Policyholders often face a formidable challenge proving causation on property damage claims, particularly when insurance companies insist on deferring to their own experts and adjustors. Of course, insurance companies must conduct reasonable investigations and review and evaluate all of the evidence before making a claim decision. The Ninth Circuit Court of Appeals held in an insurance action where the policyholder provides admissible evidence showing a genuine dispute as to coverage, the evidence should be evaluated by a trier of fact. Pyramid Technologies Inc. v. Hartford Casualty Insurance Co., 2015 DJDAR 6205 (Cal. App. May 19, 2014).
Pyramid involved a policy issued by Hartford Casualty Insurance Company (“Hartford”) to Pyramid Technologies (“Pyramid”) for business personal property replacement costs, lost business income and additional expenses. In 2005, Pyramid’s warehouse flooded, but the water did not come into contact with inventory. After discovering the flood, Pyramid was concerned about the humidity level in the warehouse and asked Hartford to test the inventory. Hartford refused to test for damage, after its expert, Peter Helms, performed a humidity test following removal of most of the water and concluded the flood did not reach a level to damage the inventory. Pyramid’s expert, David Spiegel, opined the humidity levels rose to over 90% during the flood and exceeded the levels of the moisture-proof packaging. Pyramid employees conducting inventory after the flood quarantined over 250,000 items with corrosion, tarnish or discoloration damage. Hartford retained Dr. Arum Kumar to conduct limited tests of the quarantined items and he found less than half the items tested were damaged, two failed “suitability standards” and concluded the damage was caused by moisture, but not by the flood. Pyramid’s expert, Ken Pytlewski, challenged Dr. Kumar’s opinion that corrosion caused by the flood would be uniform, and concluded the damaging corrosion was caused by the high humidity attributed to the flood. However, Hartford still refused coverage based on its own experts’ determinations that flood did not damage inventory in the warehouse.
Subsequently, Pyramid filed a civil action for breach of contract and the breach of the implied covenant of good faith and fair dealing. The district court granted summary judgment for Hartford without holding Daubert hearings to evaluate Pyramids’ expert testimony, and Pyramid appealed.
The Court of Appeals reversed and remanded, holding summary judgment was improper as there was a genuine dispute as to whether the flood damaged Pyramid’s inventory. First, the Court held evidence from Pyramid’s experts showing the flood caused the damage triggering coverage was admissible, and its exclusion constituted an abuse of discretion. Spiegel’s report provided evidence that Helms’ report relied on improper data regarding humidity, that humidity exceeded 90% during the flood and the 90% humidity likely compromised the moisture-proof packaging of Pyramid’s products. Pytlewski’s report contradicted Dr. Kumar’s statement that a flood would have caused uniform corrosion damage, an assumption underlying his determination. These reports permitted a trier to fact to infer the flood could have caused the damage to the inventory. The court stated:
After an expert establishes admissibility to the judge’s satisfaction, challenges that go to the weight of the evidence are within the province of a fact finder, not a trial court judge. A district court should not make credibility determinations that are reserved for the jury.
Secondly, the court stated there were triable issues of fact as to whether Hartford breached the insurance contract or acted in bad faith by failing to investigate and pay Pyramid’s claims for loss of inventory. Hartford argued Pyramid did not show the flood caused the claimed damages, as opposed to other factors. However, the court noted that evidence of condensation on the packaging and high humidity levels permitted a reasonable inference of causation. Accordingly, summary judgment was inappropriate. Next, the court held that there existed a triable issue of fact regarding Pyramid’s claim for breach of the implied covenant of good faith and fair dealing claim in light of evidence that Hartford and its experts discouraged Pyramid’s claim, refused to test inventory, conducted inadequate testing, denied coverage and extended a “low-ball” offer. The court held that if viewed in the light most favorable to Pyramid, these facts permit an inference such that a reasonable trier of fact could have found for Pyramid. Finally, the Court of Appeals affirmed summary judgment as to Pyramid’s business interruption claim, as Pyramid failed to show it lost customers due to the flood.
Pyramid is mostly a policyholder-friendly decision as it sets standards for policyholders to utilize, especially regarding expert testimony, that allow them to defeat summary judgment motions. In litigation, the policyholder’s credible expert evidence should be admitted to support an inference in favor of coverage, and will be viewed in a light most favorable to the policyholder if the insurer moves for summary judgment.