XL Insurance America, Inc. v. Noranda Aluminum Holding Corporation ( 2020 )

IN THE SUPREME COURT OF THE STATE OF DELAWARE
XL INSURANCE AMERICA, INC.,
§
TALBOT UNDERWRITING §
SERVICES (US) LTD., FACTORY
§
MUTUAL INSURANCE COMPANY,§
AXIS INSURANCE COMPANY, § No. 444, 2019
LIBERTY MUTUAL FIRE §
INSURANCE COMPANY, LIBERTY
§
SURPLUS INSURANCE § Court Below: Superior Court of the
CORPORATION, ACE AMERICAN§ State of Delaware
INSURANCE CO., ASPEN §
INSURANCE UK LTD., STEADFAST
§ C.A. No. N17C-01-152 (CCLD)
INSURANCE COMPANY, AIG §
EUROPE LIMITED, SCOR UK §
COMPANY LIMITED, SWISS RE§
INTERNATIONAL S.E., AND §
CERTAIN UNDERWRITERS AT §
LLOYD’S, LONDON, §
§
Defendant Below, §
Appellant, §
§
v. §
§
NORANDA ALUMINUM HOLDING §
CORPORATION, §
§
Plaintiff Below, §
Appellee. §
Submitted: July 22, 2020
Decided: October 2, 2020
Before SEITZ, Chief Justice; VALIHURA, and TRAYNOR, Justices.
Upon appeal from the Superior Court of the State of Delaware. AFFIRMED.
Ilana H. Eisenstein, Esq., Rachel A.H. Horton, Esq., DLA PIPER LLP (US),
Philadelphia, Pennsylvania; Aidan M. McCormack, Esq., DLA PIPER LLP (US),
New York, New York; John L. Reed, Esq., Matthew Denn, Esq., (argued), Kelly L.
Freund, Esq., DLA PIPER LLP (US), Wilmington, Delaware, for Appellants/Cross-
Appellees XL Insurance American, Inc., et al.
David B. Goodwin, Esq., Christine S. Haskett, Esq., (argued), COVINGTON &
BURLING LLP, San Francisco, California; David J. Baldwin, Esq., BERGER
HARRIS LLP, Wilmington, Delaware, for Appellee/Cross-Appellant Noranda
Aluminum Holding Corporation.
2
TRAYNOR, Justice:
Following two operation-disabling accidents, an insured aluminum-products
manufacturer, whose “all-risks” property-insurance policy included business-
interruption coverage, did not rebuild its damaged facility and consequently did not
resume operations. The insured and its insurers agreed that the failure to rebuild and
resume operations does not negate the business-interruption coverage. But when the
insured submitted its business-interruption claim, the parties could not agree on how
to calculate the insured’s gross-earnings loss, which is the measure of the insurers’
liability under the relevant policy. A lawsuit in the Superior Court ensued. After a
seven-day trial, the jury found in favor of the insured, and the insurers appealed.
At trial, the insured’s damages expert employed a model that measured the
insured’s gross-earnings loss by comparing the value of the insured’s production had
the accident not occurred with the value of its production after the accidents had it
repaired and resumed operations with due diligence. Although the parties dispute
whether the insurers took issue with this methodology—as opposed to its factual
underpinnings—in the proceedings below, in this appeal, the insurers contend that
the model is inconsistent with the policy’s formula for calculating gross-earnings
loss and that it grossly exaggerated the amount of the insured’s claim. The insurers
also challenge the insured’s expert’s factual assumptions and claim that he
improperly included amounts that the insured had waived in an earlier property-
3
damage settlement. For its part, the insured has cross-appealed, asking us to reverse
the trial court’s post-verdict reduction of the jury’s verdict to eliminate recovery of
an increased electrical expense that, according to the court, was not covered by the
policy.
For the reasons that follow, we conclude that the insured’s expert’s damages
model was consistent with the relevant policy provisions and that the trial court’s
determination that the factual assumptions made by the expert were sufficiently
reliable for the jury to consider was not an abuse of discretion. Likewise, we hold
that the insurers’ claim that the earlier property-damage settlement precluded a
portion of the insured’s recovery is without merit. Finally, we agree with the
Superior Court’s conclusion that the insured’s increased electrical expense was not,
as presented, properly added to the insured’s gross-earnings loss.
Therefore, we affirm.
I. BACKGROUND
A. Factual Background
Noranda, an aluminum-products manufacturer, operated an integrated
aluminum smelting and casting plant in New Madrid, Missouri (the “Smelter”). At
the Smelter, Noranda mined and refined raw materials, produced aluminum from the
raw materials, and carried out other downstream activities to manufacture and sell
finished aluminum products. The Smelter had three potlines, each with over 150
4
steel containers, known as pots. An electrical current ran through the potlines to
convert raw material into molten aluminum. The Smelter also had a casthouse where
equipment shaped the molten aluminum into finished aluminum products.
From 2013 to 2015, Noranda recorded multi-million dollar losses due largely
to a decline in aluminum prices. Industry analysts anticipated, however, that
aluminum prices would rebound starting in the first quarter of 2016. In August 2015,
an explosion at Noranda’s casthouse damaged both the building and equipment (the
“Casthouse Explosion”). The damage from the explosion limited production of one
of Noranda’s more profitable products. In the wake of this misfortune, Noranda’s
board of directors retained financial advisors to explore the company’s restructuring
options. In December 2015, the board decided that Noranda should pursue Chapter
11 bankruptcy protection while keeping the Smelter running to reduce costs and
defer expenditures so that the company could remain in business until 2016, when
aluminum prices were projected to rebound.
On January 7, 2016, a second accident occurred at the Smelter. A breakdown
of electrical equipment—specifically, a switchgear—disrupted the operation of the
potlines, causing molten aluminum to solidify in hundreds of pots in two of the
Smelter’s three potlines (the “Potline Freeze”). The two potlines were inoperable
until the frozen aluminum could be extracted and the pots restarted.
