration. Dr. Kumar
conducted additional tests on those 147 items. He found that
two parts failed the additional testing, and they were deemed
unsuitable for commercial applications. Dr. Kumar stated that
corrosion, tarnish, and discoloration are always caused by
moisture, but he concluded that the August 11, 2005 flood
was not the cause of the corrosion damage to the parts he
examined.

    Pyramid hired two additional experts, Del Mortenson and
Ken Pytlewski, to evaluate the validity of Dr. Kumar’s report.
Mortenson questioned Dr. Kumar’s opinion on the grounds
that Dr. Kumar used “military” standards of suitability
instead of “commercial” standards. Pytlewski challenged
other opinions of Dr. Kumar’s, including his opinions that
any corrosion caused by the flood would necessarily have
been uniform and that visible corrosion is not a failure criteria
under military standards. Pytlewski also noted the internal
inconsistency in Dr. Kumar’s report between his statement
that the cause of the moisture-related corrosion cannot be
determined and his conclusion that the flood was not the
cause of any moisture-related damage. Pytlewski testified at
a deposition that in his opinion, some of the corrosion to
Pyramid’s inventory occurred as a result of the high humidity
caused by the August 11, 2005 flood.

     By May 2010, approximately 17 million of Pyramid’s 52
million parts in inventory at the time of the flood had been
sold, and approximately 35 million parts remained in
Pyramid’s inventory. In October 2010, Pyramid sold most of
its remaining inventory at a distress sale price of $125,000.
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.                7

            PROCEDURAL BACKGROUND

    Pyramid filed this civil action in California state court.
Hartford removed the lawsuit to federal court. On March 21,
2011, Hartford moved for summary judgment. In opposition
to Hartford’s motion, Pyramid offered the expert reports of
Spiegel, Mortenson, and Pytlewski, among other evidence. In
reply to Pyramid’s opposition, Hartford argued that the expert
reports of Spiegel, Mortenson, and Pytlewski, and much of
the testimony of Tony Mavusi, the president of Pyramid, was
inadmissible. The district court did not hold a Daubert
hearing.

     The district court also did not hold oral argument on
Hartford’s motion for summary judgment. Instead, on June 1,
2011, the district court granted summary judgment in favor of
Hartford, sustained many of Hartford’s objections to the
testimony of Mavusi, and excluded the expert reports of
Spiegel, Mortenson, and Pytlewski. The district court
excluded the reports of Mortenson and Pytlewski as being
“illegible,” and the court excluded the Spiegel report on the
grounds that Spiegel was not a qualified expert and that his
report was not based on sufficient facts or data and was not
the product of reliable principles and methods.

    Pyramid moved for reconsideration and submitted
enlarged and more legible versions of the Mortenson and
Pytlewski reports. The district court accepted the enlarged
reports as sufficiently readable, but then excluded them as
unreliable and not based on sufficient facts or data. The
district court also concluded that even if these reports were
admissible, they fail to raise a genuine dispute of material fact
because they do not sufficiently address causation. The
district court denied Pyramid’s motion for reconsideration.
8       PYRAMID TECH. V. HARTFORD CAS. INS. CO.

                 STANDARD OF REVIEW

    We review a district court’s order granting summary
judgment de novo. Ford v. City of Yakima, 706 F.3d 1188,
1192 (9th Cir. 2013) (per curiam). We review evidentiary
rulings for abuse of discretion and reverse if the exercise of
discretion is both erroneous and prejudicial. Nev. Dep’t of
Corr. v. Greene, 648 F.3d 1014, 1018 (9th Cir. 2011). We
review underlying factual determinations for clear error.
United States v. Lukashov, 694 F.3d 1107, 1114 (9th Cir.
2012).

