Leprino Foods Co. v. Factory Mut. Ins. Co.
| Citation | 453 F.3d 1281 |
| Decision Date | 06 July 2006 |
| Docket Number | No. 04-1338.,No. 04-1319.,04-1319.,04-1338. |
| Parties | LEPRINO FOODS COMPANY, Plaintiff-Appellant/Cross-Appellee, v. FACTORY MUTUAL INSURANCE COMPANY, Defendant-Appellee/Cross-Appellant. |
| Court | United States Courts of Appeals. United States Court of Appeals (10th Circuit) |
Michael A. Pope (with J. Christian Nemeth, McDermott, Will & Emery LLP, Chicago, IL, and Michael G. Bohn, Campbell, Bohn, Killin, Brittan & Ray, LLC, Denver, CO, on the briefs), McDermott, Will & Emery LLP, Chicago, IL, for Plaintiff-Appellant/Cross-Appellee.
Matthew Mersfelder (with Russell E. Yates and Carlos Leal, on the briefs), Yates & Leal LLP, Denver, CO, for Defendant-Appellee/Cross-Appellant.
Before KELLY, HENRY, and McCONNELL, Circuit Judges.
This diversity action stems from a dispute involving the contamination of over eight million pounds of mozzarella cheese manufactured by Leprino Foods Company resulting in damages of $13,589,235.45. Leprino sought coverage under an all-risk insurance policy issued by Factory Mutual Insurance Company ("FM"), which denied the claim, citing the FM policy's "contamination exclusion." Leprino argued first, that the insured cheese was covered under the express terms of the FM policy, and second, that Leprino had a reasonable expectation of coverage under the FM policy such that it had coverage for all changes in flavor for its cheese.
The district court disagreed as to the first claim, granting partial summary judgment because the cheese was clearly contaminated. It submitted the reasonable expectations question to the jury. The jury found that Leprino's expectation of coverage was not reasonable.
Leprino appeals the grant of partial summary judgment, the jury verdict and the district court's denial of its motion for a new trial. FM cross-appeals, arguing that the district court erred when it submitted the doctrine of reasonable expectations to the jury. For the reasons given below, we REVERSE the grant of partial summary judgment and REMAND for a new trial.
Leprino, a privately-held Colorado corporation, specializes in manufacturing mozzarella cheese and is the largest manufacturer of mozzarella cheese in the United States. Leprino stores vast amounts of newly-manufactured cheese in cold-storage warehouses before shipment, sometimes reaching an inventory of forty million pounds at one time.
In 1998, Leprino sought a three-year "all-risk" property insurance policy to cover risks related to its products, plants, and equipment. Leprino entered negotiations with Arkwright Insurance, a predecessor company to FM. Arkwright issued an All-Risk Policy, effective until November 1, 2001 covering "ALL RISK OF PHYSICAL DAMAGE" except where specifically excluded. The proposed Arkwright Policy contained an exclusion (Exclusion No. 6) stating:
This Policy does not insure against ... contamination including but not limited to pollution; shrinkage or change in color, flavor, texture or finish; all unless such damage directly results from other physical damage not excluded by this Policy[.]
Aplt's App. vol. V, at 1731 (emphasis added).
Leprino sought to delete the language regarding "change in color, flavor, texture or finish," noting that to leave such language in the exclusion "effectively negated any coverage for the product while it was being stored or otherwise." Id. vol. IV, at 1163. After Arkwright completed a risk analysis regarding the implications of this request, it was "agreeable to deleting" this exclusionary language. Id. at A1165; A1849. On December 11, 1998, Arkwright issued an endorsement stating:
Exclusion No. 6 is replaced by the following:
6. contamination including but not limited to pollution; or shrinkage; all unless such damages directly results from other physical damage not excluded by this Policy.
Id. vol. V, at A1698 (emphasis added).
The next year, Arkwright merged into Allendale Mutual Insurance Company and became FM. FM informed Leprino that, although the name of the insurer had changed, Leprino's "policy rights and obligations and those of [the insurer] have not been altered or changed in any way." Id. vol. IV, at A1169. FM sent Leprino the FM Policy as a replacement for the Arkwright policy. The original FM Policy contained exclusionary language nearly identical to that deleted from the Arkwright policy the year before:
D. This Policy excludes the following unless directly resulting from other physical damage not excluded by this Policy:
1) contamination including but not limited to the presence of pollution or hazardous material.
