Ingenco Holdings, LLC v. ACE American Insurance Co., 041519 FED9, 16-35792

Docket Nº:16-35792
Opinion Judge:PREGERSON, District Judge.
Party Name:Ingenco Holdings, LLC, a Delaware limited liability company; Bio Energy (Washington), LLC, a Delaware limited liability company, Plaintiffs-Appellants, v. ACE American Insurance Company, Defendant-Appellee.
Attorney: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...
Judge Panel:Before: Dorothy W. Nelson and Paul J. Watford, Circuit Judges, and Dean D. Pregerson, District Judge.
Case Date:April 15, 2019
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Ingenco Holdings, LLC, a Delaware limited liability company; Bio Energy (Washington), LLC, a Delaware limited liability company, Plaintiffs-Appellants,

v.

ACE American Insurance Company, Defendant-Appellee.

No. 16-35792

United States Court of Appeals, Ninth Circuit

April 15, 2019

Argued and Submitted June 12, 2018 Seattle, Washington

Appeal from the United States District Court for the Western District of Washington D.C. No. 2:13-cv-00543-RAJ Richard A. Jones, District Judge, Presiding.

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.

Before: Dorothy W. Nelson and Paul J. Watford, Circuit Judges, and Dean D. Pregerson, [*] District Judge.

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 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.

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.

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 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.

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 restarted 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...

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