United States District Court, C.D. California
CIVIL MINUTES - GENERAL
PHILIP S. GUTIERREZ, District Judge.
Proceedings (In Chambers): Order GRANTING IN PART and DENYING IN PART Defendant's Motion for Summary Judgment
Before the Court is Defendant Peerless Insurance Company's ("Defendant" or "Peerless") motion for summary judgment or, in the alternative, partial summary judgment. See Dkt. # 28. After considering the arguments presented in the moving, opposing, and reply papers, and at a hearing on January 5, 2015, the Court GRANTS IN PART and DENIES IN PART the motion.
Defendant Peerless Insurance Company ("Peerless") issued a commercial insurance policy - CBP 1017237 (the "Policy") - to Plaintiff CV Ice Company, Inc. ("CV Ice") for the policy period December 7, 2012 to December 7, 2013. See Plaintiff's Response to Uncontroverted Facts ("Pl. Response") ¶¶ 1-3. CV Ice is a company that makes and supplies large-scale block ice and packaged ice for customers in the Coachella Valley, Imperial Valley, and surrounding areas. See Opp. 1:16-2:2. CV Ice was formed in 2001, when its owners purchased two existing ice plants and associated property out of bankruptcy. See Pl. Response ¶ 67. This lawsuit concerns CV Ice's block ice making system, located at 83796 Date Avenue in Indio, California ("Date Avenue Plant"). See Def. Response ¶ 2.
The block ice making system is enclosed in a large steel tank (78 feet long, 30 feet wide, and 6 feet deep) that is built into the floor of the building. Id. ¶ 3. In the 1970s, CV Ice's predecessor installed a 12, 000-foot piping system made from two-inch, Type F, butt-welded furnace pipe tightly coiled in rows throughout the steel tank. Id. ¶¶ 4-5. The piping system is welded into the walls and floor of the tank. Id. ¶¶ 5-6. To make the block ice, the coiled pipes, which are submerged in a salt-water solution known as "brine" that fills the steel tank, are flooded with pressurized anhydrous ammonia. Id. ¶ 7. Large baskets, each containing six cans filled with water, are lowered by a hoist into the brine solution, with a row of piping between each basket. Id. ¶ 8. Each can is capable of making a 300 pound block of ice. Id. The top of the tank has a deck on it that keeps the baskets in the brine until it is time for them to be hoisted out of the tank. Id. ¶ 9. At that time, the ice is harvested. Id.
The incident at the center of this insurance dispute occurred on July 27, 2013, during the appropriate policy period. See Pl. Response ¶ 14. On August 1, 2013, Kevin Mason ("Mason"), the President of CV Ice, reported a claim to Peerless. Id. On July 27, 2013, personnel at the Date Avenue Plant smelled ammonia and started emergency procedures to find the leak and prevent the further release of ammonia. See Pl. Statement of Genuine Disputes of Material Facts ("Pl. Statement") ¶ 17. After purging the pipe system of ammonia and draining the brine from the tank, CV Ice could discern what had happened. See id. ¶¶ 17-18. One of the heavy baskets had dropped onto the tank's deck, causing an angle iron on the deck to fall into the tank and strike and puncture a pipe. See id. ¶ 18. Peerless does not dispute that the impact damage to the pipe that occurred on July 27, 2013 is a covered loss under the Policy. Sullivan Decl., Ex. 16 ["September 9 Coverage Letter"] at p.107.
On August 12, 2013, Peerless claim representative Richard Gutierrez ("Gutierrez") inspected the block ice system with a retained engineering consultant, Robert Underwood ("Underwood") of Werlinger and Associates. See Pl. Response ¶ 16. After that inspection, Underwood advised Mason that it appeared that the impact damage could be fixed with an isolated weld repair. Id.
