Ingenco Holdings, LLC, a Delaware limited liability company; Bio Energy (Washington), LLC, a Delaware limited liability company, Plaintiffs-Appellants,
ACE American Insurance Company, Defendant-Appellee.
and Submitted June 12, 2018 Seattle, Washington
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.
A. Talmadge (argued), Talmadge/Fitzpatrick/Tribe, Seattle,
Washington; Robert J. Rauch, Law Offices of Robert J. Rauch,
Bow, Washington; for Plaintiffs-Appellants.
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.
Insurance Law / Fed. R. Civ. 37 Sanctions
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.
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.
panel held that the district court properly applied
Washington law to this insurance coverage dispute.
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'
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
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.
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
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.
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
PREGERSON, District Judge.
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
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.
AND PROCEDURAL BACKGROUND
Damage to the gas purification plant
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.
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. These
unforeseeable vibrations, Ingenco argues, caused the metal
straps to change shape and break.
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.
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
The insurance coverage dispute
filed a property damage and business interruption insurance
claim with Ace in May 2011. Ingenco's all risks insurance
policy, issued by Ace, covered against "all risks of
direct physical loss or damage occurring . . . from any
external cause." The policy, however, excluded
"[f]aulty or defective material, faulty workmanship,
faulty methods of construction, [or] errors or omissions in
plan or specification or designs . . . unless loss by a peril
not otherwise excluded ensues . . . ." The policy also
excluded "[g]radual deterioration, depletion, inherent
vice, [or] latent defect . . ., unless such loss is caused
directly by physical damage not otherwise excluded . . .
." A separate Boiler and Machinery endorsement
("the Endorsement") covered property damage and
business losses "resulting from an Accident" to a
pressure vessel. The Endorsement's definition of
"Accident," however, excluded "depletion,
deterioration[, . . . and] wear and tear."
denied coverage on several grounds. Ace claimed that, as a
threshold matter, Ingenco failed to comply with a
notification provision that required Ingenco to notify Ace of
all losses. Specifically, Ace claimed that Ingenco failed to
notify Ace of both the October diffuser shield failure and
the resulting loss of beads in V32 until May 11, when the
plant shut down for the second time. With respect to
coverage, Ace took the position that Ingenco's losses
were not caused by any "external" force, but rather
from defects in the diffuser basket and the overly delicate
adsorbent beads. Thus, Ace reasoned, without an
"external cause" there was no covered loss, and
even if there were an external cause, coverage would
nevertheless be lacking under the "defective
material," "wear and tear,"
"deterioration," and other, similar exclusions.
brought suit in the Western District of Washington, alleging
causes of action for breach of contract and declaratory
relief, as well as statutory claims under Washington's
Consumer Protection Act and Insurer Unfair Conduct Act. The
parties eventually filed cross motions for summary judgment.
The district court granted Ingenco's motion insofar as
Ingenco argued that Washington law should apply to all
claims, and that, under Washington law, Ingenco's alleged
failure to comply with the policy's notice provision did
not preclude coverage absent prejudice to Ace. The court
ruled for Ace, however, that Ingenco's losses did not
result from an "external cause," but rather from an
"inherent problem in the system," which system had
been designed to withstand the "external" force at
issue, i.e., the landfill gas.
district court also ruled that the "ensuing loss"
exception to the "defective material" exclusion did
not apply to create coverage because there was no covered
loss in the first place. In a similar vein, the district
court concluded that Ingenco's losses were caused by wear
and tear resulting from normal operation, and therefore fell
outside the Endorsement's definition of covered
"Accident." Lastly, the district court ruled that,
even in the event of coverage, business interruption losses
would be limited to the "hypothetical" reasonable
repair period, regardless of the actual time necessary to
separate order, the district court found that Ingenco had
failed to timely disclose or produce evidence related to its
state law bad faith claims. As a discovery sanction, the
district court precluded Ingenco from introducing any such
evidence and, accordingly, dismissed Ingenco's statutory
claims for lack of proof of damages.
now appeals the district court's orders.
review grants of summary judgment, and partial grants of
summary judgment, de novo. Flores v. City of San
Gabriel, 824 F.3d 890, 897 (9th Cir. 2016). Discovery
rulings, including the imposition of discovery sanctions, are
reviewed for abuse of discretion. R & R Sails, Inc.
v. Ins. Co. of Pennsylvania, 673 F.3d 1240, 1245 (9th
Cir. 2012). A district court abuses its discretion if it
bases its decision "on an erroneous view of the law or
on a clearly erroneous assessment of the evidence."
Holgate v. Baldwin, 425 F.3d 671, 675 (9th Cir.
2005); Marchand v. Mercy Med. Ctr., 22 F.3d 933, 936
(9th Cir. 1994).
resolving this appeal, we must first determine whether
Washington or Virginia law applies to this insurance coverage
dispute. Only then can we proceed to analyze the coverage
issues, including whether Ingenco violated a condition
precedent to coverage. We address these questions before
turning to the remaining damages and discovery issues.