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United States Fire Insurance Co. v. Kelman Bottles LLC

United States District Court, W.D. Pennsylvania

May 23, 2014

UNITED STATES FIRE INSURANCE COMPANY, Plaintiff,
v.
KELMAN BOTTLES LLC and KELMAN GLASS, LLC, Defendants, and Counterclaim Defendant, Counterclaim Plaintiffs and Third Party Plaintiffs,
v.
CONTINENTAL CASUALTY COMPANY, Third Party Defendant.

MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART THIRD PARTY DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

ARTHUR J. SCHWAB, District Judge.

In this declaratory judgment action, brought by Plaintiff, United States Fire Insurance Company ("U.S. Fire"), U.S. Fire seeks a declaration that it does not have to provide insurance coverage under an all-risk policy it issued to Defendants, Kelman Bottles and Kelman Glass, LLC ("Kelman"). Kelman filed Counterclaims against U.S. Fire and also filed a Third-Party Complaint against Continental Casualty Company ("CNA") alleging both U.S. Fire and CNA breached their respective insurance contracts and violated Pennsylvania's bad faith statute in doing so.[1]

Presently before the Court is CNA's Motion for Partial Summary Judgment (and Brief in support of same) wherein CNA contends that the bad faith claim advanced by Kelman must be dismissed. Doc. no. 172-173. Kelman filed a Response and Brief in Opposition. Doc. nos. 181-182. CNA also filed a Concise Statement of Material Facts (doc. no. 174), to which Kelman filed a "Response in Opposition" to the Concise Statement of Material Facts (doc. no. 183) and also filed a "Counterstatement" of Facts.[2] Doc. no. 184. CNA filed a Reply to Kelman's Brief in Opposition on May 19, 2014. Doc. no. 192. Kelman filed a Sur-Reply on May 23, 2014. Doc. no. 204. The matter is now ripe for adjudication.

At the core of this insurance dispute, Kelman claims that the "occurrence" ( i.e. the breakdown of its sole operational furnace) was "sudden and accidental, " while the insurance carriers contend that the occurrence was not. With respect to the specific matter before the Court, Kelman sued CNA for violating Pennsylvania's bad faith statute. In order to recover on its bad faith claim, Kelman must prove by clear and convincing evidence: (1) that CNA did not have a reasonable basis for denying benefits under the policy; and (2) that CNA knew of or recklessly disregarded its lack of a reasonable basis in denying the claim. As will be discussed in greater detail below, the Court concludes that CNA did have a reasonable basis for denying benefits under its insurance policy. Given this conclusion, the Court need not reach nor discuss the second prong of the two-part test. Accordingly, the Court will enter an Order granting that portion of CNA's Motion for Partial Summary Judgment requesting that Kelman's bad faith claim be dismissed.

The Court will deny CNA's Motion for Partial Summary Judgment in all other respects, as those remaining portions of CNA's Motion attempt to limit Kelman's damages on its breach of contract claim against CNA. The arguments CNA makes in this respect are more properly brought as Motion(s) in Limine.

I. STANDARD OF REVIEW

Summary judgment may be granted if, drawing all inferences in favor of the non-moving party, "the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see also Post v. St. Paul Travelers Ins. Co., 691 F.3d 500, 514 (3d Cir. 2012), citing Fed.R.Civ.P. 56(a) ("A court may grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'").

A fact is "material" if proof of its existence or non-existence might affect the outcome of the suit under applicable law. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248, (1986); see also Lamont v. New Jersey, 637 F.3d 177, 181 (3d Cir. 2011); Smith v. Borough of Dunmore, 516 Fed.Appx. 194, 200 (3d Cir. 2013). Disputes must be both (1) material, meaning concerning facts that will affect the outcome of the issue under substantive law, and (2) genuine, meaning there is sufficient evidence supporting the claimed factual dispute "to require a jury or judge to resolve the parties' differing versions of the truth at trial. In re Lemington Home for Aged, 659 F.3d 282, 290 (3d Cir. 2011); see also S.H. ex rel. Durrell v. Lower Merion School Dist., 729 F.3d 248 (3d Cir. 2013).

A party moving for summary judgment has the initial burden of supporting its assertion that fact(s) cannot be genuinely disputed by citing to particular parts of materials in the record - i.e., depositions, documents, affidavits, stipulations, or other materials - or by showing that: (1) the materials cited by the non-moving party do not establish the presence of a genuine dispute, or (2) that the non-moving party cannot produce admissible evidence to support its fact(s). Fed.R.Civ.P. 56(c)(1). The moving party may discharge its burden by "pointing out to the district court" the "absence of evidence to support the nonmoving party's case" when the nonmoving party bears the ultimate burden of proof for the claim in question. Conoshenti v. Public Service Elec. & Gas Co, 364 F.3d 135, 140 (3d Cir. 2004) (quoting Singletary v. Pennsylvania Dept. of Corrections, 266 F.3d 186, 192 n. 2 (3d Cir. 2001)). Estate of Beim v. Hirsch, 121 Fed.Appx. 950, 953 (3d Cir. 2005).

