Ingenco Holdings, LLC v. Ace American Insurance Company , 921 F.3d 803 ( 2019 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
INGENCO HOLDINGS, LLC, a No. 16-35792
Delaware limited liability
company; BIO ENERGY D.C. No.
(WASHINGTON), LLC, a 2:13-cv-00543-RAJ
Delaware limited liability
company,
Plaintiffs-Appellants, OPINION
v.
ACE AMERICAN INSURANCE
COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Western District of Washington
Richard A. Jones, District Judge, Presiding
Argued and Submitted June 12, 2018
Seattle, Washington
Filed April 15, 2019
2 INGENCO HOLDINGS V. ACE AMER. INS. CO.
Before: Dorothy W. Nelson and Paul J. Watford, Circuit
Judges, and Dean D. Pregerson,* District Judge.
Opinion by Judge Pregerson
SUMMARY**
Washington Insurance Law / Fed. R. Civ. 37 Sanctions
The panel affirmed the district court’s application of
Washington law and its discovery sanctions against
appellants, reversed the grant of summary judgment that was
entered in an insurer’s favor, and remanded for trial in a
diversity insurance coverage case.
Appellants operate a gas purification plant in King
County, Washington. Appellants’ insurer, Ace American
Insurance Company, denied coverage when appellants sought
to recover for damages sustained after metal brackets broke
resulting in an eventual shutdown of the entire plant.
The panel held that the district court properly applied
Washington law to this insurance coverage dispute.
Concerning the insurer’s argument that appellants’ failure
to give notice of the initial failure and shutdown violated a
*
The Honorable Dean D. Pregerson, United States District Judge for
the Central District of California, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 3
condition precedent to coverage under the all risks policy, the
panel held that there was a triable issue of fact as to whether
the insurer was prejudiced by appellants’ remedial actions.
Concerning the insurer’s argument that the cause of the
damage was an “external” force not covered by the all risks
policy, the panel held that there was at the very least a triable
issue of fact whether appellants’ loss was fortuitous. The
panel further held that a determination that a particular loss
was fortuitous could obviate the need to examine whether that
loss was caused by an external force. The panel concluded
that the district court’s grant of summary judgment to the
insurer on the question of whether appellants’ loss was the
cause of an “external cause” must be reversed because the
district court failed to consider the role of fortuity in all risks
insurance disputes.
In Vision One, LLC v. Philadelphia Indem. Ins. Co.,
174 Wash.2d 501, 515 (2012), the Washington Supreme
Court held that insurance ensuing loss clauses ensure that,
where an uncovered event takes place, any ensuing loss
which is otherwise covered by the policy remains covered,
even though the uncovered event itself is never covered.
Applying Vision One to the facts at hand, the panel held that
even if it were conclusively established that appellant’s
diffuser shield suffered from some inherent defect, the
subsequent destruction of absorbent beads would be covered
under the policy’s ensuing loss exception.
The panel held that there was a genuine dispute of
material fact as to whether the policy’s Boiler and Machinery
endorsement applied to independently confer coverage for
appellants’ losses.
4 INGENCO HOLDINGS V. ACE AMER. INS. CO.
Assuming there was coverage, the policy covered
business interruption losses for only the time required with
the exercise of due diligence to rebuild the damaged property.
The panel held that although appellants’ actual time to repair
might be relevant to the question whether the sixteen-month
shutdown was consistent with the exercise of due diligence,
it was by no means dispositive of the issue.
The district court determined that appellants willfully
withheld evidence of damages on its state law statutory
claims, and as a Fed. R. Civ. P. 37(c) sanction, the district
court precluded appellants from introducing such evidence.
The panel held that appellants failed to explain its failure to
meet its affirmative obligations under Fed. R. Civ. P. 26. The
panel also held that the district court did not abuse its
discretion in sanctioning appellants for failure to disclose
statutory damages information to the insurer, even though
those damages resulted in the dismissal of appellants’
statutory claims.
COUNSEL
Philip A. Talmadge (argued), Talmadge/Fitzpatrick/Tribe,
Seattle, Washington; Robert J. Rauch, Law Offices of Robert
J. Rauch, Bow, Washington; for Plaintiffs-Appellants.
Anton Metlitsky (argued), O’Melveny & Myers LLP, New
York, New York; Kimya Saied and Jonathan D. Hacker,
O’Melveny & Myers LLP, Washington, D.C.; Michael L.
Foran and Thomas B. Orlando, Foran Glennon Palandech
Ponzi & Rudloff PC, Chicago, Illinois; for Defendant-
Appellee.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 5
OPINION
PREGERSON, District Judge:
Appellants operate a gas purification plant in King
County, Washington. In 2010, metal brackets securing a
crucial component broke, resulting in damage to other
components and an eventual shutdown of the entire facility.
Appellants’ insurance carrier Appellee ACE American
Insurance Company (“Ace”), denied coverage, and
Appellants sued. The district court, applying Washington
law, granted summary judgment in Ace’s favor and
sanctioned Appellants for discovery violations.
We have jurisdiction under 28 U.S.C. § 1291. We affirm
the district court’s application of Washington law and its
discovery sanctions against Appellants, but reverse its grant
of summary judgment in Ace’s favor and remand for trial.
FACTUAL AND PROCEDURAL BACKGROUND
A. Damage to the gas purification plant
Appellants, Ingenco Holdings, LLC and its wholly owned
subsidiary, Bio Energy (Washington), LLC (collectively,
“Ingenco”) operate a gas purification plant at the Cedar Hills
landfill in King County, Washington. The plant converts raw
landfill gas into usable natural gas. The final step of the
purification process involves the removal of excess nitrogen
from the landfill gas in a nitrogen rejection unit, or “NRU”.
The gas is directed through adsorbent beads, to which
nitrogen adheres, contained within pressure vessels. The
beads, which are essentially a filter medium, cannot withstand
the direct pressure of the landfill gas inflow, which, if
6 INGENCO HOLDINGS V. ACE AMER. INS. CO.
unmediated, can grind the beads down into dust. To reduce
the force of the gas flow on the beads, a “diffuser basket” is
suspended from the top of, and surrounds, each bead-filled
pressure vessel. The diffuser basket, in particular its
perforated bottom plate, acts as a shield that prevents the full
force of the incoming landfill gas from striking the beads
directly. Instead, the incoming stream of gas strikes the
diffuser basket’s bottom plate first, is diffused, and then
passes through the beads in the pressure vessel with reduced
force.
The diffuser basket bottom plate, or shield, is secured to
the rest of the diffuser basket by metal straps, or brackets. On
October 1, 2010, the metal straps securing the bottom plate of
pressure vessel number thirty-two’s (“V32") diffuser basket
broke and the bottom plate fell away, leaving the beads in
V32 unprotected. The parties dispute the reason for the
breakage. Ace maintains that the bottom plate flexed, leading
to excess stress upon, fractures in, and ultimately failure of,
the metal straps. Ingenco contends that the bottom plate
could not flex unless subjected to pressures far greater than
those present within the nitrogen rejection unit. Instead,
Ingenco posits, the flow of landfill gas caused the bottom
plate’s metal straps to vibrate at a frequency that
coincidentally matched the straps’ natural vibration
frequency, or resonant frequency.1 These unforeseeable
vibrations, Ingenco argues, caused the metal straps to change
shape and break.
