In a recent decision in the case of Pyramid Technologies, Inc. v. Hartford Casualty Ins. Co., 752 F.3d 807 (9th Cir., May 19, 2014), the 9th Circuit, relying on California law, upheld a grant of summary judgment dismissing the insured’s business interruption claim as speculative. In addition, by a split decision, it reversed in part and remanded in part the trial court’s exclusion of the testimony from the insured’s expert witnesses under Daubert standards. Finally, and most importantly, the Court of Appeals reversed a grant of summary judgment concerning the insurer’s “genuine dispute” defense, holding that bad faith was an issue for the jury under the facts of the case.
In 2005, a flood occurred in the insured’s warehouse that housed an inventory of electronic parts. The insurer’s consultant concluded that the flood did not create sufficient humidity to have caused damage to the electronic parts, and, as a result, the insurer chose to not test the parts. Pyramid retained a public adjuster and another two experts who challenged the insurer’s conclusion. In 2007, two years after the flood, the insurer retained an engineer to provide limited testing. Although some damage from humidity to the electronic parts was located, the insurer’s expert concluded that the 2005 flood was not the cause of the corrosion damage to the examined parts. Thus, causation remained an issue.
With this factual backdrop, the insurer filed a motion for summary judgment challenging Pyramid’s claim for business interruption and for damage to inventory. On the latter, the insurer argued that the plaintiff’s expert reports were inadmissible. Without holding a Daubert hearing or hearing argument from counsel, the district court granted the insurer’s motion for summary judgment concluding that plaintiff’s expert evidence failed to raise a disputed issue of material fact because it did not sufficiently address causation. The district court also concluded that the insured’s claim for business interruption, based on purported lost business from a potential customer as a result of the flood, was too speculative and tenuous to permit consideration by the fact-finder.
On appeal by Pyramid, the 9th Circuit upheld the district court’s ruling granting summary judgment to Hartford on Pyramid’s business interruption claim, finding that there were no material issues of fact on Pyramid’s claim that it actually lost business from the potential customer as a result of the flood. There was evidence that had the potential customer known that Pyramid did not have humidity control in its warehouse, Pyramid would have been disqualified as a supplier. The Circuit Court found that in order to find for the insured on its business interruption claim, a jury would need to speculate: that the customer would not have discovered that the warehouse had no humidity control; that the parties would have successfully negotiated pricing and other terms for many additional parts; and that the customer would have followed through with a large purchase. The court concluded that the law did not permit such speculation and that the proffered evidence was too tenuous to permit a jury to make such conclusions.
On the second issue dealing with the claim for damaged inventory, a divided 9th Circuit panel reversed the district court’s decision to exclude evidence from two of the insured’s experts based on Daubert standards, but it affirmed the ruling as to the third of the insured’s experts. On the critical question of whether the condensation that was found two years after the flood originated from the flood waters or from other (excluded) sources of humidity, the majority found that the court had overstepped its “gatekeeper” function under Daubert. The district court should have left it for the jury to assess the reliability of the experts and the disputed evidence with respect to causation. The dissent, however, opined that the plaintiff had failed to raise a material issue of fact as to causation and that, that was fatal to its breach of contract and bad faith claims.
Finally, the appellate court addressed the alleged bad faith of the insurer. Under California law, to establish a breach of the implied covenant of good faith and fair dealing “a plaintiff must show: (1) benefits due under the policy were withheld; and (2) the reason for withholding benefits was unreasonable or without proper cause.” Geubara v. Allstate Ins. Co., 237 F.3d 987, 992 (9th Cir. 2001) (citing Love v. Fire Ins. Exch., 271 Cal.App.3d 246, 255, (1990)). The insurer argued that its position in denying the inventory claim was not unreasonable because a “genuine dispute” existed as to coverage for the inventory that precluded plaintiff’s bad faith claim. Guebara at 992.
While the reasonableness of an insurer’s conduct is typically a question of fact, an insured’s claim of breach of the implied covenant of good faith and fair dealing may be dismissed on summary judgment if the insurer can show that there was a genuine dispute as to liability. Id. However, the court noted that an expert report alone does not demonstrate that a genuine dispute exists. Id.
The 9th Circuit observed that California law holds that the genuine dispute doctrine should be applied on a case-by-case basis and that it does not protect allegedly biased investigations. A biased investigation includes circumstances where: (1) the insurer misrepresents the nature of the investigatory proceedings; (2) the insurer’s employees lie during depositions or to an insured; (3) the insurer dishonestly selects experts; (4) the insurer’s experts were unreasonable; or (5) the insurer fails to conduct a thorough investigation. Id. at 996.
Based in part on the challenged expert evidence offered by plaintiff, the 9th Circuit opined that the insurer might not have available a defense that a genuine dispute existed as to liability, because an inference could be drawn that the insurer’s investigation (which included its failure to test the products at issue until two years after the loss) was not thorough and prompt. Thus because it concluded that an issue of fact existed, the existence of a genuine dispute as to coverage had to be decided by the jury and not on summary judgment. Further, the court stated, “summary judgment cannot be granted under the genuine dispute doctrine in a bad faith claim unless it is undisputed or undisputable that the basis of the insurer’s denial of benefits was reasonable – for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law.” 752 F.3d at 44, (citing Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002)). Therefore, the court left it for the jury to decide whether a genuine dispute existed as to coverage for the insured’s inventory.
Although an insurers’ defense to bad faith claims based on a the existence of a genuine dispute can apply to both disputes as to the law and disputes as to the facts of a claim, as this opinion demonstrates, it is more difficult to obtain a summary judgment on a genuine dispute issue that is based solely on the facts. A counter statement of material facts based on admissible evidence from the opposing plaintiff may be fatal to such a motion for summary judgment. See Wilson v. 21st Century Ins. Co., 42 Cal.4th 713 (2007).