After the carrier was successful on summary judgment before the district court, the Ninth Circuit reversed, finding the causation and bad faith issues required a trial. Pyramid Tech., inc. v. Allied Public Adjuster, Inc., 2014 U.S. App. LEXIS 9210 (9th Cir. May 19, 2014).
Pyramid purchased and resold electronic parts, many of which were out-of-date or not state-of-the-art. Pyramid stored its inventory on shelves in a warehouse that did not have air conditioning or humidity control. Pyramid had approximately 52 million items in its warehouse at the time of a flood.
The warehouse was flooded with one to two inches of water on August 11, 2005. Condensation was visible on packages on the lower three to four shelves in the warehouse. Pyramid asked Hartford Casualty Insurance Company to test the inventory. Hartford's expert determined that the humidity did not reach a level that could have caused damage to any of he inventory. Hartford refused to test the inventory. It would have cost more than $13 million to test every item.
In August 2007, Hartford finally agreed to conduct limited testing of a small subset of parts identified by Pyramid as being damaged. Although some of the items were damaged, the Hartford expert determined that the flood was not the cause of corrosion damage to the parts he examined. In October 2010, Pyramid sold most of its undamaged inventory at a distress sale price of $125,000.
Pyramid sued for breach of contract and breach of the implied covenant of good faith. The district court granted summary judgment to Hartford.
On appeal, Pyramid argued that Hartford breached the policy by failing to properly investigate and for denying the claim for loss of inventory. The Ninth Circuit noted that the inability to sell items due to physical damage would constitute a covered loss. A reasonable fact finder could conclude that some of the inventory items had moisture-related damage that diminished their market value. The diminution in market value was a recoverable measure of damages. Therefore, there was evidence from which a jury could determine that Pyramid suffered harm to its inventory.
Regarding causation, there was evidence from which a jury could infer that moisture from the flood may have reached moisture-sensitive components because the packaging was not fully sealed, failed from age, or failed because the humidity caused by the flood reached above the dew point. Therefore, summary judgment was inappropriate against Pyramid's claim of loss of inventory.
Finally, there was evidence supporting an inference that Hartford acted unreasonably or with bias. It relied on its expert that humidity could not have caused damage, even though the expert conducted only a cursory investigation and relied on readings taken after the drying operation had concluded. Further, Hartford did not test any of Pyramid's inventory until two years after the flood and only after Pyramid had engaged its own expert. Therefore, summary judgment against Pyramid's claim for breach of the implied covenant of good faith was inappropriate.