Conversely, in order to defeat a motion for summary judgment, the non-moving party must support its assertion that fact(s) are genuinely disputed by citing to particular parts of materials in the record, or by showing that: (1) the materials cited by the moving party do not establish the absence of a genuine dispute, or (2) the moving party cannot produce admissible evidence to support its fact(s). Fed.R.Civ.P. 56(c)(1). When determining whether there are any genuine issues of material fact, all inferences should be drawn in favor of the non-moving party. Gallup v. Clarion Sintered Metals, Inc., 489 Fed.Appx. 553, 555 (3d Cir. 2012); Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 201 (3d Cir. 2006).

In sum, "In determining whether such relief is warranted, [t]he evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor.'" Post, 691 F.3d at 514, quoting Anderson, 477 U.S. at 255 (1986). The inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." 477 U.S. at 251-52.

In reviewing a motion for summary judgment, the court does not make credibility determinations, and summary judgment is "inappropriate when a case will turn on credibility determinations." El v. Southeastern Pennsylvania Transp. Authority, 479 F.3d 232 (3d Cir. 2007).

II. RELEVANT FACTUAL HISTORY

The following facts are undisputed and material unless otherwise stated.

Prior to March 15, 2011, Kelman operated a glass manufacturing facility in Glenshaw, Pennsylvania, where it produced glass containers for the food industry. Complaint, doc. no. 1, ¶¶ 3, 8-9; see also Kelman's Pretrial Statement, doc. no. 187, p. 2. The facility contains several furnaces for melting glass. Doc. no. 1, ¶ 11. From 2007 to March 15, 2011, Kelman operated only one furnace at the facility. Id., ¶¶ 15-16.

Kelman has indicated that this particular furnace "typically [has] a ten[-]year lifespan." Kelman's Pretrial Statement, doc. no. 187, p. 2. Kelman has also indicated that "every nine years the [f]urnace underwent a rebuild, which includes the of the replacement of the glass containment block in the melter." Id . Kelman has stated that the prior owner of the furnace replaced the containment block in December 2003 and January of 2004. Id . At the end of January 2004 the furnace "underwent a controlled cool down and was idle until January of 2007" when Kelman began using the furnace to produce glass. Id . By Kelman's calculation, the furnace was in year five of its rebuilt ten-year life span when the incident occurred. Id.

On March 15, 2011, molten glass escaped from the furnace ultimately resulting in physical damage to the furnace and other property. Doc. no. 1, ¶ 21. Kelman timely placed its insurers (including CNA) on notice of the March 15, 2011 leak claim.[3] Amended Third Party Complaint, doc. no. 149, ¶ 21.

On March 17, 2011, an engineer hired by CNA (David Bizzak) met with Kelman representatives (and others), interviewed Kelman employees, obtained records (including the furnace logs), and inspected the furnace. Kelman's Response to CNA's Statement of Facts, doc. no. 183, ¶¶ 8-12. A Reservation of Rights letter ("ROR letter"), dated March 22, 2011, was sent to Kelman on behalf of CNA, acknowledging the claim and advising Kelman of its investigation, which, as noted immediately above, had already begun. Id., ¶ 15, 19. The ROR letter contained the wrong definition of "Breakdown" - a key term defined by the policy.[4] Id., ¶¶ 16-18.

On March 23, 2011, CNA, through its adjuster, Goewey, received a copy of Bizzak's four-page report which contained nine photographs ("Bizzak report"). Id., at ¶ 29. After receiving the Bizzak report, CNA contacted U.S. Fire on March 23, 2011, and told U.S. Fire that Kelman's loss was not a boiler and machinery claim, but was in fact, a property claim. Id., ¶ 31. That same day, March 23, 2011, CNA notified Kelman's insurance broker that CNA would decline coverage under the CNA policy. Id., ¶ 32.

On March 25, 2011, U.S. Fire notified Kelman via email that it had retained its own consultants who visited the Kelman plant twice - once in late March of 2011, and once in May of 2011 - to inspect the Furnace at issue. Id., ¶ 40.

