Tred R. Eyerly | Insurance Law Hawaii | May 15, 2019
The Ninth Circuit reversed the district court’s issuance of summary judgment regarding coverage for damages when the insured’s plant had to be shut down due to an accident. Ingenco Holdings, LLC v. Ace American Ins. Co., 2019 U.S. App. LEXIS 10946 (9th Cir. April 15, 2019).
Ingenco operated a gas purification plant which converted raw landfill gas into usable natural gas. The final step in the purification process involved the removal of excess nitrogen from the landfill gas. The gas was directed through adsorbent beads, to which nitrogen adhered, contained within pressure vessels.The beads could not withstand the direct pressure of the landfill gas inflow. which, if untreated, could grind the beads down into dust. To reduce the force of the gas flow on the beads, a “diffuser basket” was suspended from the top of each bead-filled pressure vessel. The diffuser basket acted as a shield that prevented the full force of the incoming landfill gas from striking the beads directly.
In 2010, metal brackets securing a diffiuser basket broke. This resulted in damage to other components and an eventual shutdown of the entire facility. The plant remained idle for several months as Ingenco investigated alternative nitrogen filtration options and undertook repairs.
Ingenco filed a property damage claim with Ace in May 2011. The all-risk policy excluded “faulty or defective material, faulty workmanship, faulty methods of construction . . . unless loss by a peril not otherwise excluded ensues . . .” Ace denied coverage, contending that the losses were not caused by any”external” force, but rather from defects in the diffuser basket. Ace reasoned that without an “external cause” there was no covered loss. Even if there were an external cause, coverage would still be denied under the “defective material,” “wear and tear,” “deterioration,” and other, similar exclusions.
Ingenco sued for breach of contract and declaratory relief. The district court granted summary judgment to Ace, agreeing that Ingenco’s losses did not result from an “external cause,” but rather from an inherent problem in the system, which had been designed to withstand the “external” force at issue, i.e., the landfill gas. The “ensuing loss’ exception to the “defective material” exclusion did not apply because there was no covered loss in the first place. Ingenco appealed.
The Ninth Circuit noted that the policy did not define the term “external cause.” The proper analysis was on whether the loss was fortuitous. This required looking into whether a particular loss was certain to occur, the parties’ perception of risk at the time of the policy issuance, and whether the loss could reasonably have been foreseen. The issue was not the fortuity of the process gas or some other cause, but rather whether Ingenco’s loss was fortuitous. The court concluded the loss was not inevitable and could not have been reasonably foreseen. Therefore, the loss was fortuitous or, at the very least, there was a triable issue of fact.
Therefore, the district court’s grant of summary judgment to Ace on the question of whether Ingenco’s loss was the result of an “external cause” was reversed. The district court failed to consider the role of fortuity in all risks insurance disputes.
The court next considered the ensuing loss provision in the exclusion for faulty or defective material, etc. Ingenco argued that, even if the diffuser basket was defectively designed, and even if its failure constituted an uncovered “internal” cause of loss, the “ensuing loss” exception preserved coverage for the post-failure damage to the adsorbent beads throughout the purification system. Ace’s position was that the damage did not result from an “external cause.” The court reasoned that the loss of the adsorbent beads did ensue from some prior, but excluded loss or event, whether it was the stream of gas or the failure of the diffuser shield. There was no specific exclusion regarding the loss of the beads. Therefore, even if the diffuser shield suffered from some inherent defect, the subsequent destruction of the adsorbent beads would be covered under the ensuing loss exception.
Consequently, the Ninth Circuit reversed the district court grant of summary judgment against Ingenco and remanded the case to the district court for trial.