CV Ice's retained refrigeration industry expert - Alliance Industrial Refrigeration Services, Inc. ("Alliance") - was also present at the Date Avenue Plant on August 12, 2013. See Pl. Statement ¶ 23. Alliance's report after that inspection indicated that the pipe could not be repaired because the CV Ice ammonia piping was seamed and current codes require seamless ammonia piping. See McKeon Decl., Ex. 37 ["Alliance Report"] at 2. Alliance presented two code compliance options for repair - replacing the 12, 000 feet of existing piping with seamless pipe (~ $517, 000) or replacing the piping system with a modern pipeless system (~ $425, 60). Id. at 2-3. Alliance's opinion was informed by a consultation with Miguel Anderson ("Anderson"), an expert welder from STL Fabrication who informed Alliance that repair by welding was not permitted by the applicable codes or logistically feasible due to the corroded state of the damaged pipe. See id., Ex. 40-41.
At some point after the accident, Mason contacted the Riverside Country Department of Environmental Health ("DEH") to report the ammonia leak. Id. ¶ 17. The directive issued by the DEH in this matter is relevant because part of this dispute involves whether the DEH's instructions regarding the piping system triggered additional coverage within the meaning of one of the Policy's endorsements. The DEH inspector Brad Ballen ("Ballen") states that he received notice of the leak on August 15, 2014 and inspected the Date Avenue Plant the following day, August 16, 2014. See Sullivan Decl., Ex. 7 ["DEH Inspection Report"] at p.79. Ballen's inspection report identified CV Ice's block ice making system as being in violation of Health & Safety Code Chapter 6.95, California Code of Regulations Title 19 Chapter 4.5, "I. Maintained and Operated to Minimize the Possibility of a Release[, ]" referring to release of ammonia. Id. at p.78. The report explains:
Inspection of random sections of the heat exchanger piping showed the piping to be very badly corroded and pitted throughout the entire length of this line. All of this piping is very susceptible to failure due to corrosion even if it is not mechanically damaged again. This system should not be placed back into service until all defective piping has been replaced.
Violation: The stationary source is not operating and/or maintaining the covered process in such a manner as to minimize the possibility of a release. Heat exchanger piping in the ice making tank could fail due to severe corrosion releasing anhydrous ammonia into the environment.
Correction:... The heat exchanger piping in the ice making tank must be replaced prior to restarting the system.
Id. at p.78.
Ballen had been making periodic visits to the CV Ice facility since 1991, but he had never actually seen the ammonia piping before the August 16, 2013 visit because the piping had always been covered. See Sullivan Decl., Ex. 28 ["Ballen Depo."] at 110:16-111:2. Ballen explained: "Normally, this piping is not exposed. It's submerged under brine and it usually has covers over it all, so during the course of my previous inspections it's not something I would have been able to see unless there was some great effort on the facility's part to, you know, drain the swamp, so to speak, so I could see what alligators are in there." Id. at 110:8-15. Prior to the accident, on May 30, 2013, Ballen had inspected and cleared the Date Avenue Plant; however, Ballen's deposition clarifies that he did not visually inspect the pipes on that occasion (or any other occasion). See id. 110:6-111:2; McKoen Decl., Ex. 33.
CV Ice started incurring expenses due to the inoperative block ice making system since its shutdown on July 27, 2013. See Sullivan Decl., Ex. 8 at p.86. On August 19, 2013, Peerless authorized a payment of $50, 000 to CV Ice based on Mason's assertion that he would expend over $47, 000 in connection with the purchase and handling of replacement ice by the end of August. See Pl. Response ¶ 23; Sullivan Decl., Ex. 8-9.
On August 23, 2014, a group inspection and meeting was held at the Date Avenue Plant. Peerless Claims Manager Phillip White inspected the block ice making system, accompanied by the following individuals: Underwood, Frank Jackman ("Jackman") of FJR Pacific Industrial Refrigeration ("FJR Pacific"), registered mechanical engineer Adam Johnson ("Johnson") of FJR Pacific, certified welder Rick Jackman of FJR Pacific, Shahram Sheybany ("Sheybany") of Pacific Metallurgical, and Robert Distaso ("Distaso"). See Pl. Response ¶¶ 24-25. Ballen also attended at Peerless' request. Id. ¶ 26.