On April 20, 2011, Kelman retained a public adjuster, Randall Goodman, to represent Kelman in its pursuit of insurance coverage. Id., ¶ 47. On April 27, 2011, Goodman spoke with Goewey at CNA, and Goewey told Goodman that CNA was going to deny coverage based on the Bizzak report. Id., ¶ 50. The Bizzak report concluded as follows:

Conclusions

Based upon my review and analysis of available evidence, it is my opinion, within a reasonable degree of engineering certainty, that the March 15, 2011 incident at Kelman Bottles Glenshaw facility did not occur as a result of operator error or the specific failure of a component of the furnace and/or its associated controls. On the contrary, the initial leak below the top of the molten glass was not uncommon either in its occurrence or location. That is, Mr. Hogan [Kelman's plant manager] indicated that leaks near the surface of the molten glass within the furnace, although not frequent, can occur during glass color changeovers when temperature disturbances within the furnace occur. While such leaks are either self-sealing due to cooling of the escaping glass (very small leaks) or are manually arrested by cooling the glass with water lances, the subject leak occurred at a location that permitted molten glass to flow onto the cooling line of one of the electrodes. As a result of the loss of cooling to the electrode, molten glass began to flow out the casing of the electrode and the cooling jacket annulus. The resulting flow of molten glass out of three separate leakage pathways was too great to allow the flow to be sealed by cooling the glass using one or more water lances. Consequently, a significant volume of molten glass escaped the furnace before employees were able to arrest the flow.

Doc. no. 175-11, Ex. 60, p. 20.

Despite the March 23, 2011 oral denial of coverage which CNA made to Kelman's broker, and the April 27, 2011 oral denial of coverage which CNA made to Kelman's retained public adjuster (Goodman), CNA sent three letters to Kelman - one dated April 11, 2011, one dated May 6, 2011, and one dated June 9, 2011. Doc. no. 175-17, pp. 10-14; and doc. no. 175-15, pp. 66-71. The April 11, 2011 letter indicated that CNA was "in the process of reviewing [Kelman's] claim." Doc. no. 175-17, p. 13-14. The May 6, 2011 letter indicated that CNA was "[s]till investigating the claim." Doc. no. 175-15, pp. 66-68. The June 9, 2011 letter stated that CNA was "in the process of verifying coverage" and that "[a] decision on this claim is anticipated by 06/23/2011." Id., pp. 69-71.

Additionally, there is no dispute between the parties that despite the March 23, 2011 and April 27, 2011 oral denials of coverage made by CNA to Kelman's broker and to Kelman's retained public adjuster, CNA did not issue a written denial letter until June 14, 2011. Moreover, there is no dispute that in the intervening months, CNA sent Kelman three letters suggesting its investigation was ongoing. See relevant references, above. There is also no dispute between the parties that during these intervening months, CNA monitored the status of U.S. Fire's investigation of Kelman's claim. Kelman's Response to CNA's Statement of Facts, doc. no. 183, ¶ 37.

As stated above, on June 14, 2011, a denial letter was sent by CNA to Kelman which included the correct definition of the term, "Breakdown." Id., ¶ 59. The parties agree that CNA's June 14, 2011 denial letter set forth reasons for the denial of coverage, but Kelman contends that the "reasons" were at a minimum unclear, and at worst, were intentionally vague in violation of Pennsylvania insurance law. Id., ¶¶ 34-36.

The June 14, 2011 denial letter sent by CNA to Kelman's retained a public adjuster (Goodman) reads, in pertinent part, as follows:

The purpose of this letter is to formally set forth Continental Casualty Company's reasons for its denial of coverage for this claim under your client's Boiler & Machinery Policy, BM4027236757, issued to Kelman Bottles, LLC with effective dates of March 14, 2011 to March 14, 2012.
Your client explained that on March 15, 2011 they were in the process of producing bottles when a water line was damaged by the molten glass. This caused a drop in temperature and this caused the glass to cool and push upward. In this case the glass was pushed out of a hole in the furnace and approximately 120 gallons of molten glass spilled.
We then contacted engineer Dave Bizzak with Romuladi Davidson & Associates and requested that he meet with your client and verify the cause of loss. Mr. Bizzak met with your client and verified the facts of the loss with him. He determined the loss did not occur as a result of operator error or the specific failure of a component of the furnace and/or its associated controls. The leak that occurred near the surface is not uncommon. Molten glass can leak during glass color changeovers when temperature disturbances within the furnace occur. The subject leak occurred at a location that allowed the molten glass to flow over one of the cooling lines of one of the electrodes. As a result there was a loss of this cooling electrode and molten glass began to flow out of the casing of the electrode and the cooling jacket annulus. This resulted in a flow of molten glass from three separate leak pathways and the amount was too great for cooling or water lances to stop. Thus there was a significant volume of molten glass that escaped from the furnace.
* * *
1. "Breakdown":
a. Means sudden and accidental direct physical loss to "Covered Equipment, " which manifests itself by physical damage, necessitating its repair or replacement, unless such loss is ...

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