Friday, May 15, 2020

WDNY Reiterates That Under New York Law, Direct Physical Loss Means Some Form of Actual, Physical Damage to the Insured Property

SatisPie, LLC v. Travelers Prop. Cas. Ins. Co.of Amer.
(WDNY, decided 3/25/2020)

Insured makes and sells unbaked frozen pies.  After a "major ammonia leak" occurred inside the insured's cold-storage area, where upwards of $800,000 of the insured's product was stored, the insured disposed of what was then thought to be contaminated product, allegedly having been told by his broker that Travelers had advised that the insured could "dispose of the contaminated products."

After learning that its policy afforded only $25,000 in coverage for ammonia contamination, the insured claimed and argued that the pies were not contaminated, and that Travelers owed coverage for them because (1) it had said the pies could be discarded and (2) had issued a denial of coverage for the discarded product based only on the policy's food spoilage exclusion.

In granting Travelers' summary judgment motion with respect to the insured's breach of contract claim, District Judge Elizabeth A. Wolford of the Western District of New York held:
The Court agrees with Defendant that Plaintiff cannot demonstrate a breach of contract under the circumstances of this case. To the extent the pies in question were contaminated by the ammonia leak, it is clear that the Policy entitled Plaintiff to recover only $25,000. Plaintiff does not dispute this point in its papers, and Plaintiff's counsel confirmed at oral argument that Plaintiff was not contesting that if the pies were rendered unfit for human consumption by the ammonia leak, the $25,000 limit would apply. Instead, Plaintiff argues that the $25,000 limit is a red herring because the pies were not contaminated by ammonia and were in fact still fully edible. (See Dkt. 35 at 17 ("SatisPie's expert ... is of the opinion that the shrink-wrapped and sealed boxed pies ... were never damaged.")). 
Plaintiff's argument is logically inconsistent and proves too much. Accepting Plaintiff's position that the pies were not damaged by the ammonia leak and were instead fully intact and edible when Plaintiff disposed of them, Plaintiff cannot show that it suffered a loss that is covered by the Policy. The Policy covers "direct physical loss of or damage to Covered Property" from a "Covered Cause of Loss." (Dkt. 31-2 at 19). "Covered Cause of Loss" is further defined as "risks of direct physical loss," unless subject to an exclusion or limitation. (Id. at 36). 
"It is well established under New York law that a policyholder bears the burden of showing that the insurance contract covers the loss." Morgan Stanley Group, Inc. v. New England Ins. Co., 225 F.3d 270, 276 (2d Cir. 2000). This is true even for "all-risk" policies—"labeling the policy as `all-risk' does not relieve the insured of its initial burden of demonstrating a covered loss under the terms of the policy." Roundabout Theatre Co. v. Cont'l Cas. Co., 302 A.D.2d 1, 6 (1st Dept. 2002). Under New York law, the phrase "risks of direct physical loss" has been interpreted to mean "some form of actual, physical damage" to the insured property. Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323, 331 (S.D.N.Y. 2014). In this case, it is Plaintiff's position that there was no physical damage to its pies. (See Dkt. 35-4 at ¶ 34, ¶ 36 (statements by Michael Pinkowski that "I can definitively say that none of the pies or pie product that were in the freezer ever spoiled" and "the pie product was perfectly edible"))[2]. Accordingly, Plaintiff cannot show that coverage under the Policy was ever triggered, and therefore also cannot show any breach by Defendant in failing to pay. In other words, according to Plaintiff's logic, the loss was caused by its disposal of product that was not contaminated—but if that is the case, it constitutes a loss that is not covered by the Policy. 
Plaintiff argues that Defendant denied coverage on the pie loss claim due to the Policy's exclusion for food spoilage and that it cannot now "change horses in midstream" and argue that a different exclusion applies. (See Dkt. 35 at 16-17). However, the New York Court of Appeals has held that "a disclaimer of liability, based on specified exclusions..., does not effect a waiver of an insurer's defense (in other words, no preclusion obtains) that the claim was outside the scope of the insuring clause of the policy." Cent. Gen. Hosp. v. Chubb Grp. of Ins. Companies, 90 N.Y.2d 195, 201 (1997). In other words, Defendant's reliance on the food spoilage exclusion to deny Plaintiff's claim does not now prevent it from arguing that if, as Plaintiff maintains, the pies were not damaged when Plaintiff disposed of them, coverage was never triggered in the first instance. 