5
In February 2016, Noranda filed a Chapter 11 bankruptcy petition. Even with
the assistance of the bankruptcy process, however, it was no longer economically
feasible to continue operating the Smelter. In March 2016, Noranda shut down the
Smelter. In November 2016, Noranda sold the Smelter as part of its bankruptcy
proceeding.
B. Insurance Claims
At the time of the Casthouse Explosion and the Potline Freeze, the Smelter
was covered by several “all risks” property-insurance policies, all of which have the
same material terms, conditions, and exclusions. Noranda and its insurers (the
“Insurers”) agreed that the policy issued by Factory Mutual Insurance Company,
which provided 50% of Noranda’s coverage (the “Policy”), would be the relevant
policy for Noranda’s claims in this litigation. Noranda submitted claims for the
Casthouse Explosion and the Potline Freeze for three categories of loss: property
damage, business-interruption losses, and professional fees associated with claims
preparation.
The Policy’s property-damage component covered the cost to repair the
Smelter. Noranda and the Insurers settled the property-damage claims for both
accidents for approximately $38.5 million, of which about $16 million was related
to the Potline Freeze. As a condition of the settlement of the Potline Freeze claim,
Noranda released the Insurers from liability from any claims relating to the Potline
6
Freeze except “any portion of the [Potline Freeze Claim] relating to any replacement
costs or non-property damages.”1
The Policy’s business-interruption component covers lost earnings resulting
from the accidents for a defined time period during which the business interruption
persists. The Insurers paid Noranda approximately $5.6 million for claimed
business-interruption losses associated with the Casthouse Explosion, but denied the
remainder of Noranda’s business-interruption claim, including all of the business-
interruption losses associated with the Potline Freeze. The Insurers also denied
Noranda’s claim for professional fees related to the Potline Freeze.
1. The GROSS EARNINGS formula2
Noranda elected to pursue its business-interruption loss from the Casthouse
Explosion and the Potline Freeze under the GROSS EARNINGS formula of the
Policy,3 which provides that Noranda’s loss is to be measured as follows:
1) The recoverable GROSS EARNINGS loss is the Actual Loss
Sustained by the Insured of the following during the PERIOD OF
LIABILITY:
a) Gross Earnings;
1
Answering Br. at 14 (quoting App. to Opening Br. at A2406).
2
Unless otherwise defined in this opinion, capitalized terms have the meaning or should be
interpreted as set forth in the Policy.
3
The Policy provided Noranda with the option to pursue a business-interruption claim based on
GROSS EARNINGS AND EXTENDED PERIOD OF LIABILITY formula or a GROSS PROFIT
formula.
7
b) less all charges and expenses that do not necessarily continue
during the interruption of production or suspension of
business operations or services;
c) less ordinary payroll; and
d) plus all other earnings derived from the operation of the
business.
e) Ordinary Payroll . . . to the extent such payroll continues
following the loss and would have been earned had no such
interruption happened.4
The Policy defines the “PERIOD OF LIABILITY” of a business-interruption claim
as the period beginning at the time of the accident and “ending when with due
diligence and dispatch the building and equipment could be: i) repaired or replaced,
and ii) made ready for operations, under the same or equivalent physical and
operating conditions that existed prior to the damage.”5 The Policy defines “Gross
Earnings” as “the net sales less cost of all raw stock, materials and supplies used in
such production.”6
C. The Experts’ Calculations
Each party retained an expert forensic accountant to calculate Noranda’s
business-interruption loss. Noranda retained Christopher Hess, and the Insurers
4
App. to Opening Br. at A205–06. For the sake of clarity in distinguishing the components of the
GROSS EARNINGS formula, we refer to the resulting calculation as the “Measurement of Loss.”
5
Id. at A211–12. The parties disputed the PERIOD OF LIABILITY below. The issue was
submitted to and considered by the jury. The PERIOD OF LIABILITY is not challenged on
appeal.
6
Id. at A206.
8
retained Peter Karutz. The parties agreed that subpart (a) of the GROSS
EARNINGS formula (the “Gross Earnings Component”)7 was designed to measure
the insured’s loss of Gross Earnings during the PERIOD OF LIABILITY. In
calculating the Gross Earning Component, the parties further agreed that a
comparison should be made between Noranda’s Gross Earnings if the accidents had
not occurred (the “But For World”) with Noranda’s Gross Earnings if the accidents
occurred and Noranda made repairs (the “Hypothetical Repair World”).8 Both
parties reasoned that this was the appropriate comparison for determining the Gross
Earnings Component because the Policy requires Noranda to mitigate its losses.
The parties further agreed that, had Noranda repaired the Smelter, Noranda’s Gross
Earnings would gradually ramp up—increasing production thereby reducing its
earnings loss—as the two frozen pots were brought back into operation. Thus,
Noranda’s Gross Earnings loss would gradually decrease over the PERIOD OF
LIABILITY.
7
The parties interchangeably refer to the Gross Earnings Component as “lost production,” “lost
margin,” and “net revenues.”
8
App. to Opening Br. at A1675 (Hess, testifying for Noranda, stated that “the two scenarios are
both hypothetical: One, as if the accident never happened, a projection . . . of what they would
have done absent the loss. The other . . . you’re trying to project [Noranda’s lost production] had
they come back and rebuilt . . . .”); A1971 (Karutz, testifying for the Insurers, conceded “that the
correct comparison for assessing Noranda’s lost margin is between what would have happened if
there had been no accidents and what would have happened if there were accidents but Noranda
had gone ahead and made repairs.”).
9
The parties differed, however, as to whether the comparison between the But
For World and the Hypothetical Repair World applied to all components of the
GROSS EARNINGS formula.9 According to Hess, Noranda’s expert, this
comparison applied across all parts of the GROSS EARNINGS formula. According
to Karutz, the Insurers’ expert, the But For World and Hypothetical Repair World
comparison only applied to the Gross Earnings Component, not to subpart (b) (the
“Charges and Expenses Component”) or subpart (c) (the “Payroll Component”).