1
Every material has a natural, or resonant, frequency at which it will
vibrate if disturbed. See, e.g. https://www.scientificamerican.com/articl
e/fact-or-fiction-opera-singer-can-shatter-glass/
INGENCO HOLDINGS V. ACE AMER. INS. CO. 7
Whatever the cause of the strap breakage, once the
diffuser basket’s bottom plate fell away from the assembly,
there was no longer any shield in place to protect the
adsorbent beads from the full pressure of the incoming stream
of landfill gas. The unmediated gas flow pulverized the
30,000 pounds of beads in V32 into dust, resulting in an
automatic total shutdown of the facility on October 5, 2010.
Ingenco thought it had removed, or would be able to
remove, the dust from all gas processing systems, and re-
started the facility on October 13, 2010. Unbeknownst to
Ingenco, however, dust from the pulverized beads in V32 had
infiltrated other parts of the system, including other bead-
containing pressure vessels. Dust from the V32 beads
abraded against undamaged beads in the other pressure
vessels, degrading those beads as well. Eventually, the
accumulation of bead dust forced an automatic shutdown of
the plant in March 2011. The plant remained idle for several
months as Ingenco investigated alternative nitrogen filtration
options and undertook repairs. Ingenco did not begin cleanup
or repair operations until November 2011. The plant resumed
operation in August 2012.
B. The insurance coverage dispute
Ingenco filed a property damage and business interruption
insurance claim with Ace in May 2011. Ingenco’s all risks
insurance policy, issued by Ace, covered against “all risks of
direct physical loss or damage occurring . . . from any
external cause.” The policy, however, excluded “[f]aulty or
defective material, faulty workmanship, faulty methods of
construction, [or] errors or omissions in plan or specification
or designs . . . unless loss by a peril not otherwise excluded
ensues . . . .” The policy also excluded “[g]radual
8 INGENCO HOLDINGS V. ACE AMER. INS. CO.
deterioration, depletion, inherent vice, [or] latent defect . . .,
unless such loss is caused directly by physical damage not
otherwise excluded . . . .” A separate Boiler and Machinery
endorsement (“the Endorsement”) covered property damage
and business losses “resulting from an Accident” to a
pressure vessel. The Endorsement’s definition of “Accident,”
however, excluded “depletion, deterioration[, . . . and] wear
and tear.”
Ace denied coverage on several grounds. Ace claimed
that, as a threshold matter, Ingenco failed to comply with a
notification provision that required Ingenco to notify Ace of
all losses. Specifically, Ace claimed that Ingenco failed to
notify Ace of both the October diffuser shield failure and the
resulting loss of beads in V32 until May 11, when the plant
shut down for the second time. With respect to coverage,
Ace took the position that Ingenco’s losses were not caused
by any “external” force, but rather from defects in the diffuser
basket and the overly delicate adsorbent beads. Thus, Ace
reasoned, without an “external cause” there was no covered
loss, and even if there were an external cause, coverage
would nevertheless be lacking under the “defective material,”
“wear and tear,” “deterioration,” and other, similar
exclusions.
C. Procedural history
Ingenco brought suit in the Western District of
Washington, alleging causes of action for breach of contract
and declaratory relief, as well as statutory claims under
Washington’s Consumer Protection Act and Insurer Unfair
Conduct Act. The parties eventually filed cross motions for
summary judgment. The district court granted Ingenco’s
motion insofar as Ingenco argued that Washington law should
INGENCO HOLDINGS V. ACE AMER. INS. CO. 9
apply to all claims, and that, under Washington law,
Ingenco’s alleged failure to comply with the policy’s notice
provision did not preclude coverage absent prejudice to Ace.
The court ruled for Ace, however, that Ingenco’s losses did
not result from an “external cause,” but rather from an
“inherent problem in the system,” which system had been
designed to withstand the “external” force at issue, i.e., the
landfill gas.
The district court also ruled that the “ensuing loss”
exception to the “defective material” exclusion did not apply
to create coverage because there was no covered loss in the
first place. In a similar vein, the district court concluded that
Ingenco’s losses were caused by wear and tear resulting from
normal operation, and therefore fell outside the
Endorsement’s definition of covered “Accident.” Lastly, the
district court ruled that, even in the event of coverage,
business interruption losses would be limited to the
“hypothetical” reasonable repair period, regardless of the
actual time necessary to complete repairs.
In a separate order, the district court found that Ingenco
had failed to timely disclose or produce evidence related to its
state law bad faith claims. As a discovery sanction, the
district court precluded Ingenco from introducing any such
evidence and, accordingly, dismissed Ingenco’s statutory
claims for lack of proof of damages.
Ingenco now appeals the district court’s orders.
STANDARD OF REVIEW
We review grants of summary judgment, and partial
grants of summary judgment, de novo. Flores v. City of San
10 INGENCO HOLDINGS V. ACE AMER. INS. CO.
Gabriel, 824 F.3d 890, 897 (9th Cir. 2016). Discovery
rulings, including the imposition of discovery sanctions, are
reviewed for abuse of discretion. R & R Sails, Inc. v. Ins. Co.
of Pennsylvania, 673 F.3d 1240, 1245 (9th Cir. 2012). A
district court abuses its discretion if it bases its decision “on
an erroneous view of the law or on a clearly erroneous
assessment of the evidence.” Holgate v. Baldwin, 425 F.3d
671, 675 (9th Cir. 2005); Marchand v. Mercy Med. Ctr.,
22 F.3d 933, 936 (9th Cir. 1994).
ANALYSIS
In resolving this appeal, we must first determine whether
Washington or Virginia law applies to this insurance
coverage dispute. Only then can we proceed to analyze the
coverage issues, including whether Ingenco violated a
condition precedent to coverage. We address these questions
before turning to the remaining damages and discovery
issues.
A. Choice of Law
Ingenco is a citizen of Virginia. Ace is a citizen of
Pennsylvania. The gas processing plant at issue here is
located in Washington, where Ingenco filed suit. The district
court engaged in a lengthy choice of law analysis, much of
which is unchallenged by the parties. The court properly
determined, for example, that Washington’s choice of law
rules control in this diversity matter. See Patton v. Cox,
276 F.3d 493, 495 (9th Cir. 2002). The court also properly
determined that an actual conflict exists between Washington
and Virginia law. Specifically, the district court observed
that under Virginia law, an insured’s compliance with a
notice provision in an insurance contract is a condition
INGENCO HOLDINGS V. ACE AMER. INS. CO. 11
precedent to coverage even where there is no prejudice to the
insurer, while under Washington law, an insurer must
demonstrate prejudice. Compare State Farm Fire & Cas. Co.
v. Walton, 244 Va. 498, 504 (1992) with Mut. of Enumclaw
Ins. Co. v. USF Ins. Co., 164 Wash. 2d 411, 424–25 (2008)
(en banc); MacLean Townhomes, LLC v. Am. States Ins. Co.,
138 Wash. App. 186, 190 (2007). The district court also
noted that Washington provides statutory remedies and bad
faith causes of action in tort, even absent insurance coverage,
while Virginia provides only contract remedies for bad faith
claims. Compare Hanson v. State Farm Mut. Auto. Ins. Co.,
261 F. Supp. 3d 1110, 1116 (W.D. Wash. 2017), Absher
Const. Co. v. N. Pac. Ins. Co., 861 F. Supp. 2d 1236, 1243
(W.D. Wash. 2012) and James E. Torina Fine Homes, Inc. v.