                        DISCUSSION

A. Exclusion of Pyramid’s Expert Witnesses

    1. Legal Standards

    Rule 702 of the Federal Rules of Evidence provides that
expert opinion evidence is admissible if: (1) the witness is
sufficiently qualified as an expert by knowledge, skill,
experience, training, or education; (2) the scientific, technical,
or other specialized knowledge will help the trier of fact to
understand the evidence or to determine a fact in issue;
(3) the testimony is based on sufficient facts or data; (4) the
testimony is the product of reliable principles and methods;
and (5) the expert has reliably applied the relevant principles
and methods to the facts of the case. Fed. R. Evid. 702.

     Under Daubert, 509 U.S. at 579, and its progeny,
including Daubert v. Merrell Dow Pharm., Inc., 43 F.3d 1311
(9th Cir. 1995), a district court’s inquiry into admissibility “is
a flexible one.” Alaska Rent-A-Car, Inc. v. Avis Budget Grp.,
Inc., 738 F.3d 960, 969 (9th Cir. 2013) (citation omitted),
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.               9

cert. denied, 134 S. Ct. 644 (2013). In evaluating proffered
expert testimony, the trial court is “a gatekeeper, not a fact
finder.” Primiano v. Cook, 598 F.3d 558, 565 (9th Cir. 2010)
(citation and quotation marks omitted).

    “[T]he trial court must assure that the expert testimony
‘both rests on a reliable foundation and is relevant to the task
at hand.’” Id. at 564 (quoting Daubert, 509 U.S. at 597).
“Expert opinion testimony is relevant if the knowledge
underlying it has a valid connection to the pertinent inquiry.
And it is reliable if the knowledge underlying it has a reliable
basis in the knowledge and experience of the relevant
discipline.” Id. at 565 (citation and quotation marks omitted).
“Shaky but admissible evidence is to be attacked by cross
examination, contrary evidence, and attention to the burden
of proof, not exclusion.” Id. at 564 (citation omitted). The
judge is “supposed to screen the jury from unreliable
nonsense opinions, but not exclude opinions 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 expert is right or wrong, just whether his
testimony has substance such that it would be helpful to a
jury.” Id. at 969–70.

    Like the test for admissibility in general, the test of
reliability is also flexible. Estate of Barabin v. AstenJohnson,
Inc., 740 F.3d 457, 463 (9th Cir. 2014) (en banc). To
determine reliability, the Supreme Court has suggested
several factors: “1) whether a theory or technique can be
tested; 2) whether it has been subjected to peer review and
publication; 3) the known or potential error rate of the theory
or technique; and 4) whether the theory or technique enjoys
general acceptance within the relevant scientific community.”
Id. (quoting United States v. Hankey, 203 F.3d 1160, 1167
10      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

(9th Cir. 2000)); see also Primiano, 598 F.3d at 564. These
factors are “meant to be helpful, not definitive, and the trial
court has discretion to decide how to test an expert’s
reliability as well as whether the testimony is reliable, based
on the particular circumstances of the particular case.”
Primiano, 598 F.3d at 564 (citations and quotation marks
omitted); see also Barabin, 740 F.3d at 463. The test “is not
the correctness of the expert’s conclusions but the soundness
of his methodology,” and when an expert meets the threshold
established by Rule 702, the expert may testify and the fact
finder decides how much weight to give that testimony.
Primiano, 598 F.3d at 564–65.

    After an expert establishes admissibility to the judge’s
satisfaction, challenges that go to the weight of the evidence
are within the province of a fact finder, not a trial court judge.
A district court should not make credibility determinations
that are reserved for the jury.

     2. Spiegel

    Spiegel is a certified restorer with the National Institute
of Disaster Restoration. He is also a certified: (1) master
restorer and water, fire and odor control journeyman with the
Institute of Inspection, Cleaning, and Restoration; (2) indoor
environmentalist and mold remediator with the Indoor Air
Quality Association; and (3) Level I thermographer with the
Infrared Training Center. Spiegel is also a general and
specialty licensed contractor with the state of California and
has 38 years of experience in property damage repair and
more than 15 years of experience in construction defect
investigation.
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.             11

    In two conclusory sentences and without analysis or
explanation, the district court held that Spiegel was not a
qualified expert “on the scientific, technical, or specialized
data on which he purports to opine” and that his opinion
regarding relative humidity was not based on sufficient facts
or data and was not the product of reliable principles and
methods. The district court abused its discretion in reaching
these conclusions.

