Leprino Foods Co. v. Factory Mut. Ins. Co.

• Decision Date: 27 July 2011
• Docket Number: Nos. 09–1262,09–1287.,s. 09–1262
• Citation: 653 F.3d 1121
• Parties: LEPRINO FOODS COMPANY, Plaintiff–Appellee/Cross–Appellant,v.FACTORY MUTUAL INSURANCE COMPANY, Defendant–Appellant/Cross–Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

653 F.3d 1121

LEPRINO FOODS COMPANY, Plaintiff–Appellee/Cross–Appellant,

v.FACTORY MUTUAL INSURANCE COMPANY, Defendant–Appellant/Cross–Appellee.

Nos. 09–1262

09–1287.

United States Court of Appeals, Tenth Circuit.

July 27, 2011.

Andrew M. Low (Terry R. Miller with him on the briefs), Davis Graham & Stubbs LLP, Denver, CO, for Defendant–Appellant/Cross–Appellee.Michael A. Pope, McDermott Will & Emery LLP, Chicago, IL (J. Christian Nemeth and Michael W. Weaver, McDermott Will & Emery LLP, Chicago, IL, and William C. Brittan and Richard O. Campbell, Campbell, Killin, Brittan & Ray LLC, Denver, CO, with him on the briefs), for Plaintiff–Appellee/Cross–Appellant.Before MURPHY, McKAY, and TYMKOVICH, Circuit Judges.TYMKOVICH, Circuit Judge.

Leprino Foods Company is a Denver-based mozzarella manufacturer that customarily stores its products in third-party warehouses. In one of these warehouses, flavoring compounds derived from nearby-stored fruit products contaminated a large quantity of cheese. Leprino's “all-risk” insurance policy with Factory Mutual Insurance Company excluded contamination unless it was caused by “other physical damage.” When Factory Mutual refused coverage on the basis of the contamination exclusion, Leprino brought suit. A jury determined the contamination was caused by other physical damage and therefore covered by the insurance policy.

On appeal, Factory Mutual contends the verdict is supported by insufficient evidence because Colorado law requires expert testimony, as opposed to lay testimony, to prove causation. Since we conclude Leprino did, in fact, present sufficient expert testimony on this element, we do not reach the question of whether lay testimony alone would be sufficient. Factory Mutual also challenges the district court's jury instructions and its evidentiary ruling on Leprino's revised cold-storage guidelines, but we do not find these to be erroneous. However, we agree with Factory Mutual that Leprino's damages should be reduced by its settlement with the warehouse, so long as the setoff does not include the attorneys' fees that Leprino incurred in pursuing that litigation.

I. Background

Most of the factual and procedural background to this case is summarized in Leprino Foods Co. v. Factory Mut. Ins. Co., 453 F.3d 1281, 1283 (10th Cir.2006) ( Leprino I ). We provide here a brief summary relevant to the issues now on appeal.

A. Storage and Contamination

Leprino is the largest manufacturer of mozzarella cheese in the United States. It stores vast amounts of newly manufactured cheese in cold-storage warehouses before shipment, using its own and third-party warehouses.

In 1998, Leprino entered into an “all-risk” property insurance policy with Arkwright Insurance, a predecessor of Factory Mutual. The policy covered “all risk of physical damage” except where specifically excluded. After Arkwright merged with another insurance company to form Factory Mutual in 1999, Factory Mutual sent Leprino a replacement policy. Both the Arkwright and Factory Mutual policies included a nearly identical exclusion, stating:

D. This Policy excludes the following unless directly resulting from other physical damage not included by this Policy:

1) contamination including but not limited to the presence of pollution or hazardous material.

2) shrinkage.

R., Vol. 10 at 2444 (emphasis added).

In 2001, Leprino received reports that some of its cheese had an off-odor and an off-flavor, rendering it unusable. Leprino traced the cheese to Gress Warehouse, a third-party warehouse in Pennsylvania that Leprino used to store millions of pounds of cheese. Leprino executives visited the warehouse and noted (1) a strong fruity odor in the warehouse office and freezer areas, (2) spills of fruit juice concentrate all over the warehouse, (3) numerous products whose packaging appeared to have been damaged by forklifts, and (4) stagnant air in the warehouse. Subsequent testing by both parties' experts was consistent and revealed that fruit flavoring compounds, which were also present in the warehouse's air, had contaminated the cheese. The contamination ruined over eight million pounds of cheese, worth more than $13.5 million. Leprino tendered an insurance claim to Factory Mutual, but Factory Mutual denied the claim, relying on the policy's contamination exclusion.