Mut. of Enumclaw Ins. Co., 118 Wash. App. 12, 20, 74 P.3d
648, 652 (2003) with Ryder Truck Rental, Inc. v. UTF
Carriers, Inc., 790 F. Supp. 637, 639 (W.D. Va. 1992),
Brenner v. Lawyers Title Ins. Corp., 240 Va. 185, 193 (1990).
The district court also correctly determined that Washington
looks to Section 188 of the Restatement (Second) of Conflict
of Laws to resolve contract choice of law questions involving
multiple-risk policies and looks to Section 145 of the
Restatement for tort issues. See Milgard Mfg., Inc. v. Illinois
Union Ins. Co., No. C10-5943 RJB, 2011 WL 3298912, at
*5–8 (W.D. Wash. Aug. 1, 2011). The parties do not dispute
these conclusions.2
The parties do dispute, however, whether the district court
correctly concluded that Washington law applies. The
Restatement provides that the local law of the state with the
2
Ingenco did argue to the district court that Section 193 of the
Restatement should control, rather than Section 188. Ingenco does not
repeat that assertion on appeal. See Milgard, 2011 WL 3298912 at *5–6.
12 INGENCO HOLDINGS V. ACE AMER. INS. CO.
“most significant relationship to the transaction and parties”
should control, and that the most significant relationship can
be determined by reference to five factors: (1) the place of
contracting; (2) the place of negotiation; (3) the place of
performance; (4) the “location of the subject matter of the
contract[;]” and (5) the residence, place of incorporation, and
place of business of the parties. Restatement (Second) of
Conflict of Laws §P 188(2) (1971). Notably, the Restatement
further provides that “[t]hese contacts are to be evaluated
according to their relative importance with respect to the
particular issue.” Id.
1. The place of contracting
The Restatement defines “the place of contracting” as
“the place where occurred the last act necessary . . . to give
the contract binding effect . . . .” Rest. (Second) Conflict of
Laws § 188, cmt. e; see, e.g., First Commerce, LLC v.
Sheldon, No. 213 CV 01915 RFB GWF, 2016 WL 5791542,
at *2 (D. Nev. Sept. 29, 2016). The parties dispute whether
the insurance contract, or at least the addition of the
Washington gas processing plant (the “Cedar Hills facility”)
to an existing insurance policy, was entered into in
Washington or Virginia. Both sides, however, conflate the
“place of contracting” factor with the “place of negotiation”
factor. Indeed, all of the parties’ citations to the record
appear to pertain more to negotiation of the insurance
contract than to its execution. Given that Ingenco’s risk
manager, Raymond Yerly, and Ace’s managing agent, Tim
Drag, met in Virginia and were both located in Virginia, it
seems likely that the contract was executed in Virginia. In
any event, however, “standing alone, the place of contracting
is a relatively insignificant contact.” Rest. (Second) Conflict
of Laws § 188, cmt. e.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 13
2. The place of negotiation
The record is also somewhat unclear with respect to the
place of negotiation. Yerly and Drag did have in-person
meetings in Virginia. Ingenco’s broker, who communicated
with Drag, also appears to have been located in Virginia.
Drag acknowledged, however, that prior to the addition of the
Washington Cedar Hills facility to the policy, Ace
investigated the Washington plant, presumably in person, and
that up to fifty percent of Ace’s due diligence may have
occurred in Washington. Furthermore, some of the
negotiations may have occurred by telephone from different
states. Neither Yerly nor Drag could recall having a
substantive, in-person meeting regarding the Washington
facility.3 Thus, the place of negotiation factor is either
neutral, or perhaps weighs slightly in favor of Ace and
Virginia. See Rest. (Second) Conflict of Laws § 188, cmt. e
(“This contact is of less importance when there is no one
single place of negotiation and agreement, as . . . when the
parties do not meet but rather conduct their negotiations from
separate states by mail or telephone.”).
3. The place of performance
With respect to the place of performance, neither party
identifies where Ingenco performed, either by paying
premiums or otherwise. Ace asserts that its own place of
performance was Virginia because the policy states that any
loss is to be “adjusted with” and payable to Ingenco, and
Ingenco’s mailing address is in Virginia. The meaning of the
3
To the extent Yerly referenced discussions regarding finding “a
permanent place” for the gas facility, he appears to have meant a proper
insurance vehicle rather than a physical, geographical location.
14 INGENCO HOLDINGS V. ACE AMER. INS. CO.
policy’s “adjusted with” language is not entirely clear, but
suggests that Ace will adjust any claim in collaboration with
Ingenco. Ace’s managing agent, however, acknowledged that
roughly fifty percent of the adjustment of Ingenco’s claim
took place in Washington, and that the rest took place in New
York, not Virginia.
With respect to payment of insurance benefits, some
courts have held that the place of performance is the place
where payment under a policy would be made. See, e.g.,
Pinnacle Realty Mgmt. Co. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, PA, No. CIVA 06 cv 02063 WDMCB, 2007 WL
1970275, at *3 (D.Colo. July 3, 2007). Other courts applying
Section 188 have concluded, however, that “[w]hen the
contract is one of payment, the place of performance seems,
in truth, of no particular consequence.” State Farm Fire &
Cas. Co. v. Miraglia, No. 4:07-CV-013-A, 2008 WL
11350060, at *3 (N.D. Tex. Jan. 30, 2008) (quoting Houston
Cas. Co. v. Certain Underwriters at Lloyd’s London, 51 F.
Supp. 2d 789, 797 (S.D. Tex. 1999). Here, the place of
performance factor is neutral, as payment took place in
Virginia but adjustment took place in Washington. In any
event, this factor merits little weight.
4. The location of the subject matter of the contract
Ace argues that the location of the subject matter of the
contract “mostly covers Virginia property.” This argument
depends entirely on the fact that the policy at issue here
covers thirteen locations in Virginia and only one in
Washington. That emphasis is misplaced, however. The
policy in question covers eighteen separate facilities across
five states. Although Virginia is home to the largest number
of insured facilities, the coverage amount for the lone
INGENCO HOLDINGS V. ACE AMER. INS. CO. 15
Washington facility dwarfs the combined coverage amounts
of all seventeen other facilities, let alone the amounts of the
thirteen Virginia facilities. The Cedar Hills facility is insured
for $35 million in property losses and $12 million in business
interruption losses, while the other seventeen facilities are
insured for a total of approximately $31.3 million.4 Thus, it
cannot be said that the policy covers “mostly” Virginia
property.
Furthermore, to the extent Ace argues that Section 188
factors look to a jurisdiction’s relationship with a contract,
rather than with a specific property, Ace cites no authority,
and ignores the language of Section 188 itself, which states
that contacts “are to be evaluated according to their relative
importance with respect to the particular issue.” Rest.
(Second) Conflict of Laws § 188(2) (emphasis added); see
also Hartford Underwriters Ins. Co. v. Found. Health Servs.