     Spiegel used weather data from the time of the incident,
thermo-hygrometer and infrared data, and ambient condition
data to opine on the level of humidity in the warehouse at the
time of the flood. As noted, Spiegel is a certified
thermographer, certified indoor environmentalist, certified
master restorer, certified water control journeyman, and
certified mold remediator, with decades of experience. This
expertise and experience is relevant to the issues on which
Spiegel opined. Because the district court provided no
explanation or analysis for rejecting these qualifications, the
district court abused its discretion in summarily determining
that Spiegel was not qualified as an expert. See Barabin,
740 F.3d at 464 (holding the district court “failed to assume
its role as gatekeeper” when it excluded expert testimony for
“dubious credentials” without conducting a Daubert hearing
or assessing expert’s findings). Spiegel’s many relevant
certifications and decades of relevant experience render him
qualified to issue his expert opinion.

    In addition, in preparing his report Spiegel conducted two
site visits to Pyramid’s warehouse, interviewed several
Pyramid employees who saw the water intrusion and its
immediate aftermath, reviewed ServPro’s ambient condition
measurements, and recorded his own ambient data during his
visits, including data from a 5:30 a.m. visit designed to
12      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

compare the difference in indoor and outdoor conditions
when the warehouse was closed and locked (as it was during
the flood). Spiegel also took digital photographs and
electronic thermo-hygrometer readings, performed infrared
imaging, reviewed www.weatherunderground.com to
determine the weather conditions at a nearby airport at the
time of the flood, and reviewed the Helms report. These facts
and data constitute a sufficient basis for Spiegel’s expert
report.

    Although not discussed by the district court, Spiegel relies
on more facts and data in reaching his expert conclusions than
did Hartford’s expert witness. Hartford’s expert Helms spent
approximately two hours conducting a visual inspection of
the warehouse but did not take any measurements,
thermographic readings, infrared images, or other data.
Although Helms contacted ServPro for its readings, Helms
did not learn the locations from which ServPro obtained its
readings, what ServPro did to get its readings, or what kind
of detection machine ServPro used. The day after his two-
hour site visit, Helms completed his report and concluded that
based on the humidity levels measured by ServPro, no
damage occurred to the components in question.

    Spiegel also adequately explained his methodology in
reaching his opinion. Spiegel described how the data he
collected and reviewed helped him determine the conditions
of the warehouse at the time of the event and at the time of
ServPro’s measurements (which were relied on by Helms to
determine that no damage from humidity could have
occurred). Unlike Helms, however, Spiegel took into
consideration the fact that the warehouse doors were closed
and locked during the flood but open during ServPro’s
measurements, and Spiegel calculated and considered the
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.             13

difference between the indoor and outdoor conditions during
his 5:30 a.m. visit. Spiegel applied that difference to the
weather data at the nearby airport on the night of the incident
to extrapolate the indoor conditions on the night of the flood.
Spiegel also used the infrared temperature readings of the
packages on the shelves in comparison to the air temperature
taken during his visit to determine the likely temperature of
the packages on the night of the incident.

    The record shows that the knowledge underlying
Spiegel’s report “has a reliable basis in the knowledge and
experience of the relevant discipline,” rendering his report
reliable. Primiano, 598 F.3d at 565 (citation and quotation
marks omitted). The record also shows that Spiegel’s reliance
on the nearby airport weather information from
www.weatherunderground.com is acceptable in the industry,
for Helms testified that he relied on the same data. Spiegel
also explained how he applied the data to reach his
conclusions and how Helms failed to rely on proper data to
reach his conclusion. In short, Spiegel’s principles and
methods were reliable and his report is not one of the
“unreliable nonsense opinions” that should be screened from
use. Alaska Rent-A-Car, 738 F.3d at 969. Thus, the district
court abused its discretion in excluding this evidence.