Similar to his calculation of the Gross Earnings Component, when calculating
the Charges and Expenses Component and the Payroll Component, Hess compared
Noranda’s But For World expenses and Noranda’s Hypothetical Repair World
expenses. At this step, Hess made two critical assumptions. First, based on
information provided by the Smelter’s former manager, Chad Pinson, Hess
understood that in the But For World Noranda anticipated laying off numerous
employees, but that Noranda may not have executed the layoffs in the Hypothetical
Repair World. This conformed to Hess’s prior experience with potline freeze claims.
9
On appeal, only subparts (a), (b), and (c) are at issue. The Insurers initially argued that “ordinary
payroll” (subpart (c)) and “Ordinary Payroll” (subpart (e)) refer to the same type of payroll
expense, attributing no significance to the capitalization (see App. to Opening Br. at A391), but,
on appeal, argue that the Policy requires these costs to be incurred in order to be included in the
calculation. Noranda argued that the capitalization was significant—a point the Superior Court
agreed with in its summary judgment ruling—and did not claim coverage under subpart (e) Id. at
A309.
10
From that experience, Hess opined that labor “is not variable,” meaning payroll does
not necessarily decrease proportionally with decreased or interrupted production.10
According to Hess, repairing and restoring operations after a potline accident
required three categories of labor: (1) reline labor, (2) restart labor, and (3)
“babysitting” labor. Hess considered the relining and restarting labor as repair labor
that was covered in the property-damage settlement. The third category of labor,
defined by Hess as “babysitting” labor, was a separate category of post-repair,
operational labor that involved monitoring the newly restarted pots and gradually
ramping up production.
Before trial, Hess recalculated the Payroll Component associated with the
Potline Freeze initially included in his expert report to reflect a more conservative
approach. In his recalculation, Hess calculated varying labor expenses throughout
the PERIOD OF LIABILITY to reflect an initial decrease in Noranda’s labor force
while the pots were relined and restarted, and then a gradual increase as post-repair
production ramped up and additional labor was needed to “babysit” the pots. These
assumptions regarding Noranda’s increased projected labor expense had it
undertaken the diligent repair of the Smelter with a gradual resumption of operations
are central to the Insurers’ objection to Hess’s damages calculation.
10
App. to Opening Br. at A1570.
11
Second, based on his experience working on potline freeze claims, Hess
understood that the amount of electricity needed for a partially functioning potline
would be higher than the amount needed for a fully functioning potline. Hess
referred to this disproportionate electrical expense as an “electrical inefficiency”
incurred after pots have been repaired, but before the pots are capable of full
production capacity, and set the increased expense at $7,461,117.11 Accordingly,
Hess added that figure to Noranda’s loss. With this addition, Hess calculated
Noranda’s Gross Earnings loss to be approximately $43 million. The record is
unclear as to how Karutz calculated the Charges and Expenses Component, but his
testimony suggests that, in his view, only incurred expenses could be included in the
Gross Earnings loss calculation.
According to Karutz, the Payroll Component involved comparing the But For
World with the real world rather than the Hypothetical Repair World. Karutz’s
expert report indicated that a proper calculation of the Measurement of Loss required
Noranda’s saved payroll to be subtracted from the lost value of production, and as
mentioned, that the policy only allowed for incurred expenses to be used in the
calculation. Karutz calculated minimal saved labor until the shutdown of the
Smelter in March 2016, after which time Karutz calculated Noranda’s labor
expenses to be zero. Karutz calculated Noranda’s real world labor expenses as zero
11
App. to Opening Br. at A1659.
12
by including the saved labor expenses for potline three, not because the Potline
Freeze impacted that potline, but because in the real world Noranda shut down all
the potlines. By assuming Noranda’s Gross Earnings loss would have been minimal
due to its financial distress in addition to assuming no reimbursement for labor
expenses after the shutdown of the Smelter, Karutz’s Measurement of Loss
calculations resulted in drastically lower recovery for Noranda in relation to the
Casthouse Explosion and no recovery for Noranda in relation to the Potline Freeze.12
Given the parties’ widely divergent views on how to calculate Noranda’s
Measurement of Loss, it is not surprising that the Insurers denied Noranda’s claim
and that this lawsuit followed that denial.
D. Trial Court Proceedings
In the proceedings below, the issues presented to us on appeal traveled a
meandering path, which we will briefly retrace here.13
On a motion for partial summary judgment, the Insurers argued, among other
things, that Karutz’s method of subtracting all three potlines’ payroll in calculating
12
Noranda calculated its Measurement of Loss for the Casthouse Explosion to be $23,136,292 and
for the Potline Freeze to be $28,206,907. App. to Opening Br. at A2298. Karutz calculated
Noranda’s Measurement of Loss for the Casthouse Explosion to be $5,489,873 and for the Potline
Freeze to be $0. Id. at A733-35.
13
We note that the principal basis for the Insurers’ denial of coverage and their principal defense
in the Superior Court was that Noranda’s claims were barred under the Policy’s “idle periods”
exclusion. See Noranda Aluminum Holding Co. v. XL Ins. Am. Inc., 2019 WL 1399956, at *6
(Del. Super. March 21, 2019). The Superior Court denied the Insurers’ summary-judgment motion
and its post-trial motion for judgment as a matter of law on the basis of that exclusion. The Insurers
did not appeal those decisions.
13
Noranda’s real world payroll was the correct method for calculating the Gross
Earnings loss according to the Policy. Although the Superior Court did not explicitly
declare whether the But For World should be compared to the real world or the
Hypothetical Repair World, it denied the Insurers’ motion because Karutz subtracted
the payroll for all three potlines instead of just the two that were damaged in the
Potline Freeze:
[T]he Court believes the parties are in basic agreement.
The dispute here is about who or what is included in each
category. The issue is complicated by the fact that, at
some point after the destruction of potlines one and two,
the company decided to or was forced to close the entire
facility. As such, the Insurers now want to subtract the
payroll for employees who worked on potline three and
were let go when the facility closed, even though they
agree the loss of gross earnings only relates to potlines one
and two. The Court agrees with Noranda that this is not
only inconsistent with the policy but also fundamentally
unfair. The simple answer here is that only the earnings
that would have been attributable to potlines one and two
and the payroll that was saved in the operation of these
two potlines should be used in the gross earnings
calculation.