Inc., 524 F.3d 588, 595 (5th Cir. 2008); Hammersmith v. TIG
Ins. Co., 480 F.3d 220, 234 (3d Cir. 2007) . The commentary
to the Restatement also counsels:
When the contract deals with a specific
physical thing . . .the location of the thing or
of the risk is significant (see §§ 189–193).
The state where the thing or the risk is located
will have a natural interest in transactions
affecting it. Also the parties will regard the
location of the thing or of the risk as
4
The Cedar Hills facility in Washington appears to be the only
facility with business interruption coverage. Even excluding the business
interruption coverage, the Cedar Hills facility is insured against a greater
amount of property damage than all of the other seventeen facilities
combined.
16 INGENCO HOLDINGS V. ACE AMER. INS. CO.
important. Indeed, when the thing or the risk
is the principal subject of the contract, it can
often be assumed that the parties, to the extent
that they thought about the matter at all,
would expect that the local law of the state
where the thing or risk was located would be
applied to determine many of the issues
arising under the contract.
Rest. (Second) Conflict of Laws § 188, cmt. e.
Thus, in light of the particular issue here and the fact that
the Washington facility is, by insured value, far and away the
primary subject matter of the policy, the location of the
subject matter factor weighs heavily in favor of Washington,
and is significant.
5. The residence, place of incorporation, and place of
business of the parties
With respect to residence, place of incorporation, and
place of business, only the latter appears to be relevant. It is
undisputed that Ingenco’s principal place of business is in
Virginia. Ingenco represented to the district court both that
its subsidiary, Bio Energy (Washington), LLC, has a principal
place of business in Virginia and that its offices, records, and
personnel are located in Washington. Ingenco, however, is
the named insured. This factor weighs in favor of Virginia
law, but is not particularly significant. See Rest. (Second)
Conflict of Laws § 188, cmt. e (“The fact that one of the
parties is domiciled or does business in a particular state
assumes greater importance when combined with other
contacts, such as that this state is the place of contracting or
INGENCO HOLDINGS V. ACE AMER. INS. CO. 17
of performance or the place where the other party to the
contract is domiciled or does business.”).
6. The balance of the Restatement factors weighs in
favor of the application of Washington law
Looking, then, to the totality of the relevant Section 188
factors, only the fifth weighs significantly and unequivocally
in favor of Ace and the application of Virginia law. The first,
second, and third factors (place of contracting, place of
negotiation, and place of performance, respectively) are either
neutral or, to the extent they weigh in favor of Virginia law,
are not particularly important. See Rest. (Second) Conflict of
Laws § 188(2) (“These contacts are to be evaluated according
to their relative importance with respect to the particular
issue.”). The fourth factor, the location of the subject matter
of the contract, weighs heavily in favor of Washington law,
and with respect to the particular issue here, is by far the most
important factor.5 Accordingly, Washington law applies.
B. Whether Ingenco’s Failure to Notify Violated a
Condition Precedent to Coverage
Having concluded that Washington law applies to this
insurance coverage dispute, we now turn to the particular
coverage provisions and exclusions at issue.
5
The district court looked beyond the Section 188 factors to
Washington’s interest in protecting its insureds and maintaining the health
and safety of its residents. Although not strictly relevant to a Section 188
analysis, these factors, insofar as they relate to the “particular issue” of
damage to a potentially hazardous facility, may be more properly
considered as relevant to the “relative importance” attributable to the
Section 188 factors, particularly the fourth, “location of the subject
matter” factor. Rest. (Second) Conflict of Laws § 188(2).
18 INGENCO HOLDINGS V. ACE AMER. INS. CO.
It is undisputed that although the diffuser basket straps
failed on October 1, 2010 and the entire facility was shut
down between October 5 and October 13, Ingenco did not
notify Ace of the October diffuser shield malfunction and the
resulting loss of beads in V32 until May 11, 2011, when the
plant shut down for the second time. Ace argues that
Ingenco’s failure to give notice of the initial failure and
shutdown violated a condition precedent to coverage under
the all risks policy.
As stated above, under Washington law, an insurer
contending that an insured violated a condition precedent to
coverage, such as by failing to comply with a notice
provision, must demonstrate prejudice from the insured’s
failure. Mut. of Enumclaw, 164 Wash. 2d. at 424–25;
MacLean Townhomes, 138 Wash. App. at 190. Ace contends
that the uncontroverted evidence demonstrates that it was
prejudiced by Ingenco’s failure to notify Ace of the October
1 diffuser basket failure or the October 5 shutdown.
Specifically, Ace points to undisputed evidence that Ingenco
discovered the shield failure on October 5, 2010, shut down
the facility until October 13, discovered dust throughout the
pressure vessels, and replaced all four vessels’ diffuser
baskets, all without notifying Ace until after the second total
shutdown on March 11.6
Although Ingenco does not dispute this evidence, it does
argue that the evidence is insufficient to demonstrate any
6
Ingenco also admits that it replaced V32’s adsorbent beads, but
claims that it did not notify Ace because the bead manufacturer did not
charge Ingenco for the replacement beads, and therefore Ingenco suffered
no loss.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 19
prejudice to Ace.7 Indeed, Ace’s entire argument is premised
on the assertion that Ingenco’s remedial actions “depriv[ed]
Ace of the ability to reconstruct the system and fully
investigate Ingenco’s claims about how the failure occurred
and why it fell within the Policy’s coverage terms.” Ace’s
argument, however, conflicts with the testimony of its own
expert, Dr. Michael Casey. Dr. Casey testified at his
deposition that he was able to determine the cause of the
diffuser basket failure based on photographs of the failed
basket and straps. To the extent Dr. Casey testified that Ace
was able to evaluate the gas purification system from
photographs alone, there is at least a triable issue of fact as to
whether Ace was prejudiced by Ingenco’s remedial actions.
C. Whether Ingenco’s Losses Resulted From an
“External Cause”
1. Background
Ingenco’s all risks policy, issued by Ace, insured against
“all risks of direct physical loss or damage occurring . . . from
any external cause.” Ingenco asserts, somewhat
inconsistently, that “gas flow-induced vibrations,” the
“pressure from the process gas,” and the “undiffused, high
velocity landfill gas” were “external” causes of Ingenco’s
adsorbent bead losses. Ace argues that, as the district court
concluded, the unmediated stream of landfill gas that
destroyed V32’s adsorbent beads does not qualify as an
“external” force, and that Ingenco’s losses are therefore not
covered by the all risks policy.
7
Ingenco did not appeal the district court’s conclusion that Ingenco
failed to comply with the policy’s notice provision.
20 INGENCO HOLDINGS V. ACE AMER. INS. CO.
There is no dispute about the generally applicable
principles of insurance policy interpretation. Policies should
be construed as a whole and given the type of sensible
construction that an average insurance purchaser would give.
Kitsap Cty. v. Allstate Ins. Co., 136 Wash. 2d 567, 575
(1998). Undefined terms must be given their “plain, ordinary,
and popular meaning,” and any ambiguities should be
construed against the insurer. Id. at 576.
The policy does not define the term “external cause.”