    Excluding the Spiegel report was both erroneous and
prejudicial. Spiegel’s expert report provides evidence that:
(1) the Helms report relied on improper data to conclude that
no damage was caused by humidity following the flood;
(2) during the flood, the humidity exceeded 90% and was
above the dew point; (3) the applicable standards for
moisture-proof packaging require a one-year shelf life and
humidity below 90% to prevent failure; (4) the vast majority
of the parts stored in moisture-proof packaging was well
14      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

beyond the one-year warranty protection; and (5) the
conditions during the flood “without question” put the
affected moisture-proof packages outside the packing
standards. Thus, as Spiegel opines, the humidity and
condensation caused by the flood may have compromised the
packaging and possibly the components themselves. This is
admissible evidence from which causation and damage
reasonably may be inferred. Although Spiegel did not say
with certainty that the humidity from the flood caused
damage to Pyramid’s inventory, a jury could reasonably infer
causation from Spiegel’s report and Pyramid’s other
evidence. It is not necessary for Spiegel’s report to establish
every element of Pyramid’s claim in order for it to be
admissible in evidence. See Primiano, 598 F.3d at 564
(“Reliable expert testimony need only be relevant, and need
not establish every element that the plaintiff must prove, in
order to be admissible.”) (citation omitted).

    If Spiegel’s report had been admitted, the district court
would have been required to view it in the light most
favorable to Pyramid when considering Hartford’s motion for
summary judgment. Because the report could assist a trier of
fact in inferring that the flood caused sufficiently high
humidity to damage Pyramid’s parts and that Helms’ contrary
conclusion was not reliable, the exclusion of Spiegel’s report
is prejudicial to Pyramid. See Messick v. Novartis Pharm.
Corp., No. 13-15433, 2014 WL 1328182, at *3–5 (9th Cir.
Apr. 4, 2014) (reversing grant of summary judgment where
expert’s testimony, which would have created a genuine issue
of material fact, was excluded because it was erroneously
deemed unreliable and irrelevant).
          PYRAMID TECH. V. HARTFORD CAS. INS. CO.                        15

     3. Pytlewski

    The district court also excluded the Pytlewski 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 explain how the opinions are rationally based
on the perceptions of the witness. Because Pytlewski was
proffered as an expert witness, however, only Rule 702
applies.

    Pytlewski was retained to review and comment on the
report prepared by Hartford’s expert Dr. Kumar of SEAL
Laboratories. The district court appears to have accepted
Pytlewski as a qualified expert, excluding his report solely
based on reliability. The district court concluded that
Pytlewski’s report was not the product of reliable principles
and methods.

    An expert opinion is reliable “if the knowledge
underlying it has a reliable basis in the knowledge and
experience of the relevant discipline.” Alaska Rent-A-Car,
738 F.3d at 969 (quoting Primiano, 598 F.3d at 565).
Pytlewski’s opinions are based on his knowledge and
experience as a professional engineer and metallurgist. For
example, Pytlewski countered Dr. Kumar’s statement that the
damage to Pyramid’s inventory could not have been caused
by the flood because the corrosion was not uniform by

 2
   Fed. R. Evid. 701 provides: “If a witness is not testifying as an expert,
testimony in the form of an opinion is limited to one that is: (a) rationally
based on the witness’s perception; (b) helpful to clearly understanding the
witness’s testimony or to determining a fact in issue; and (c) not based on
scientific, technical, or other specialized knowledge within the scope of
Rule 702.”
16      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