Additionally, because the policy does not cover any time
element losses attributable to bankruptcy, it follows that
any “ordinary payroll” saved by Noranda as a result of
its bankruptcy proceedings should not factor into the gross
earnings calculation. Only “ordinary payroll” saved on
the two potlines affected by the physical property damage
that the policy covers should be deducted from “Gross
Earnings,” as used in subparagraph “a.” Any “ordinary
payroll” saved on the third potline that was idled due to
14
Noranda’s bankruptcy is irrelevant to the calculation of
recoverable gross earnings.14
Responding to the court’s summary judgment ruling, Karutz revised his expert report
so that it only subtracted the payroll for potlines one and two.
Both parties then submitted motions in limine seeking to exclude the other’s
expert from testifying, each arguing that the opposing expert’s calculations did not
follow the court’s order. Noranda argued that Karutz’s comparison of But For World
labor expense to real world labor expense ran contrary to the order because the real
world included saved labor expenses attributable to bankruptcy, which the court held
should not factor into the calculation. And, for their part, the Insurers argued that
Hess’s calculations were inconsistent with the order because, instead of deducting
labor expenses saved in the operation of potlines one and two, Hess added labor
expenses. The Insurers also argued that Noranda’s claim for the electrical
inefficiency expense should be precluded as it was not covered by any section of the
business-interruption coverage. The Insurers noted that Noranda had represented it
was not relying on the “Extra Expense” section of the Policy, and argued that “there
[was] simply no basis in the Policy for adding this phantom expense.”15
14
Noranda Aluminum Holding Co. v. XL Ins. Am., Inc., 2019 WL 1399956, at *6 (Del. Super.
March 21, 2019) (emphasis added).
15
App. to Opening Br. at A479.
15
At the pre-trial conference, the court reserved its decision on the motions in
limine until after voir dire of the experts during trial. After voir dire of Hess, the
Insurers renewed their request that the court preclude Hess from testifying. The
court allowed Hess to testify, but reserved decision on whether his testimony should
be struck.
After Noranda rested, the Insurers moved for judgment as a matter of law,
again questioning Hess’s testimony, arguing that the payroll that Hess included
under the Payroll Component of the GROSS EARNINGS formula had already been
reimbursed under the property-damage settlement. They argued further that even if
the payroll had not been included in the settlement, all expenses, including payroll
and electrical expenses, must have been incurred to be covered under the Policy.
The court again reserved decision on the motion.
After voir dire of Karutz, the court ruled that Karutz could not testify to the
opinion expressed in his report that Noranda could only account for labor expenses
if incurred because it reflected a flawed interpretation of the Policy and “not an
expert opinion concerning what is the hypothetical world of bringing [the plant] back
together.”16 The court, however, allowed Karutz to offer opinions set forth in a
supplemental report he had authored rebutting Hess’s Hypothetical Repair World
inputs. After the court excused the jury on the last day of trial, the Insurers again
16
Id. at A2059.
16
moved for judgment as a matter of law, incorporating all of their previous arguments.
The court denied all the motions, except that it reserved decision on the Insurers’
motion regarding the electrical expense.
The jury returned a verdict in Noranda’s favor, awarding over $35 million in
damages. The notations on the verdict form suggest that the jury used Hess’s
damages model as the basis for its calculations. After the verdict, the Insurers again
moved for judgment as a matter of law on several grounds, including that the
electrical costs associated with the Hypothetical Repair World calculation should
not have been presented to the jury as potential damages. The court granted
judgment as a matter of law in the Insurers’ favor on this point—denying the motion
on all other grounds—and reduced the jury’s verdict by approximately $7 million.
After this reduction, the court entered judgment in Noranda’s favor in the amount of
$28,029,016.50 for Noranda’s business-interruption loss from the Casthouse
Explosion and the Potline Freeze, and awarded $131,244.09 in professional fees paid
to Hess for his work on the Potline Freeze business-interruption claim. The Insurers
appealed the Superior Court’s entry of judgment in favor of Noranda, and Noranda
cross-appealed the exclusion of the electrical expense.
E. Issues on Appeal
On appeal, the Insurers make three arguments, all challenging the
admissibility of Hess’s testimony. First, the Insurers contend that Hess’s damages
17
calculation was inconsistent with the Policy’s GROSS EARNINGS formula because
it included labor expenses associated with the hypothetical restart of the Smelter.
Second, the Insurers argue that Hess’s damages calculation was based on such
facially unreliable factual assumptions as to render it inadmissible as a matter of law.
Finally, the Insurers argue that Hess’s calculation included damages that Noranda
had waived as part of the property-damage settlement.
Noranda cross-appeals the court’s judgment as a matter of law regarding the
electrical expense associated with restarting repaired pots, arguing that, because that
expense was associated with restarting the pots and not repairing the pots, it is an
ordinary expense covered by the GROSS EARNINGS formula.
II. STANDARD OF REVIEW
We review the Superior Court’s interpretation of the Policy de novo.17 We
review a trial court’s decision to admit or exclude expert evidence for an abuse of
discretion.18 In addressing Noranda’s cross appeal, we review the Superior Court’s
decision to grant judgment as a matter of law de novo.19 Ordinarily, to grant
judgment as a matter of law, the Superior Court must find that “there is no legally
sufficient evidentiary basis for a reasonable jury to find for that party on the issue.”20
17
ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.3d 62, 69 (Del. 2011).
18
Tumlinson v. Advanced Micro Devices, Inc., 81 A.3d 1264, 1268 (Del. 2013).
19
Kardos v. Harrison, 980 A.2d 1014, 1016 (Del. 2009) (citing Brown v. Liberty Mut. Ins. Co.,
774 A.2d 232, 245 (Del. 2001)).
20
Id. at 1017 (quoting Del. Super. Ct. Civ. R. 50(a)).