Ingenco argues, briefly, that under the plain and ordinary
meaning of “external,” landfill gas that originated outside the
Ingenco facility was, by definition, not internal to the covered
facility and, thus, qualifies as an “external” force. Although
that argument has some appeal, Ingenco also contends,
without explaining why any meaning other than the plain
meaning should apply, that, in the absence of a definition of
“external cause” in the policy, courts may look to judicial
interpretations of that phrase, including the district court’s
decision in Standard Structural Steel Co. v. Bethlehem Steel
Corp., 597 F. Supp. 164, 193 (D. Conn. 1984).8 Both parties
cite the Standard Structural Steel court’s explanation that, in
the context of an all risks policy such as that at issue here, “a
8
In some cases, conflicting dictionary and industry (or judicially-
crafted) meanings may create ambiguities that can only be resolved, if at
all, through extrinsic evidence. See Queen City Farms, Inc. v. Cent. Nat.
Ins. Co. of Omaha, 126 Wash. 2d 50, 83 (1994). Here, although Ingenco
argues both that the plain meaning of “external cause” should apply and
that the Standard Structural Steel-type definition applies, Ingenco does not
contend that there is any ambiguity in the term “external cause.” See also
Enron Oil Trading & Transp. Co. v. Walbrook Ins. Co., 132 F.3d 526, 530
(9th Cir. 1997) (looking to other provisions of insurance contract to
determine that parties intended industry usage, rather than the plain
meaning, of a term).
INGENCO HOLDINGS V. ACE AMER. INS. CO. 21
cause is external if damage which arises from it does not
result wholly from an inherent defect in the subject matter or
from the inherent deficient qualities, nature and properties of
the subject matter.”9 Standard Structural Steel, 597 F. Supp.
at 193 (internal quotation marks omitted). Other courts,
including the district court here, have applied essentially this
same definition of “external cause.” See, e.g., Delta Nat. Gas
Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pennsylvania,
No. CIV.A. 11-57-KSF, 2011 WL 2007706, at *2 (E.D. Ky.
May 23, 2011).
2. Fortuity
The parties hew closely to the Standard Structural Steel
definition of external cause and argue at length about whether
the V32 diffuser basket and the adsorbent media were
“inherently defective.” The parties’ arguments largely
ignore, however, the concept of “fortuity,” which operates “as
a sort of partnership” with the external cause requirement.10
Standard Structural Steel, 597 F. Supp. at 191–92; see also
9
The Standard Structural Steel court also stated that all risks
insurance policies implicitly require an external cause, even if the
language of the policy is not so limited. Standard Structural Steel, 597 F.
Supp. at 192. Thus, as the Standard Structural Steel court explained,
“[t]he label ‘all risk’ is essentially a misnomer. All risk policies are not
‘all loss’ policies; all risk policies . . . contain express written exclusions
and implied exceptions which have been developed by the courts over the
years.” Standard Structural Steel, 597 F. Supp. at 192 (internal quotation
and citation omitted).
10
Ingenco does refer to fortuity in passing in its opening brief and
somewhat more extensively in its reply but, at least in part, does so in
reference to flow-induced vibrations rather than the stream of incoming
landfill gas. Ace does not refer to fortuity at all, but raises arguments that
fit within the fortuity framework.
22 INGENCO HOLDINGS V. ACE AMER. INS. CO.
Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440, 1446
(3d Cir. 1996) (citing “the generally accepted principle that
every ‘all risk’ contract of insurance contains an unnamed
exclusion—the loss must be fortuitous in nature.” (internal
quotation omitted)); Underwriters Subscribing to Lloyd’s Ins.
Cert. No. 80520 v. Magi, Inc., 790 F. Supp. 1043, 1046 (E.D.
Wash. 1991) (“Regardless of its express terms, every all-risk
policy contains an unnamed exclusion—the loss must be
fortuitous in nature.” (internal quotation and citation
omitted)). Indeed, some courts have used the word
“fortuitous” as an alternative to “external cause.” See, e.g.,
Dow Chem. Co. v. Royal Indem. Co., 635 F.2d 379, 386, (5th
Cir. 1981) (stating, in reference to an all risks policy using the
term “external cause,” that “recovery under an all-risk policy
will be allowed for all fortuitous losses not resulting from
misconduct or fraud, unless the policy contains a specific
provision expressly excluding the loss from coverage.”).11
The Washington Supreme Court has not addressed the
concept of fortuity as it relates to all risks insurance policies.
It is our task, therefore, to predict how the Washington
Supreme Court would decide the issue. Dimidowich v. Bell
& Howell, 803 F.2d 1473, 1482 (9th Cir. 1986). In so doing,
we may look to other courts’ decisions for guidance, as well
as to treatises, restatements, and other data. Id.; Astaire v.
Best Film & Video Corp., 116 F.3d 1297, 1300 (9th Cir.
1997), amended, 136 F.3d 1208 (9th Cir. 1998).
11
As discussed below, other courts have emphasized the centrality of
fortuity over externality in the modern view of all risks policies, holding
that because the critical factor is the role of chance, external causation
cannot be read into all risks policies, and that even intrinsically caused
fortuitous events may be covered under an all risks policy. See City of
Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38, 48 at n.9 (2d Cir.
2003) (collecting cases).
INGENCO HOLDINGS V. ACE AMER. INS. CO. 23
Courts, often drawing upon the Restatement of Contracts,
have typically defined a fortuitous event as one that is
dependent upon chance, taking into account the knowledge of
the parties.12 See, e.g., Compagnie des Bauxites de Guinee v.
Ins. Co. of N. Am., 724 F.2d 369, 372 (3d Cir. 1983); Magi,
Inc., 790 F. Supp. at 1047–48 (collecting cases). Courts have
further concluded that a fortuity inquiry should look to,
among other things, whether a particular loss was certain to
occur, the parties’ perception of risk at the time the policy
issued, and whether the loss could reasonably have been
foreseen.13 Magi, Inc., 790 F. Supp. at 1048; Churchill v.
Factory Mut. Ins. Co., 234 F. Supp. 2d 1182, 1188 (W.D.
Wash. 2002); Frank Coluccio Const. Co. v. King Cty.,
136 Wash. App. 751, 768 (2007). We conclude that the
Washington Supreme Court would adopt a definition of
fortuity consistent with this trend.14
With this concept of fortuity in mind, we turn to the facts
of this case. Here, the fortuity analysis is complicated
somewhat by Ingenco’s inconsistent references to both “flow
12
According the Restatement of Contracts, “[a] fortuitous event . . .
is an event which[,] so far as the parties to the contract are aware, is
dependent on chance. It may be beyond the power of any human being to
bring the event to pass; it may be within the control of third persons; it
may even be a past event, as the loss of a vessel, provided that the fact is
unknown to the parties. The event may be positive or negative—an
occurrence or a failure to occur.” Restatement (First) of Contracts § 291
(1932).
13
The Magi, Inc. court determined that the Washington Supreme
Court would adopt a similar definition. Magi, Inc., 790 F. Supp. at 1048.
14
Multiple district courts within this circuit have made similar
predictions. See, e.g., Magi, Inc., 790 F. Supp. at 104; Kilroy Indus. v.
United Pac. Ins. Co., 608 F. Supp. 847, 858 (C.D. Cal. 1985).