explaining that metal exposed to moisture would not oxidize
uniformly. This opinion is within the knowledge and
experience of a metallurgist. See, e.g., Stilwell v. Smith &
Nephew, Inc., 482 F.3d 1187, 1192–93 (9th Cir. 2007)
(holding admissible metallurgist’s expert testimony that nails
were poorly manufactured and could have been designed to
last longer); White v. Ford Motor Co., 312 F.3d 998, 1008
(9th Cir. 2002) opinion amended on denial of reh’g, 335 F.3d
833 (9th Cir. 2003) (describing metallurgist’s testimony that
was “well within his metallurgical expertise” when he
“identified wear on the ratchet wheel of the brake that showed
repeated tip-on-tip engagement rather than the proper
engagement”); see also 6 Am. Jur. Trials 555 (describing
common use of expert metallurgists to describe, among other
things, causes and effects of corrosion). The “reliability” test
is flexible and should be applied based on the circumstances
of the case. Given the subject matter and type of opinions that
Pytlewski rendered and his knowledge and experience,
Pytlewski’s opinion is reliable. See Messick, 2014 WL
1328182, at *3.

    The exclusion of Pytlewski’s report is prejudicial because
his report provides evidence from which a fact finder could
disregard the opinion of Dr. Kumar and reasonably infer
damages and causation relating to the flood. Further,
Pytlewski’s deposition testimony links the flood as at least a
partial cause of the damage to Pyramid’s inventory. Thus, the
district court abused its discretion in excluding Pytlewski’s
expert report and testimony.

     4. Mortenson

   The district court also excluded the Mortenson report
under Rule 702, stating it was not reliable, and under Rule
         PYRAMID TECH. V. HARTFORD CAS. INS. CO.                        17

703,3 stating it was not based on facts or data known to
Mortenson. Mortenson opined that it was improper for
Hartford’s expert Dr. Kumar to use military standards of
suitability instead of commercial standards in testing the
selected parts from Pyramid’s inventory. Mortenson testified
at deposition, however, that he did not know what standards
should have been used and that he is not aware of the
governing commercial standards because that is not his field
of expertise. Thus, Mortenson’s testimony that Dr. Kumar
should not have used military standards and 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 reliable because
he did not have the knowledge or experience required under
Rule 702 to permit him to give expert testimony in this
matter. The exclusion of Mortenson’s report 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 exclude expert testimony on
grounds that expert’s methodology in analyzing relevant data
was unreliable, even though the expert was qualified, where
there was no evidence that other experts in the industry used
the expert’s particular approach).

 3
    Fed. R. Evid. 703 provides: “An expert may base an opinion on facts
or data in the case that the expert has been made aware of or personally
observed. If experts in the particular field would reasonably rely on those
kinds of facts or data in forming an opinion on the subject, they need not
be admissible for the opinion to be admitted. But if the facts or data would
otherwise be inadmissible, the proponent of the opinion may disclose them
to the jury only if their probative value in helping the jury evaluate the
opinion substantially outweighs their prejudicial effect.”
18      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

B. Grant of Summary Judgment Against Pyramid’s
   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.

     1. Legal Standards

    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
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
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.              19

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).

   2. Pyramid’s Claim of Loss of Inventory

    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. HARTFORD CAS. INS. CO.

       a. Damages

    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. HARTFORD CAS. INS. CO.               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, *4–6
(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, *5–6 (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. HARTFORD CAS. INS. CO.

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.

       b. Causation

    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. HARTFORD CAS. INS. CO.               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. HARTFORD CAS. INS. CO.

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. HARTFORD CAS. INS. CO.            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 moisture-
proof 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. HARTFORD CAS. INS. CO.

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.

     3. Pyramid’s Claim of Business Interruption

    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. HARTFORD CAS. INS. CO.              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. HARTFORD CAS. INS. CO.

    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.

     4. Pyramid’s Claim of Good Faith and Fair Dealing

    “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. HARTFORD CAS. INS. CO.             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-by-
case 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. HARTFORD CAS. INS. CO.

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. HARTFORD CAS. INS. CO.                     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. HARTFORD CAS. INS. CO.

    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.