B. Procedural History

Leprino filed a complaint against Factory Mutual for breach of contract, declaratory judgment, and damages. It also filed a separate complaint for negligence against Gress in Pennsylvania. The case against Gress settled for $2.4 million.

At a pretrial hearing, the district court granted partial summary judgment in Factory Mutual's favor, holding the loss was not covered under the express terms of the policy. Consequently, the district court limited the scope of trial to Leprino's reasonable expectation that the contamination would be covered. A jury then found that Leprino did expect the Factory Mutual policy would cover any contamination changing the flavor of the cheese, but that the expectation was not reasonable.

We reversed and remanded, holding that coverage depended on whether the contamination had been caused by other physical damage and that the district court had erred by excluding evidence concerning the cause of contamination.

On remand, the district court narrowed the trial to “the question of proof of physical damage and the exception to Exclusion D.” Supp. R. at 195. With respect to Leprino's burden of proof, the court determined Leprino must show the damage was caused by “some event or condition in the warehouse other than the mere storage of other food products with the cheese.” Id. at 193. The case proceeded to trial and the jury returned a verdict in favor of Leprino, concluding the damage to Leprino's cheese was directly caused by other physical damage. The parties had stipulated the amount of the loss to be $14 million, and the district court entered judgment for the full amount plus prejudgment interest, totaling $23 million. Factory Mutual filed motions for judgment as a matter of law both at the close of evidence and after the entry of judgment, which the district court denied.

II. Analysis

Factory Mutual raises four issues on appeal. First, it challenges the district court's denial of its motion for judgment as a matter of law, contending Leprino presented insufficient expert testimony that the contamination was caused by fruit products in damaged, as opposed to undamaged, packaging. Second, it argues the district court erred in instructing the jury to find in Leprino's favor if it determined that the damage to the cheese was caused by some event or condition at the warehouse other than the mere storage of fruit products with the cheese. Third, Factory Mutual asserts the district court erred by excluding Leprino's revised cold-storage guidelines, because the evidence was offered not to prove culpability but to refute Leprino's theory of causation and to impeach Leprino's witnesses. Finally, Factory Mutual contends the amount of the judgment should have been reduced by the amount Leprino received in the Gress settlement. We address each of these issues in turn.

A. Sufficiency of the Evidence

Factory Mutual first challenges the district court's denial of its motion for judgment as a matter of law, contending Leprino presented insufficient expert testimony that the contamination was caused by other physical damage. Factory Mutual argues two possible causes of the contamination existed—either damaged or undamaged fruit products—and only contamination caused by damaged fruit products was covered by the insurance policy. It also claims the evidence presented at trial was insufficient to prove the contamination resulted directly from the covered cause, rather than the non-covered cause, because Colorado law requires expert testimony on causation in cases like this one.

We review de novo a district court's denial of a motion for judgment as a matter of law, drawing all reasonable inferences in favor of the opposing party. Hardeman v. City of Albuquerque, 377 F.3d 1106, 1112 (10th Cir.2004). We do “not weigh the evidence, pass on the credibility of the witnesses, or substitute [our] conclusions for that of the jury.” Id. at 1116 (quotation marks omitted). Only if “there is no legally sufficient evidentiary basis for a reasonable jury to find for ... the issue against that party” do we reverse a jury's verdict. Fed. R. Civ. P. 50(a)(1).

Because this case arises in diversity, we apply Colorado law in construing the insurance policies at issue. Under Colorado law, insurance policies are interpreted “consistently with the well-established principles of contractual interpretation.” Allstate Ins. Co. v. Huizar, 52 P.3d 816, 819 (Colo.2002). “In order to avoid policy coverage, an insurance policy must establish that the exemption claimed applies in the particular case, and that the exclusions are not subject to any other reasonable interpretations.” Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, 1090 (Colo.1991). Absent an indication the parties intended otherwise, “the instrument's language must be examined and construed in harmony with the plain and generally accepted meaning of the words used.” East Ridge of Fort Collins, LLC v. Larimer and Weld Irr. Co., 109 P.3d 969, 974 (Colo.2005). “[B]ecause of the unique nature of insurance contracts and the relationship between the insurer and insured, courts do construe ambiguous provisions against the insurer and in favor of providing coverage to the insured.” Cyprus Amax Minerals Co. v. Lexington Ins. Co., 74 P.3d 294, 299 (Colo.2003).

Factory Mutual contends Colorado law requires expert testimony to prove causation in this case, because establishing the cause of chemical contamination is a technical issue requiring an expert to first “rule in” a particular source as a probable cause and then “rule out” all other possible causes. It reads Truck Ins. Exch. v....