24 INGENCO HOLDINGS V. ACE AMER. INS. CO.
induced vibrations” and “the process gas” as the cause of its
losses, as discussed above. Were the inquiry focused on the
fortuity of “the process gas,” Ingenco could not possibly
succeed, as it is undisputed that all parties fully expected the
stream of landfill gas to enter the Cedar Hills facility and, as
Ingenco concedes, the incoming stream of gas never
exceeded expected tolerances. The focus of our fortuity
analysis, however, is not on the fortuity of the process gas or
some other cause, but rather on whether Ingenco’s loss was
fortuitous. There is no evidence in the record that the failure
of the diffuser basket cover plate straps, or the subsequent
obliteration of the adsorbent media, was inevitable. Nor is
there any evidence in the record that either party had reason
to believe, at the time the policy issued, that the diffuser
basket cover would fail under normal gas pressures, or that
the adsorbent media would ever be exposed to an unmediated
stream of high pressure gas. Lastly, Ingenco’s expert opined
that the resonant vibrations in the metal straps were not, and
could not have been, reasonably foreseen. See Magi, Inc.,
790 F. Supp. at 1047–48; see also City of Burlington v.
Indem. Ins. Co. of N. Am., 332 F.3d 38, 49 (2d Cir. 2003)
(recounting Third Circuit’s conclusion in Compagnie Des
Bauxites that “while in hindsight [] structural defects might
appear inevitable, [the court] had to credit the insured’s
statements that it had no knowledge of the design defects and
that the loss was therefore fortuitous,” and explaining that “an
intrinsically caused loss may be just as unexpected as an
extrinsically caused one.”). Thus, it appears that Ingenco’s
loss was indeed fortuitous, or that there is, at the very least,
a triable issue of fact regarding the issue.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 25
3. External Cause
A determination that a particular loss is fortuitous could
obviate the need to examine whether that loss was caused by
an external force. Although the policy language here
undoubtedly applies only to losses resulting from an “external
cause,” some courts, interpreting nearly identical policy
language, have held that an insured need only demonstrate
that a fortuitous loss has occurred, notwithstanding “external
cause” policy language. See, e.g., Atl. Lines Ltd. v. Am.
Motorists Ins. Co., 547 F.2d 11, 12 (2d Cir. 1976). The Fifth
Circuit addressed one such situation, explaining:
As has been recognized in other circuits, it
would appear that all risks insurance arose for
the very purpose of protecting the insured in
those cases where difficulties of logical
explanation or some mystery surround the
(loss of or damage to) property. It would
seem to be inconsistent with the broad
protective purposes of “all risks” insurance to
impose on the insured . . . the burden of
proving the precise cause of the loss or
damage. It is not surprising, therefore, that
courts which have considered claims under
insurance policies with essentially the same
insuring language as the policy before us have
consistently refused to require the insured to
demonstrate that the loss or damage was
occasioned by an external cause. We
similarly refuse to impose such a burden in
this case.
26 INGENCO HOLDINGS V. ACE AMER. INS. CO.
Morrison Grain Co. v. Utica Mut. Ins. Co., 632 F.2d 424, 430
(5th Cir. 1980).
Although we find this reasoning persuasive, the
Washington Supreme Court has not spoken on the issue. We
need not predict, however, whether the Washington Supreme
Court would read “external cause” policy language to require
an insured to make a separate showing of external causation.
Even assuming that the Washington Supreme Court would,
unlike the Morrison Grain court, require an insured to show
not only a fortuitous loss, but also an “external cause” in the
all risks context, and would adopt the Standard Structural
Steel definition of “external cause” as dependent on whether
resulting damage arises “wholly from an inherent defect in
the subject matter,” there nevertheless remains a triable issue
of fact here.15 Standard Structural Steel, 597 F. Supp. at 191.
As an initial matter, the district court appears to have
conflated, or at the very least applied, two different
definitions of “external cause.” To the extent that the district
court concluded that “the incoming landfill gas was necessary
and internal to the gas purification system,” it appears to have
applied a plain and ordinary meaning of “external.” Whether
it did so correctly is debatable. On the one hand, landfill gas
was certainly essential to the operation of the Cedar Hills
facility. At the same time, however, landfill gas was not an
15
Although we refrain from concluding that the Washington Supreme
Court would follow a Morrison Grain-like approach, neither do we
suggest that the court would adopt the Standard Structural Steel court’s
view of external causation. To the contrary, although the Washington
Supreme Court has not addressed the precise issue, it has, in the all risks
context, suggested that an external cause can exist even in circumstances
involving latent defects. See Dickson v. U.S. Fid. & Guar. Co., 77 Wash.
2d 785, 793–94 (1970).
INGENCO HOLDINGS V. ACE AMER. INS. CO. 27
essential component of the facility or of the machinery itself,
which existed before the first inflow of gas was ever piped
in.16 Furthermore, although the landfill gas indisputably
“arose” from outside the insured facility, whether it “acted”
internally or externally depends on whether the borders of the
insured subject matter begin at the property line or at the edge
of the pressure vessel.17 These conflicts are difficult to
resolve on the record before us, and perhaps, more than
anything, illustrate the advantages of avoiding the “external
cause” question altogether. See Morrison Grain, 632 F.2d at
430.
The district court also, however, applied the Standard
Structural Steel definition of “external cause,” concluding
that because there was an inherent problem in the gas
purification system, “the landfill gas was not an external
cause.” See Standard Structural Steel, 597 F. Supp. at 193.
The district court based that conclusion on its determination
that because the purification system, and in particular the
diffuser basket, was (1) designed to withstand landfill gas
and (2) failed to do so, it must have suffered from an
inherent defect. This logic, which Ace essentially reiterates
on appeal, is difficult to square, particularly in the all
16
Indeed, King County, which controls the Cedar Hills landfill, has
the ability to completely shut down the inflow of gas.
17
Ingenco’s argument that the object of the insurance claim, which in
this case is limited to the diffuser beads, defines the physical borders
relevant to an externality inquiry is not persuasive. Although Ingenco
argues that Ace’s characterization of the subject matter of the policy is so
comprehensive as to render any damage “internal,” Ingenco’s
characterization is no less extreme, being so fine-grained as to render
virtually any damage to any particular component, such as adsorbent
beads, “external.”
28 INGENCO HOLDINGS V. ACE AMER. INS. CO.
risks context. Although, in general, system failures of any
kind can conceivably result from an inherent defect, so too
might failures occur for some other, justifiably unexpected
reason. See, e.g., City of Burlington, 332 F.3d at 49 (“[I]n
hindsight[, ] structural defects might appear inevitable, . . .
[but] an intrinsically caused loss may be just as unexpected as
an extrinsically caused one.”); Morrison Grain, 632 F.2d at
430 (“[A]ll risks insurance arose for the very purpose of
protecting the insured in those cases where difficulties of
logical explanation or some mystery surround the (loss of or
damage to) property.”).