                      CONCLUSION

   The district court abused its discretion in excluding the
expert evidence of David Spiegel and Ken Pytlewski. Such
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.              33

evidence is admissible. The district court did not abuse its
discretion in excluding the expert evidence of Del Mortenson.
The district court erred in granting summary judgment
against Pyramid’s claims because genuine disputes of
material fact exist as to whether Hartford breached its
contract with Pyramid and breached the implied covenant of
good faith. To the extent such claims are premised on
Pyramid’s business interruption theory, however, no material
issues of fact exist, and the district court did not err in
granting summary judgment against that theory of liability.

    AFFIRMED IN PART, REVERSED IN PART, and
REMANDED FOR TRIAL. The parties shall bear their own
costs on appeal.

RAWLINSON, Circuit Judge, dissenting:

    I respectfully dissent because I do not agree that the
district court abused its discretion in ruling that the proposed
expert testimony of Plaintiff’s experts should be excluded. I
also disagree, in any event, that summary judgment was
improperly granted.

    The central issue in this case was whether the inventory
in Plaintiff’s warehouse was damaged as a result of
floodwaters that did not even reach the shelves on which
inventory was stored. Therefore, the only potential source of
damage to the inventory was condensation. The critical
question was whether that condensation originated from the
flood waters or from some other source of humidity. Because
neither of the excluded experts opined as to that critical
34        PYRAMID TECH. V. HARTFORD CAS. INS. CO.

causation question, the district court acted within its
discretion when it excluded their testimony.

    We review the district court’s decision to admit or
exclude expert testimony for abuse of discretion. See Estate
of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 460 (9th Cir.
2014) (en banc). The district court is given “broad latitude”
in performing this gatekeeping function and no Daubert1
hearing is required. Id. at 463. A district court abuses its
discretion only if it uses an incorrect legal standard or makes
factual findings that are “illogical, implausible, or without
support in inferences that may be drawn from facts in the
record. . . .” United States v. Hinkson, 585 F.3d 1247, 1262
(9th Cir. 2009) (en banc) (citation, footnote reference and
internal quotation marks omitted). None of these judicial
infractions was committed by the district court judge.

    Admission or exclusion of expert opinion testimony in
federal courts is governed by Rule 702 of the Federal Rules
of Evidence. That rule provides:

          A witness who is qualified as an expert by
          knowledge, skill, experience, training, or
          education may testify in the form of an
          opinion or otherwise if:

          (a) the expert’s scientific, technical, or other
          specialized knowledge will help the trier of
          fact to understand the evidence or to
          determine a fact in issue;

 1
     Daubert v. Merrell Dow Pharm. Inc., 509 U.S. 579 (1993).
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.                35

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

        (c) the testimony is the product of reliable
        principles and methods; and

        (d) the expert has reliably applied the
        principles and 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 “logically advance a material aspect
of the party’s case.” Id. (citation omitted).

    The district court rejected the opinion testimony of
proffered expert Spiegel on the basis that Spiegel was not
“qualified as an expert on the . . . specialized data on which
he purports to opine. . . .” This ruling by the district court
was not “illogical, implausible or without support in
inferences that may be drawn from facts in the record. . . .”
Hinkson, 585 F.3d at 1262. It is undisputed that Spiegel
never inspected or tested the inventory or its packaging. In
addition, Spiegel’s calculation of “ambient air conditions in
the warehouse” was performed in October, 2005, two months
after the flood, utilizing weather information from
www.weatherground.com for the John Wayne International
Airport seven miles away. The district court acted well
within its discretion in concluding that this less than scientific
process was not “relevant and reliable,” Barabin, 740 F.3d at
463, especially given that Spiegel never actually opined on
the cause of the condensation.
36      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

    Similarly, the district court excluded the opinion
testimony of proffered expert Pytlewski because he failed to
explain “what principles and methods he uses to challenge the
report [from Defendant’s expert].” The district court noted
that Pytlewski did not visit the warehouse or conduct any
independent testing. Pytlewski also failed to link his opinions
to the perceptions of the witnesses he interviewed. These
rulings were well within the discretion of the trial judge, and
we have no license to second-guess. See Barabin, 740 F.3d
at 462 (explaining that the evidentiary rulings of the trial
judge “should not be reversed absent clear abuse of
discretion”).