18
But here, the Superior Court’s judgment as a matter of law included legal
determinations regarding the scope of coverage under the Policy; we review those
determinations of legal issues raised by the parties before the case was submitted to
the jury de novo.21
III. ANALYSIS
A. Hess’s damages model was consistent with the Policy’s GROSS
EARNINGS formula.
The Insurers argue that Hess’s damages model was “dramatically
different”22 than the Policy’s Measurement of Loss provision and “allow[ed] the jury
to reimburse Noranda for additional labor associated with a plant rebuild.”23 Shorn
of its hyperbolic criticism of Hess,24 however, we understand the Insurers’ principal
methodological complaint to be that, although Noranda’s hypothetical earnings
during the liability period—including those associated with a gradual restart of the
potlines—should be taken into account, thereby reducing its gross-earnings loss, the
labor expenses that would necessarily be incurred to generate those earnings should
21
Emmons v. Hartford Underwriters Ins. Co., 697 A.2d 742, 744 (Del. 1997) (“The interpretation
of insurance contracts involves legal questions and thus the standard of review is de novo.”).
22
Opening Br. at 12.
23
Id. at 23.
24
In the Insurers’ motion in limine, they exclaim, for instance, that Hess’s calculations “clash
violently with [the trial court’s summary judgment] Order, the insurance policy, and common
sense.” App. to Opening Br. at A449. In a similar manner, the Insurers characterize Hess’s
testimony as “wildly unreliable” (Opening Br. at 1), claim that his methodology was “dramatically
different” than the Policy’s “Measurement of Loss provision” (Opening Br. at 12), and describe
his inputs as “facially absurd” (Opening Br. at 38; 39), all leading to a “massive overstatement of
Noranda’s claim.” (Opening Br. at 14).
19
not. We find no warrant in the Policy for such a one-sided calculation and therefore
reject this argument.
At the outset, we note that our understanding of Hess’s treatment of Noranda’s
projected labor expense during the hypothetical rebuild differs from the Insurers’.
In particular, we take issue with the Insurers’ persistent claim that Hess’s
methodology inappropriately permitted “the labor costs required to rebuild
[Noranda’s] plant.”25 Contrary to the Insurers’ characterization, we do not see the
costs underlying Hess’s labor-expense assumptions as reconstruction costs; rather,
they reflect the labor costs, including increased labor expense associated with the
operation of newly restarted pots—the so-called “babysitting expenses,” incurred as
Noranda would, albeit hypothetically, ramp up production. This important
distinction informs our response to the Insurers’ legal argument. We now turn, then,
to the Insurers’ claim that Hess’s consideration of Noranda’s hypothetical labor
25
Opening Br. at 13 (emphasis added). See also id. at 23 (“It was error for the court to allow the
jury to reimburse Noranda for additional labor associated with a plant rebuild.”); id. at 26
(“…Noranda’s ‘dual hypothetical worlds’ damages model requires a calculation of the costs of
rebuilding the facility, is directly contrary to the plain language of the policy.”); id. at 27 (“[T]he
Policy’s unambiguous language bars a claim for ‘hypothetical rebuilding costs.”); id. at 28 (“[T]he
hypothetical costs of rebuilding the facility have no place in the Policy’s Measurement of Loss
Calculation.”); id. at 29 (claiming that Hess’s model “add[ed] into the claim the costs of a labor-
intensive reconstruction of the facility.”); id. at 31 (“The amount of recoverable losses is limited
to the estimated lost revenues minus variable costs—and does not include the cost of rebuilding
the plant.”).
20
expenses during the ramping-up period of a hypothetical rebuild was inconsistent
with the Policy.
According to the Insurers, the Policy unambiguously “provides a clear
‘revenues minus variable costs’ damages formula,” and therefore Hess’s “Dual
Hypothetical Worlds”26 damages model contravenes the Policy’s GROSS
EARNINGS formula.27 We agree with the Insurers, as does Noranda, that the Policy
provides a “revenues minus variable costs” damages formula. But we do not agree
with the Insurers that Hess’s model is untrue to that formula. That Hess’s
calculations result from inputting hypothetical revenues and hypothetical expenses
does not make Hess’s model any less of a “revenues minus variable costs” model.
As the Third Circuit Court of Appeals has observed, “[i]nherent in the concept of
business interruption insurance is the necessity of insureds making claims for lost
earnings based in large part on estimates of things that have not happened . . . .”28
The Insurers recognize that “[t]he Policy’s language required that the parties
estimate Noranda’s revenues and variable costs if the accident had not occurred.”29
This world in which the accident had not occurred is itself a hypothetical world.
26
We take the Insurers’ reference to Hess’s “Dual Hypothetical Worlds” damages model to mean
his comparison of the But For World with the Hypothetical Repair World—both of which are
hypothetical scenarios—in order to calculate Measurement of Loss.
27
Opening Br. at 23-25.
28
Am. Med. Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F.2d 690, 694 (3d Cir. 1991).
29
Opening Br. at 25.
21
Furthermore, the Insurers agree that the correct comparison for calculating the Gross
Earnings Component is between the world in which no accident occurred—a
hypothetical world—and the world in which Noranda made repairs after the accident
occurred—again, a hypothetical world.30 Yet despite their own dual-hypothetical-
world comparison for the Gross Earning Component, the Insurers argue for a
hypothetical-to-real-world comparison for the remaining components of the GROSS
EARNINGS formula. This would allow the Insurers the benefit of a smaller
Measurement of Loss payable to Noranda calculated by taking net revenues into
account without considering any of the associated expenses needed to realize those
revenues. In our view, this would not accurately capture Noranda’s loss.
Accordingly, we do not find Hess’s comparison of dual hypothetical worlds contrary
to the Policy, especially in light of the Insurers’ own reliance on a comparison to a
hypothetical world.31
The Insurers contend that Hess’s methodology is “unprecedented” and
unsupported by any legal authority. And, admittedly, Noranda has not pointed us to
a reported decision that adopts Hess’s damages model. But neither do the Insurers
refer us to any cases that establish a method for calculating an insured’s gross-
30
App. to Opening Br. at A1971.