Even putting that logic aside, the district court’s
conclusion that an inherent defect, and therefore an internal
cause, was responsible for Ingenco’s losses fails to account
for material evidence and, indeed, is inconsistent with the
district court’s own determinations. The district court stated
that the V32 diffuser basket was “not necessarily defective,”
and acknowledged that Ingenco presented “some evidence
that the [diffuser] basket may not have been defectively
designed.” This observation is impossible to reconcile with
the district court’s conclusion on summary judgment that an
inherent defect nevertheless existed. Ingenco’s expert opined
not only that resonant vibrations caused the V32 shield
failure, but also that such failure was rare, that the vibrations
were unforeseeable and, perhaps for that reason, that the
relevant design codes do not require testing for resonant
vibrations. Although Ace’s experts certainly disagree, that
genuine dispute of fact is material to the questions whether
(1) the gas purification system, or V32’s diffuser basket and
its adsorbent beads, did, in fact, suffer from an inherent defect
and (2) accordingly, whether the cause of Ingenco’s loss was
internal or external.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 29
We therefore conclude that the district court’s grant of
summary judgment to Ace on the question of whether
Ingenco’s loss was the result of an “external cause” must be
reversed. The district court, and to some extent, the parties,
failed to consider the role of fortuity in all risks insurance
disputes. There is, at least, a dispute of fact as to whether
Ingenco’s loss here was fortuitous. We take no position at
this juncture on the question whether the Washington
Supreme Court would require a separate showing of external
causation. Even assuming, however, that Ingenco must make
such a showing, and even assuming that “external cause” is
coterminous with “inherent defect,” there is a triable issue of
fact as to whether Ingenco’s purification system, and/or its
components, suffered from such a flaw.
D. The Ensuing Loss Exception
Ingenco’s all risks policy excluded losses resulting from
“[f]aulty or defective material, faulty workmanship, faulty
methods of construction, [or] errors or omissions in plan or
specification or designs . . . unless loss by a peril not
otherwise excluded ensues . . . .” Ingenco argues that, even
if V32’s diffuser basket was defectively designed, and even
if its failure therefore constitutes an uncovered “internal”
cause of loss, the “ensuing loss” exception quoted above
preserves coverage for the post-failure damage to the
adsorbent beads throughout the purification system. Ace’s
opposition is based largely upon the contention, discussed at
length above, that the damage at issue here did not result from
an “external cause.”
As Ingenco points out, the Washington Supreme Court
discussed ensuing loss exclusions in Vision One, LLC v.
Philadelphia Indem. Ins. Co., 174 Wash. 2d 501 (2012). As
30 INGENCO HOLDINGS V. ACE AMER. INS. CO.
the Vision One court explained, ensuing loss clauses ensure
that, where an uncovered event takes place, any ensuing loss
which is otherwise covered by the policy remains covered,
even though the uncovered event itself is never covered.
Vision One, 174 Wash.2d at 515. For example, if a
homeowner’s policy excluded losses from faulty
workmanship, an electrician’s wiring mistakes would not be
covered, even if the policy included an ensuing loss
exception. Id. If, however, those uncovered wiring mistakes
subsequently caused a fire that then caused additional
damage, the fire damage would be covered under the ensuing
loss clause. Id. Conversely, for example, if a policy
contained an ensuing loss provision but specifically excluded
both faulty construction and mold losses, the ensuing loss
provision would not preserve coverage where defective
construction led to mold damage, because the ensuing mold
damage was not “otherwise covered.” Id. “[T]he dispositive
question in analyzing ensuing loss clauses is whether the loss
that ensues from the excluded event is covered or excluded.
If the ensuing loss is also an excluded peril or an excluded
loss under the policy, there is no coverage.” Id. at 516.
The bulk of the dispute here appears to center on whether
Ingenco’s bead-related loss ensued from some other, prior,
uncovered loss, or itself constituted the loss. Ingenco
concedes that the loss of the V32 diffuser shield was not
covered.18 Ingenco argues, however, that because the
destruction of the adsorbent beads occurred subsequent to the
shield failure, the ensuing loss provision should operate to
18
It is not entirely clear whether Ingenco’s concession is based upon
the fact that the basket failed for some excluded reason, the fact that the
basket was not an integral part of the nitrogen rejection vessel, or some
other reason.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 31
cover the bead-related loss, regardless of the fact that the
shield failure itself is excluded. In response, Ace argues that
“nobody is concerned with damage to the diffuser basket
itself,” and thus the bead-related damage is not an ensuing
loss, but rather the excluded loss itself.
Ace’s argument appears to be inconsistent with its prior
assertion that the high-pressure stream of landfill gas was the
internal cause of Ingenco’s loss. Vision One counsels that the
key question is whether “the loss that ensues from the
excluded event is covered or excluded.” Vision One,
174 Wash.2d at 516 (emphasis added). Ace’s understanding
of “the excluded event” is difficult to pin down. In the
external cause context, Ace argues that the stream of landfill
gas was an internal, causative event, and was thus excluded.
In the ensuing loss context, in contrast, Ace appears to
suggest a different precipitating “excluded event,” suggesting
that the breakdown of the adsorbent beads is the primary
event. At the same time, however, Ace also states that the
loss of the beads was “caused by the diffuser basket’s
defective design,” suggesting yet a third potential
preliminary, excluded cause. Ace cannot have it both (or all
three) ways.
Proceeding, therefore, with the understanding that the loss
of the adsorbent beads did ensue from some prior, but
excluded loss or event, whether it be the stream of gas or the
failure of the diffuser shield, the question remains whether
the loss of the beads was itself excluded. Vision One,
174 Wash.2d at 516. In other words, to compare these facts
to the examples cited in Vision One, is the loss of the beads
more akin to the fire damage in the mis-wiring example or to
the mold in the defective construction case? We conclude
that the answer is the former. Although in the latter example,
32 INGENCO HOLDINGS V. ACE AMER. INS. CO.
the mold did ensue from faulty construction, the ensuing loss
provision nevertheless did not preserve coverage because
mold itself was an excluded peril. Id. Here, there was no
specific exclusion regarding the loss of the beads, just as in
the mis-wiring example, there was no specific exclusion for
fire.19 Thus, even if it were conclusively established that the
diffuser shield suffered from some inherent defect, the
subsequent destruction of the adsorbent beads would be
covered under the policy’s ensuing loss exception.
E. The Endorsement’s “Accident” coverage
Ingenco also argues that the separate Boiler and
Machinery endorsement to the policy independently confers
coverage for Ingenco’s losses. The Endorsement covered
“Accident[s],” defined as a “sudden and accidental
breakdown of an Object,” exclusive of “depletion,
deterioration, . . . [and] wear and tear . . . .” As discussed
above, Ingenco’s experts opined that the “truly sudden”
breakdown of V32’s diffuser shield, which resulted in the
destruction of the adsorbent beads in V32 and throughout the
system, was the “unexpected” result of unanticipated
resonant vibrations that were “not foreseeable.” Thus there
is a genuine dispute of material fact as to whether the
Endorsement applies.
F. Actual Time of Repair
Assuming, for the sake of argument, that there is
coverage, the policy covers business interruption losses for
19
To the extent Ace argues that there was such an exclusion because
the beads themselves suffered from an inherent defect, there is a triable
issue of fact regarding the integrity of the beads.
INGENCO HOLDINGS V. ACE AMER. INS. CO. 33
“only such length of time . . . as would be required with the
exercise of due diligence and dispatch to rebuild or replace”
damaged property. Ingenco did not resume operations at
Cedar Hills for approximately sixteen months after the
second, March 2011 shutdown. Nor did Ingenco perform any
remedial work at the facility for approximately nine months,
during which time Ingenco evaluated alternative options for
nitrogen removal. Nevertheless, Ingenco seeks to recover for
the entire sixteen-month shutdown period. Ace argues that
Ingenco’s business interruption recovery should be limited to
the “theoretical period of restoration.” The district court
largely agreed with Ace, concluding that the applicable
period “is limited to the hypothetical period of restoration.”