2) shrinkage.
3) changes in color, flavor, texture or finish.
Id. at A1882 ("Exclusion D") (emphasis added).
Once again, Leprino demanded that the third clause ("changes in color, flavor, texture or finish") be removed, and FM agreed. FM issued a formal endorsement that deleted this clause.
In October 2001, after receiving complaints about an off-flavor in both raw and cooked cheeses, Leprino traced the cheese to a third-party warehouse in Scranton, Pennsylvania. Leprino recalled the cheese and delivered replacement shipments to its customers. Leprino executives investigated and noted a strong odor and an objectionable off-flavor in the cheese stored in the Pennsylvania warehouse. Also noted in the warehouse were spills of fruit juice concentrate on the sides of 55-gallon juice concentrate barrels, on the floor, and on pallets on which food was stored, and generally all over the warehouse. Numerous popsicle products appeared to have been smashed by forklifts in the warehouse. Leprino employees testified that they noted stagnant air and a strong odor in the warehouse.
On October 26, 2001, Leprino notified FM of the possible loss. Testing on the Leprino cheese from the Pennsylvania warehouse indicated that a number of chemicals had contaminated the cheese, including "toluene, ethyl benzene, m/p-xylene, o-xylene, 1, 2, 4 trimethylbenzene, IR-.alpha.-Pinene and Limonene." Aplt's App. vol. V, at A1925. Leprino determined that the cheese was not usable (even as salvage for feed to animals), and it disposed of all 8,220,495 pounds of the cheese in a landfill.
In July 2002, FM denied the claim under the FM Policy. FM noted that contamination of the cheese resulted from "exposure to limonene," and FM maintained that the damage was not due to "other physical damage." Thus, FM applied Exclusion D to preclude coverage of Leprino's claim.
Leprino filed a complaint against FM (1) alleging breach of contract against FM as a result of FM's denial of Leprino's claim for damages; (2) seeking declaratory judgment regarding the existence of coverage for the same, and (3) seeking coverage under the reasonable expectations doctrine. In its answer, FM admitted that the Aplt's App. vol. I, at A0036; see also id. at A0250 (Final Pretrial Order, filed Jan. 12, 2004) (same) (emphasis added). Therefore, according to FM, the contamination was excluded.
The parties filed cross-motions for summary judgment. Leprino contended (1) its loss was covered under the FM Policy because it fell within the "other physical damage" exception to the exclusion, and/or (2) because the "other physical damage" exception is ambiguous, Leprino prevails under the reasonable expectations doctrine. FM countered, arguing the damage to the cheese fell squarely within the contamination exclusion. The district court initially denied both motions, noting that "the question of whether contamination occurred in this case or whether there was a change of flavor without contamination is a mixed question of law and fact requiring participation by the jury." Id. at A0243-44.
In April 2004, FM filed motions in limine to exclude certain proposed expert witness testimony about how the cheese became contaminated.1 Leprino sought to present expert testimony regarding its investigation of the damaged cheese, the effect of spills at the Pennsylvania warehouse, and the results of testing samples of the damaged cheese. At a hearing on May 6, 2004, the district court concluded that this expert testimony was "irrelevant" because the cheese was indisputedly contaminated. Id. vol. III, at A0763. "There's no question here that the flavor of this cheese has been altered as a result of some chemical, we don't know what chemical it is, for sure, or where it came from, but it's changed." Id. at A0764. Id. The district court thus precluded the introduction of evidence regarding the cause of the damage to the cheese.
Leprino's experts proffered testimony about whether the "other physical damage" exception to Exclusion D caused the damage to the cheese. FM challenged Leprino's proffer of evidence regarding spillage in the warehouse as "speculation and conjecture." Id. vol. IV, at A1110. The court reiterated that it was not "necessary... for the insured to prove what specifically happened that contaminated this cheese." Id. at A1112. The court stated it did not "see that spillage is something we need to concern ourselves about." Id. The court emphasized that the parties should "focus only on the reasonable expectation... and not on the exception." Id. (emphasis added).
At the same hearing, the district court clarified its earlier ruling concerning the parties' motions for summary judgment, stating:
It's apparent to me from the papers that you filed that there is confusion in this case about my view of [the case], and what is to be tried at the forthcoming trial....
The case, of course, is for the loss of cheese as a result of changes...
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