31
See Shuck v. CNH Am., LLC, 498 F.3d 868, 874 (8th Cir. 2007) (“When a litigant clearly believes
a certain methodology is acceptable as shown by his or her own expert's reliance on that
methodology, it is disingenuous to challenge an opponent's use of that methodology.”).
22
earnings loss when the insured, for whatever reason, chooses not to rebuild.32 When
an insured repairs after an accident, the comparison is obvious—the world in which
no accident occurred and the real world. Indeed, two of the cases from other
jurisdictions cited by the Insurers—Associated Photographers, Inc. v. Aetna
Casualty & Surety Co.33 and National Union Fire Insurance. Co. v. Anderson-
Prichard Oil Corp.34—present that very scenario and are, for that reason,
uninstructive. And the only other opinion cited by the Insurers on the point, East
Associated Coal Corp. v. Aetna Casualty & Surety Co.,35 involves the interpretation
of a business-interruption provision to determine, in part, whether expenses
associated with an arbitration judgment against the insured were covered. Because
of the notably different issue presented, this case also does not support the Insurers’
attack on Hess’s dual hypothetical methodology or convince us that Hess’s
methodology is contrary to the Policy.
The Insurers also seek to distinguish this case from DiLeo v. United States
Fidelity & Guaranty Co., 36 an Illinois case in which the court found the insured’s
labor costs were covered by its business-interruption insurance even though the labor
32
The Insurers do not argue that Noranda is not entitled to recover because it did not rebuild, but
rather, that under its business-interruption coverage Noranda’s recoverable loss is negligible, if
recoverable at all.
33
677 F.2d 1251 (8th Cir. 1982).
34
141 F.2d 443 (10th Cir. 1944).
35
632 F.2d 1068 (3d Cir. 1980).
36
DiLeo v. U.S. Fid. & Guaranty Co., 248 N.E.2d 669 (Ill. App. Ct. 1969).
23
costs were not actually incurred. Dismissing DiLeo as “inapposite,” the Insurers
argue that “Noranda’s Policy [is] devoid of the language that formed the basis for
the DiLeo opinion.”37 The Insurers are correct that the policy at issue in DiLeo is
different than the Policy we are interpreting here. But that difference was not critical
to the Illinois court’s recognition of two principles that are relevant here: (1) “Under
policies which insure against loss from the interruption of business, the fact that the
period required to rebuild or replace with due diligence and dispatch is entirely
theoretical does not impede recovery;”38 and (2) “The fact that . . . payroll expenses
are entirely theoretical should not impede recovery of them.” 39 At a minimum,
DiLeo lends support for the proposition that, when an insured does not go back into
business, the consideration of hypothetical scenarios is appropriate.
The Policy provides no explicit guidance on the proper comparison when, as
in this case, the insured does not repair. In the absence of such guidance, it is fitting
to anchor our analysis to the parties’ mutual understanding that the GROSS
EARNINGS formula is designed to measure the loss with reference to the insured’s
loss of revenue, taking into account its savings achieved through the elimination of
variable costs. As mentioned, this framework, by its very nature, involves the
37
Opening Br. at 33.
38
DiLeo, 248 N.E.2d at 676.
39
Id.; see also Nat’l Union Fire Ins. Co. v. Scandia of Hialeah, Inc., 414 So. 2d 533, 535 (Fla.
App. 1982) (citing DiLeo, 248 N.E.2d 669) (upholding jury verdict notwithstanding conflicting
evidence of estimated gross-earnings loss charges and expenses that would not have been
continued during the period of business interruption).
24
consideration of suppositions—or, in the Insurers’ words, “hypothetical” facts. For
instance, the computation of the insured’s loss must suppose that, had the accidents
not occurred, the insured would have generated a certain measure of earnings during
the period during which the insured’s operations are repaired or rebuilt.
The formula also contemplates that the calculation will account for any saved
costs—if there be any—because of the temporary cessation of the insured’s
operations. The determination of the amount of such savings requires a predictive
judgment. Of course, these predictive judgments must be grounded in a realistic
assessment of the known facts. The weight or accuracy of these predictive judgments
is then left for the jury to assess.40
Here, the parties’ experts made glaringly disparate assumptions about the
extent to which Noranda’s operational labor costs would be “saved” during the
liability period had Noranda rebuilt. Karutz’s trial testimony on behalf of the
Insurers assumed 100% labor savings for the two downed potlines and held to that
assumption even during the hypothetical ramping-up period. The Insurers contend
that this assumption was appropriate because “the Gross Earnings formula requires
subtracting out ordinary, variable costs required to generate the Gross Earnings,”
and “presumably such variable costs are saved during the period of business
40
Pryor v. State, 453 A.2d 98, 100 (Del. 1982) (“The jury is the sole judge of a witness’ credibility
and is responsible for resolving conflicts in testimony.”).
25
interruption.”41 But there is evidence in the trial record, contrary to the Insurers’
presumption, from which the jury could conclude—as they did—that, had Noranda
rebuilt, there would not be a 100% labor reduction for the downed potlines. There
would be, as Hess described, saved labor in the months immediately following the
accident, followed by an increase in labor expense as production was ramped up.
This did not result in, as the Insurers claim, an “add[ition] into the claimed recovery
[of] the labor costs required for a hypothetical rebuild of the facility.” 42 As Hess
explained, the insured labor costs during the ramping-up period did not extinguish
the entirety of the saved labor expense; it merely reduced the amount of the savings
from approximately $6.1 million to approximately $1.6 million. And when pressed
on cross-examination, Hess denied that the increased labor expense increased
Noranda’s claim, explaining that the added labor “contribut[ed] to the production
coming back, . . . decreasing the claim.”43
A careful review of the Insurers’ arguments below reveals that their core
complaint with Hess’s calculation is not so much with his methodology but with his
inputs, particularly his handling of saved labor expenses. This conclusion is
supported throughout the record, but here we identify two instances that make the
41
Opening Br. at 25 (emphasis omitted).