Some courts have held that the applicable period for an
insured to reenter business is the “theoretical replacement
time.” Vermont Mut. Ins. Co. v. Petit, 613 F. Supp. 2d 154,
161 (D. Mass. 2009); W. & Clay, LLC v. Landmark Am. Ins.
Co., No. C09-1423 MJP, 2011 WL 321740, at *5 (W.D.
Wash. Jan. 28, 2011); SR Int’l Bus. Ins. Co. v. World Trade
Ctr. Properties, LLC, No. 01 CIV.9291(MBM), 2005 WL
827074, at *9 (S.D.N.Y. Feb. 15, 2005). Nevertheless,
Ingenco argues, based largely upon our memorandum
disposition in Alevy v. All. Gen. Ins. Co., No. 95-56034, 1996
WL 623065 (9th Cir. Oct. 24, 1996), that the “actual
replacement time” is relevant to the measure of Ingenco’s
losses.20 The Alevy court observed that although theoretical
replacement time would be an appropriate measure of actual
insured losses where payment was to be made before
rebuilding was complete, actual replacement time is a more
logical “starting point in the analysis” where rebuilding has
20
Ingenco’s citation to the unpublished disposition in Alevy runs
counter to Ninth Circuit Rule 36-3. See CTA9 Rule 36-3(a), (c).
34 INGENCO HOLDINGS V. ACE AMER. INS. CO.
already occurred. Alevy, 1996 WL 623065, at *2–3; see also
SR Int’l, 2005 WL 827074, at *7. Other courts have agreed
that it makes “perfect sense” to look first to actual time of
repair in cases where businesses have completed repairs or
resumed operations by the time a court is presented with the
task of interpreting coverage provisions. See, e.g. SR Int’l,
2005 WL 827074, at *7.
Here, as in Alevy, repairs had already been made by the
time Ace denied Ingenco’s claim. We conclude that under
such circumstances, the actual time of repair has some
bearing on what period “would be required with the exercise
of due diligence and dispatch to rebuild or replace” damaged
property. We further observe, however, that Ingenco does not
argue, nor does any authority appear to state, that the
applicable repair period should be measured by “actual
replacement time” even where the actual time to repair is
unreasonable.21 Thus, although Ingenco’s actual time to
repair might be relevant to the question whether a sixteen-
month shutdown was consistent with “the exercise of due
diligence and dispatch,” it is by no means dispositive.
21
Furthermore, to the extent Ingenco seeks to recover amounts
beyond the theoretical replacement time because of Ace’s alleged delay
in investigating and adjusting Ingenco’s claim, we note that even those
courts that have applied theoretical replacement time as the measure of
loss have provided for extensions of that time to account for an insurer’s
delay. See, e.g., Vermont Mutual, 613 F. Supp. 2d 154 at 161 (“The
period of restoration is a ‘theoretical replacement time,’ which a court may
extend to account for an insurer’s failure to adjust [a] loss within a
reasonable time.” (internal quotation and citations omitted)).
INGENCO HOLDINGS V. ACE AMER. INS. CO. 35
G. Sanctions
The district court determined that Ingenco willfully
withheld evidence of damages on its state law statutory
claims. The district court then, as a sanction, precluded
Ingenco from introducing such evidence.22 See Fed. R. Civ.
P. 37(c). Ingenco argues that the district court abused its
discretion in finding willful misconduct because (1) Ingenco
responded to Ace’s request for damages information within
one day of Ace’s request, and (2) the district court refused to
consider sanctions other than dismissal.
We afford district courts “particularly wide latitude” to
impose discovery sanctions, and will not reverse absent a
“definite and firm conviction that the district court committed
a clear error of judgment.” R&R Sails, 673 F.3d at 1245;
Marchand, 22 F.3d at 936. The district court observed that
Ace requested damages information in written interrogatories
several months before Ingenco ultimately, after an additional
request from Ace, provided the information at a Rule 30(b)(6)
deposition. Furthermore, Ace points out, as did the district
court, that Federal Rule of Civil Procedure 26(a)(1)(A)(iii)
requires the disclosure of “a computation of each category of
damages claimed by the disclosing party—who must also
make available . . . the documents or other evidentiary
material . . . on which each computation is based, including
materials bearing on the nature and extent of injuries
suffered,” regardless whether the opposing party requests
such information. Fed. R. Civ. P. 26(a)(1)(A)(iii). The
22
Because damages are an essential element of the statutory claims,
the district court then dismissed the claims. Ingenco does not appear to
dispute that, to the extent the exclusion of Ingenco’s damages evidence
was proper, dismissal of the statutory claims was also appropriate.
36 INGENCO HOLDINGS V. ACE AMER. INS. CO.
district court concluded that Ingenco’s initial disclosures,
which were never supplemented, never disclosed any
damages information related to statutory claims. Here, on
appeal, Ingenco has not presented any argument explaining
this failure to meet its affirmative obligations under Rule 26.
When a party fails to disclose information required by
Rule 26, Rule 37(c)(1) provides that the improperly withheld
information should be excluded, unless the failure to disclose
is “substantially justified or harmless.” Fed. R. Civ. P.
37(c)(1). Here, the district found that Ingenco’s eleventh
hour disclosure was not substantially justified, and was not
harmless because it disrupted both Ace’s and the court’s
schedules. Although the court’s prejudice explanation was
not particularly detailed, its conclusion was not clearly
erroneous.
The district court also recognized that, because exclusion
of Ingenco’s statutory damages evidence as a Rule 37(c)
sanction would be dispositive of Ingenco’s statutory claims,
which require a showing of damages, the court was required
to consider (1) whether Ingenco’s noncompliance involved
willfulness, fault, or bad faith, and (2) whether lesser
sanctions were available. See R&R Sails, 673 F.3d at 1247.
The district court made the required findings of willfulness,
fault, and bad faith, supported by evidence that Ingenco
(1) ignored Ace’s written interrogatories, (2) never complied
with its Rule 26 obligations, or even attempted to do so until
one day before the discovery cutoff, and then (3) attempted
to blame Ace for those failures instead of justifying or
explaining them. The district court also explained that a
lesser sanction would not be appropriate because (1) Ingenco
had not put forth any viable alternative and (2) any lesser
INGENCO HOLDINGS V. ACE AMER. INS. CO. 37
sanction requiring the reopening of discovery would have
interfered with the impending trial date.
Accordingly, the district court did not abuse its discretion
in sanctioning Ingenco for failure to disclose statutory
damages information to Ace, even though those sanctions
resulted in the dismissal of Ingenco’s statutory claims.
CONCLUSION
For the reasons stated above, we AFFIRM the district
court’s orders in part, insofar as they apply Washington law
and exclude evidence of damages for purposes of state law
claims as a discovery sanction. We REVERSE, however, the
district court’s grant of summary judgment against Ingenco
and REMAND to the district court for trial. Each party shall
bear its own costs.
AFFIRMED IN PART; REVERSED IN PART; and
REMANDED.