Following this inspection, Ballen issued a supplemental inspection report. Id. ¶ 27; Sullivan Decl., Ex. 12 ["Ballen Supplemental Report"]. He summarized that the group discussed repair options, "including replacement of severely corroded piping, replacing all piping regardless of its condition and changing the entire process to eliminate any piping within the ice making tank." Id. Ballen indicated that he "left the meeting with the understanding that the group would decide what actions would be taken to place the system back into operation and that they would present their decision to me at a later date for my review." Id.
On August 30, 2013, FJR Pacific issued a piping repair proposal to Peerless. Pl. Response ¶ 36; Sullivan Decl., Ex. 13 ["FJR Proposal"]. Contrary to CV Ice's Alliance-generated report, the FJR Proposal concluded that the damaged section of pipe could be repaired in compliance with current code requirements. FJR Proposal. FJR Pacific explained that although the applicable guidelines no longer permit Grade F carbon steel piping (the piping in the Date Avenue Plant system) to be used for ammonia refrigeration, the standard only applies to components installed after its adoption and a repair to an existing pipe is not covered within any of the standards. Id. FJR Pacific estimated that the repair process would take three days and cost no more than $10, 000. Id.
Having concluded its investigation, Peerless sent CV Ice a letter explaining its coverage position regarding the July 27, 2013 incident. Pl. Response ¶ 43. Peerless reported its conclusion that the Policy covers the direct physical damage to the ammonia piping, but not the damage caused by corrosion and deterioration of the 40-year-old piping system. September 9 Coverage Letter at p.107. Peerless determined that the impacted section of pipe could be repaired, both logistically and legally, because it found that the damaged pipe section had acceptable wall thickness (it was not too corroded) and that a Type F patch job was permissible under the guidelines. Id. at p.106. Thus, Peerless would cover the cost of repairing the direct physical damage to the pipe that occurred on July 27, 2013 as well as the loss of business/extra expense associated with an isolated weld repair of the ammonia piping. Id. at p.107-10.
CV Ice immediately disputed this coverage position. See Mot. 9:18. Mason followed up with Ballen at the DEH, asking for clarification about whether existing laws permitted a weld repair under the circumstances. Pl. Response ¶ 48. Ballen responded that his "intent is not only the damaged section of piping be replaced, but that any and all piping that is subject to failure due to extensive corrosion be replaced." Sullivan Decl., Ex. 17 at p.111. CV Ice's position was that the DEH and pertinent laws and regulations required complete replacement of all piping or the installation of a new system before allowing operations to resume, and the Policy covers those costs under a number of provisions.
On September 24, 2013, Peerless sent CV Ice its final coverage letter. See Pl. Response ¶ 50; Sullivan Decl., Ex. 18 ["September 24 Coverage Letter"]. In this letter, Peerless reiterated its position communicated on September 9, 2013 and stated the following regarding the DEH issues:
With respect to issues raised by DEH... those issues pertain to deficiencies (pre-existing conditions) such as corrosion/maintenance issues found in the block ice tank system... Our estimate reflects what it would cost to repair the ammonia piping in the absence of all other conditions and circumstances currently existing in the block ice tank system. We recognize that once the repair solution has been completed, Mr. Ballen may not authorize CV Ice to place the system back in operation due to various violations related to corrosion, deterioration of the piping system or maintenance related items etc. that are excluded under the policy.
September 24 Coverage Letter at p. 126.
To date, Peerless has paid CV Ice for its net loss calculated as follows:
Production Equipment (based on repair): $10, 000 Extra Expense (incurred from July 27 to Aug. 31, 2013): $57, 102 Subtotal: $67, 102 ...