42
Id. (emphasis in original).
43
App. to Opening Br. at A1670.
26
point. In Karutz’s expert report, he noted that “[p]ayroll savings is the central issue
driving the major difference between [Noranda’s] claim and my measure.”44 And
more to the point, when the Insurers argued their motion in limine below, they
emphasized that there were four separate reasons why Hess’s testimony should be
precluded. None of those reasons directly challenged Hess’s dual hypothetical
methodology.45 We therefore turn to the Insurers’ challenge to Hess’s factual
assumptions.
B. The Superior Court did not abuse its discretion in permitting Hess
to offer an expert opinion that made certain factual assumptions
regarding Noranda’s labor expense during a hypothetical
rebuilding and restarting of the Smelter.
The Insurers also challenge Hess’s testimony on the grounds that his opinions
were based on unreliable factual assumptions. Because Hess’s testimony was based
on information received from a former plant manager, Chad Pinson, and Hess “did
not perform any independent analysis of whether that number [given to him by
Pinson] of people was actually required to repair and restart the plant,”46 the Insurers
contend that his opinions were unreliable as a matter of law. Although the Insurers
frame this claim as a legal question, they acknowledge that we are to review the
44
Id. at A742.
45
The four reasons were: Hess’s fact-based conclusions regarding saved labor expenses; the
property-damage-settlement-release and the applicability of the policy’s “extra expense”
provision; Noranda’s pre-accident financial woes; and Hess’s reliance on the December 15, 2015
timeframe to determine Noranda’s hypothetical labor expense during the PERIOD OF
LIABILITY. Id. at A1633-36.
46
Opening Br. at 35.
27
Superior Court’s decision not to exclude Hess’s testimony on this basis for an abuse
of discretion.
Under Delaware Rule of Evidence 702, expert testimony must be based on
sufficient facts or data to be admissible. Applying this rule, we have recognized that
“the factual basis of an expert opinion goes to the credibility of the testimony, not
the admissibility and it is for the opposing party to challenge the factual basis of the
expert opinion on cross-examination.”47
To calculate the Payroll Component, Hess estimated the labor force needed in
the Hypothetical Repair World. He testified that he based his labor estimate on a
conversation with Pinson, who had worked for Noranda for twenty years in various
roles, including as the Smelter’s plant manager. Pinson provided support for two
key assumptions made by Hess. First, Pinson testified that, during a 2009 potline
freeze, Noranda had “kept all employees onboard because it actually takes more
labor to restart a potline and restart all these pots.”48 This was consistent with Hess’s
experience working on other aluminum smelter claims in which the insured’s labor
expense did not decrease proportionally with decreased production. Second, during
his tenure as the plant manager, Pinson oversaw the Smelter’s repair process after a
potline freeze in 2009. Pinson provided Hess an estimate of the number of
47
Perry v. Berkley, 996 A.2d 1262, 1271 (Del. 2010) (citing Porter v. Turner, 954 A.2d 308, 313
(Del. 2008)).
48
App. to Opening Br. at A1263.
28
employees that would be needed to bring the potlines back into full operational
capacity.
Pinson’s estimate, which was consistent with Hess’s experience in other
smelter restarts, formed the basis for Hess’s allocation of Noranda’s projected labor
expense among three different types of labor: (1) “reline labor” devoted to the
reconstruction of the pots; (2) “physical restart labor;” and (3) “operational labor”
needed during the reconstruction period “to get production out of the pots and to
maintain . . . the pots from getting out of control.”49 Hess also relied on his own
observations from other smelter restarts, which corroborated Pinson’s statements.
In keeping with the general tenor of their argument, the Insurers characterize
Hess’s assumptions generally as “extraordinary and facially implausible,”50 and, in
particular, the assumption that Noranda’s plant would remain at full employment
despite the elimination of two of the three potlines “facially absurd.”51 As such, say
the Insurers, they did not provide a sufficiently reliable foundation for Hess’s
calculations, and for that reason, the Superior Court should have excluded Hess’s
testimony.
The Superior Court disagreed with the Insurers’ characterization, explaining
in its post-trial ruling:
49
Id. at A1567-68.
50
Opening Br. at 34.
51
Id. at 38.
29
The Court has again read the testimony of both experts,
including the extensive voir dire that was allowed, and
believes its previous ruling continues to be correct. This
is simply two experts making calculations with the
underlying assumptions fully presented to the jury.52
In our view, this evidentiary ruling was well within the trial court’s discretion.
Admittedly, it might seem counter-intuitive that Noranda would keep their
employees on the payroll during a lengthy plant shut down. But the evidence in the
form of a historical precedent and Hess’s experience supported that assumption.
And that same history and experience provided a basis, rooted in the evidence, for
the increased labor expense during the hypothetical ramping-up period. Having
failed to persuade the trial court that these assumptions were mere “guesswork,”53
the Insurers were free to cross-examine Hess vigorously (they did) and make their
argument to the jury (they did that as well). That the jury found Hess’s assumptions
more credible than the Insurers’ critique of them does not provide a basis for
reversal.
C. The Superior Court did not abuse its discretion in admitting Hess’s
testimony that his damages calculation did not include damages
that were covered in the property-damage settlement.
The Insurers argue the Superior Court erred in admitting Hess’s testimony
because Hess’s calculation included damages that were included in the property-
52
Noranda Aluminum Holding Co. v. XL Ins. Am., Inc., 2019 WL 5268696, at *2 (Del. Super.
October 7, 2019).
53
Opening Br. at 37.
30
damage settlement. The Insurers’ challenge is twofold. First, the Insurers argue that
the “babysitting” labor is repair labor and thus already paid to Noranda under the
property-damage settlement. Second, the Insurers contend that the manner in which
Hess’s calculation distinguished repair labor costs from operational “babysitting”
labor costs was unreliable.