In sum, there are two possible scenarios presented by the record: (1) Plaintiff's pies were rendered unfit for human consumption by ammonia and the $25,000 limit applies; or (2) the pies were, as Plaintiff claims, undamaged, and no covered loss occurred. Under either set of facts, Defendant has not failed to comply with its contractual obligations. For these reasons, the Court agrees with Defendant that no reasonable jury could find for Plaintiff on its express breach of contract claim. Accordingly, the Court grants Defendant's motion for summary judgment as to Plaintiff's claim that Defendant breached the express terms of the party's contract.
The court did, however, deny Travelers' motion with respect to the insured's breach of the implied covenant of good faith and fair dealing and equitable estoppel claims, holding:
The Court further finds that there are genuine issues of material fact regarding whether Defendant breached the implied covenant of good faith and fair dealing. As noted above, in the context of insurance contracts, the implied covenant encompasses a duty to investigate claims in good faith. In this case, construing the evidence in the light most favorable to Plaintiff, Defendant (through its employee Rempel) told Plaintiff that it would send out an adjuster to inspect the damage (including the damage to the pie products) but then never did so. Instead, it sent out Fischer, who did not inspect the pies but nonetheless told Plaintiff to proceed with disposing of them so that the equipment could be repaired. 
The Court agrees with Defendant that the evidence of record demonstrates that Defendant and its agents told Plaintiff only to dispose of contaminated product. In particular, the Court notes that the email from Viksjo states that Defendant had confirmed that Plaintiff could dispose of contaminated products. (Dkt. 31-9 at ¶¶ 10-11; Dkt. 35-1 at ¶¶ 10-11). Pinkowski's follow-up email to Defendant stated that Plaintiff's employees would "remove damaged products." (Dkt. 31-9 at ¶ 12; Dkt. 35-1 at ¶ 12). Further, Fischer's claim investigation report refers to removal of "damaged product." (Dkt. 35-3 at 44). However, these facts are not determinative, because there still remains an open question as to whether Defendant, through its conduct, caused Plaintiff to believe that it conducted an investigation and determined that the pies and product were contaminated and should be destroyed. Regardless of the Court's views as to how a jury will likely answer that question, it must resolve that disputed issue of fact in Plaintiff's favor. See Medeiros v. Pratt & Whitney Power Sys., Inc., 272 F. App'x 78, 80 (2d Cir. 2008) ("On a motion for summary judgment, a district court must consider the evidence in the context of whether any reasonable finder of fact—not merely the district court itself—could return a verdict in favor of the non-moving party.").  
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The Court finds that there are genuine issues of material fact regarding Plaintiff's equitable estoppel claim. As discussed above, a reasonable factfinder who considered all evidence in the light most favorable to Plaintiff could conclude that Defendant's conduct misled Plaintiff into thinking that Defendant had inspected the pies and concluded that they were contaminated. There is also evidence to support the conclusion that Defendant's agent Fischer knew that he had not inspected the pies, yet nonetheless communicated that Plaintiff should move forward with disposing of them so that repair of the damaged equipment could begin. A reasonable factfinder could further conclude that Plaintiff then detrimentally changed its position, in reliance on Defendant's actions, by disposing of the pie products. By no means is the Court suggesting that this is a likely outcome— particularly since evidence in the record exists supporting the conclusion that Plaintiff intended to dispose of the pie product prior to the visit from Fischer—but on this record, Defendant has not demonstrated that it is entitled to judgment as a matter of law on Plaintiff's equitable estoppel claim.
Lastly, the insured's negligence claim against Travelers was dismissed:
The Court agrees with Defendant that Plaintiff cannot establish the existence of a duty outside the contract in this case. The only duty suggested by Plaintiff is a duty to have tested the pie products before "directing and ordering that they be disposed of by [Plaintiff]." (Dkt. 31-18 at 26 (quoting Dkt. 1-2 at ¶ 41)). However, as discussed above, under New York law, the duty to perform a good faith investigation into claims is inherent in an insurance contact. See Those Certain Underwriters at Lloyds, London v. Gray, 49 A.D.3d 1, 4 (1st Dept. 2007) (noting that insurer has the obligation to conduct a prompt, diligent investigation into claims). Thus, Defendant's alleged duty to inspect the pie products is not separate from its contractual obligations. There is no evidence in the record before the Court to support a finding of any other independent duty by Defendant. Accordingly, the Court grants Defendant's motion with respect to Plaintiff's negligence claim.

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