    Even if the expert testimony should have been admitted,
any error in excluding the testimony was harmless because
neither proffered expert opined that the floodwaters caused
damage to Plaintiff’s inventory. In his report, Spiegel
expressed “concerns, that the condensation (water-films)
observed on the packaging may have compromised the
packaging and possibly the electronic components within
those packages.” (emphasis added). Rather than opining
definitively on causation, as opposed to “concerns,” Spiegel
recommended that “a qualified electronic professional should
perform independent testing, to evaluate if this inspector’s
concerns are justified.” Not only did Spiegel fail to opine on
the causation issue, he all but admitted that he was not
qualified to do so.

    When asked specifically about damage to the inventory,
Pytlewski also hedged. To the question whether the
electronic components were damaged by the flood, Pytlewski
responded:
        PYRAMID TECH. V. HARTFORD CAS. INS. CO.              37

           I certainly think that some element of
       corrosion occurred as a result of that high
       humidity. I don’t know that all of it did. In
       fact, if it was on the shelf for a long time
       there’s going to be some element of aging and
       corrosion. Corrosion would occur as a result
       of the aging, but I can’t tell from the
       information I had necessarily, you know,
       which ones that applies to without even seeing
       them myself.

(Emphases added).

    Pytlewski’s response failed to connect the flood to any
damaged inventory. He even conceded that the corrosion he
described could occur as a result of the inventory sitting on
the shelves for considerable lengths of time. By the end of
his statement, he admitted that he “[could not] tell from the
information [he had]” which items were corroded and which
were not.

    Under California law, failure to raise a material issue of
fact regarding causation is fatal to Plaintiff’s breach of
contract claim as well as its bad faith claim. See MRI
Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins.,
187 Cal. App. 4th 766, 779 (2010) (explaining that the
covered property must be damaged and the damage must
directly “occur by the action of the fortuitous event triggering
coverage”); see also Guebara v. Allstate Ins. Co., 237 F.3d
987, 992 (9th Cir. 2001) (“Under California law, a bad faith
claim can be dismissed on summary judgment if the
defendant can show that there was a genuine dispute as to
coverage[.]”).
38      PYRAMID TECH. V. HARTFORD CAS. INS. CO.

     The majority opinion relies on the fact that some of
Plaintiff’s inventory displayed “corrosion, tarnish, or
discoloration.” Majority Opinion, p. 20. But that says
nothing about the cause of the corrosion, tarnish or
discoloration. After all, one of Plaintiff’s experts conceded
that corrosion could occur as a function of inventory sitting
on the shelves unused. The best the majority can muster is
“that the vast majority of [Plaintiff’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
dewpoint humidity. . . .” Id. at 24. Glaringly absent is any
reference to opinion testimony that any damage to the
inventory was directly caused by the floodwaters. See MRI
Healthcare, 187 Cal. App. 4th at 779. The majority faults
Defendant’s expert for failing to disprove causation. See
Majority Opinion, pp. 24–25. However, it was Plaintiff’s
burden to raise a material issue of fact regarding coverage of
its claimed loss. See Oglio Ent’mt Group, Inc. v. Hartford
Cas. Ins. Co., 200 Cal. App. 4th 573, 582 (2011). Plaintiff
failed to meet its burden, and the district court properly
entered summary judgment in favor of Defendant. See
Trishan Air, Inc. v. Federal Ins. Co., 635 F.3d 422, 434 (9th
Cir. 2011).

    I agree with the majority that the district court properly
excluded Mortenson’s expert report and properly rejected
Plaintiff’s business interruption claim. As discussed, I
fervently disagree with the balance of the majority opinion.
I would affirm the district court’s judgment in its entirety. I
respectfully dissent.