In calculating the Payroll Component of the GROSS EARNINGS formula,
Hess estimated the labor force Noranda would need in the Hypothetical Repair
World. As noted above, based on information provided by Pinson and his personal
knowledge of potline damage claims gained during “over 20 engagements related to
the aluminum industry, 15 of which . . . related to a potline freeze or smelter loss,”54
Hess accounted for three categories of labor: reline labor, restart labor, and
babysitting labor. Hess considered the babysitting labor—as mentioned, the labor
devoted to maintaining and deriving production from the pots once they are
restarted—to be “operational” labor. The Insurers’ claims adjuster, who was
involved in the property-damage claim, acknowledged that this labor was not
included in the property-damage settlement.
Hess valued the repair labor expenses, including both reline labor and restart
labor, at $6.6 million. This estimate was based on, among other things, facts learned
during his preparation of the schedules in support of Noranda’s property-damage
54
Id. at A1648.
31
claim. Hess therefore reduced the Payroll Component for the Hypothetical Repair
World calculation by that amount. This left only the post-repair operational labor—
the “babysitting” labor—during the PERIOD OF LIABILITY included in his
damages calculation for Noranda’s business-interruption claim.
The Insurers pointed critically to Hess’s voir dire testimony, which suggested
that he did not know how many people would be restarters, whose labor would be
covered, and how many would be repairers, whose labor would not be covered. But
the Insurers’ own expert admitted that Hess’s calculation of the “babysitting” costs
was “pretty close.”55
The Superior Court found that the factual basis for Hess’s labor calculations
was a fact issue to be presented to and considered by the jury. As the Superior Court
suggested, if the Insurers doubted Hess’s testimony that $6.6 million in labor costs
could be attributed to repair labor that was included in the property-damage
settlement, they had ample opportunity to test that testimony on cross-examination
or to offer evidence to the contrary. We agree with the Superior Court. The Insurers’
complaint was not with the method used to distinguish the repair labor from the
operational labor, but rather with the dollar figure assigned to the repair labor. Any
flaw in that conclusion was a fact question to be resolved by the jury. 56
55
Id. at A2127.
56
Ashley v. State, 988 A.2d 420, 424 (Del. 2010).
32
The jury was informed of the property-damage settlement and the waiver
during the trial and was reminded during the court’s instructions that Noranda had
already collected under the property-damage coverage. And the court instructed the
jury that Noranda was not entitled to recover any damages or expenses that the jury
found were covered in the property-damage settlement. Allowing the issue to be
resolved by the jury under these circumstances was not an abuse of discretion.
D. Noranda’s increased hypothetical expense caused by electrical
inefficiencies was properly excluded from Noranda’s Measurement
of Loss calculation.
In its cross appeal, Noranda argues that the Superior Court erred when it
granted the Insurers’ motion for judgment as a matter of law and reduced the jury’s
verdict by the $7 million Hess attributed to the electrical inefficiency expense in the
Hypothetical Repair World.57 The Superior Court reasoned that the increased
electrical expense associated with the hypothetical restart of the pots was a “non-
routine extra expense[ ] unrelated to the normal operation of [Noranda’s] business”58
and, therefore, not encompassed within the Policy’s GROSS EARNINGS formula.
Noranda argues that “electricity is a significant cost in aluminum
production”59 and, thus, both the But For World and the Hypothetical Repair World
57
Hess’s total electrical charge totaled $7,461,117. The jury did not issue a special verdict, but the
Superior Court pointed out “the parties seemed to agree that in their calculation of damages, the
jury included the $7 million figure in the damage amount.” Noranda, 2019 WL 5268696, at *3.
58
Id.59
Answering Br. at 61.
33
calculations must account for electrical expenses. The increased cost associated with
the electrical inefficiency should be included in the Measurement of Loss calculation
as a normal charge and expense. To do otherwise, according to Noranda, would be
fundamentally unfair because it would decrease the measurement of its loss by the
amount of increased production during the ramping-up period, without allowing for
the costs it would incur to achieve that production.
Noranda’s argument has a certain surface appeal and even a kinship with its
argument regarding its fluctuating labor expense in the Hypothetical Repair World.
After all, earlier in this opinion, we accepted the premise that the labor expense
associated with the generation of loss-mitigating revenues must be considered when
calculating Noranda’s Gross Earnings loss.
Nevertheless, we see a critical distinction between Noranda’s labor expense
and the electrical inefficiency expense, at least as the two were presented at trial. In
particular, Hess’s consideration of an increase in labor expense during the ramping-
up period was merely a component of his calculation of the saved labor expense
during the entire PERIOD OF LIABILITY; as such, it was in service of the task of
determining the extent to which variable costs were saved during the liability period.
34
Moreover, Noranda tied Hess’s saved labor calculation to the Payroll Component of
the Policy’s GROSS EARNINGS formula.
By contrast, Noranda grounds the addition of the electrical inefficiency claim
to the Charges and Expenses Component of the GROSS EARNINGS formula. That
subsection calls for the reduction of the insured’s gross-earnings loss for “charges
and expenses that do not necessarily continue during the interruption of production
or suspension of business operations . . . .”60 We have reviewed Hess’s calculations
and trial testimony and can find no effort on his part to calculate the extent to which
Noranda’s electrical expense did not continue or was reduced during the liability
period. Instead, he considered the electrical inefficiency as a freestanding “claim”
and added it to Noranda’s gross-earnings loss.
It is telling that Hess repeatedly referred to the increased expense caused by
electrical inefficiency as a “claim,” one that he helped Noranda make following the
2009 potline freeze.61 But in 2009, Noranda restarted the pots and actually incurred
the increased electrical expense, which would trigger coverage under the Extra
Expense provision of the Policy. Noranda acknowledges that Extra Expense
coverage is not available here because, under that provision, to be covered, the extra
expense must actually be incurred. This explains, we suspect, why Noranda has
60
App. to Opening Br. at A205.
61
Id. at A1659.
35
attempted to shoehorn this “claim” into the Measurement of Loss calculation. We
agree, however, with the Superior Court, albeit for different reasons, that there is no
warrant in the GROSS EARNINGS formula for the addition of this “claim.”
IV. CONCLUSION
For these reasons, we affirm the judgment of the Superior Court.
36