Fed. Ins. Co. v. Coast Converters
Citation2014 NV 95
Date Filed2014-12-24
Docket59639
Cited0 times
StatusPublished
Full Opinion (html_with_citations)
130 Nev., Advance Opinion 15
IN THE SUPREME COURT OF THE STATE OF NEVADA
FEDERAL INSURANCE COMPANY, No. 59639
Appellant/Cross-Respondent,
vs. MED
COAST CONVERTERS, INC.,
Respondent/Cross-Appellant. DEC 2 4 2014
E'
rop
TAC'E K. I INDEHAN
d H „IC
CHRiF GE ( EEL (K
Appeal and cross-appeal from a judgment on a jury
finding an insurance company liable for breach of contract and violation of
the Nevada Unfair Claims Practices Act. Eighth Judicial District Court,
Clark County; Gloria Sturman, Judge.
Vacated in part, reversed, and remanded.
Lewis Roca Rothgerber LLP and Daniel F. Polsenberg and Joel D.
Henriod, Las Vegas; Pyatt Silvestri and James P.C. Silvestri, Las Vegas,
for Appellant/Cross-Respondent.
Lee, Hernandez, Landrum, Garofalo & Blake, APC, and David S. Lee and
Robert A. Carlson, Las Vegas; Lemons, Grundy & Eisenberg and Robert L.
Eisenberg and Tiffinay B. Pagni, Reno,
for Respondent/Cross-Appellant.
BEFORE THE COURT EN BANC.
OPINION
By the Court, GIBBONS, C.J.:
This case involves a dispute between an insured manufacturer
and its insurer. In the present case, electrical problems at a plastic bag
manufacturing plant led to damaged machinery and an increased number
of defective bags being produced. Following the electrical problems, the
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manufacturer filed a claim with its insurance company. However, a
dispute arose between the parties regarding whether losses associated
with the defective bags should be covered under the insurance policy's
property damage provision or its business interruption/extra expense
provision. The parties further disputed whether a policy limit of $2
million or $5 million should apply to the manufacturer's property loss.
The district court submitted both of these issues to the jury. Following
trial, the jury awarded the manufacturer $4,005,866 for breach of the
insurance contract, impliedly finding that the insured's loss was property
damage and that the $5 million property damage policy limit applied.
In this opinion, we first address whether categorizing the
insured's loss under the policy presents a question of law or a question of
fact. We conclude that categorizing the insured's loss under the policy is a
question of law. Second, we address whether determining which policy
limit applies to the insured's property loss presents a question of law or a
question of fact. We conclude that determining which policy limit applies
presents a question of law. Accordingly, we conclude that the district
court erred in sending these questions to the jury. We therefore reverse
the district court's judgment and remand this matter for further
proceedings consistent with this opinion.
FACTS AND PROCEDURAL HISTORY
Respondent/cross-appellant Coast Converters, Inc.,
manufactured plastic bags in California. In 2003, Coast began moving its
plastic bag factory, including machines and equipment, from California to
Las Vegas. Corresponding with the move, in June 2003, Coast obtained a
commercial package all-risk insurance policy from appellant/cross-
respondent Federal Insurance Company. The insurance policy covered up
to $2 million in property damage (PD) and up to $1.75 million for business
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interruptions/extra expenses (BI/EE). On August 27, 2003, Coast
requested, and later received, an increase in the PD coverage limit from $2
million to $5 million.
In anticipation of Coast's move to Las Vegas, electrical
modifications were made to the Las Vegas facility. However, the
modifications were apparently inadequate, causing voltage fluctuations.
The voltage fluctuations damaged machinery used in the manufacturing
process and also caused the production of a larger-than-normal amount of
defective bags, or "scrap."
Coast filed a claim with Federal Insurance, seeking to recover
costs related to the damaged machinery and the production of increased
scrap. Coast pointed out that the defective bags were often hidden in rolls
of otherwise quality bags, rendering the defective bags largely
undiscoverable prior to sale. While it was able to pull some of the rolls
containing defective bags, Coast claimed that it was not made aware of the
defects until several orders were returned. Thus, Coast asserted that it
was unable to separate the defective bags from the quality ones, rendering
the entire package of bags a total loss.
Upon receiving Coast's claim, Federal Insurance investigated
the machine malfunctions and eventually made several payments to
Coast. Initially, Federal Insurance did not communicate under which
provision, PD or BI/EE, the payments were made. Federal Insurance later
allocated a small portion of the payments—relating to the damaged
machinery—to the PD coverage. However, the majority of the payments,
including payments for the increased scrap, were made under the BI/EE
coverage. Ultimately, Federal Insurance disbursed amounts covering the
increased scrap and other losses up to the entire $1.75 million BI/EE
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policy limit Coast contended that the increased scrap losses should have
been covered under the PD provision. However, Federal Insurance
disagreed and refused to make any additional payments under the PD
provision. Coast alleges that it ultimately went out of business as a result
of Federal Insurance's refusal to pay. Coast then filed a complaint against
Federal Insurance.
Both before and after trial, Federal Insurance asked the
district court to determine (1) whether Coast's loss fell under the policy's
PD provision or the BI/EE provision; and (2) if PD coverage was
appropriate, whether the coverage limit was $2 million or $5 million. The
district court, however, declined to answer these questions, opting instead
to leave them to the jury. After a five-week jury trial, the jury found
Federal Insurance liable in the amount of $4,005,866 for breaching the
insurance contract and in the amount of $5,048,717 for violating the
Nevada Unfair Claims Practices Act (UCPA), NRS 686A.310. The district
court offset the judgment by amounts Coast obtained in settlement for its
claims against other parties. The district court, however, refused to offset
the judgment by the amount already paid on the increased scrap
insurance claim, and awarded Coast attorney fees and prejudgment
interest.
Federal Insurance now appeals, arguing that (1) the district
court erred in refusing to rule, as a matter of law, on the policy coverage
and policy limit issues, as well as on the UCPA claims; (2) substantial
evidence does not support the jury's findings on the breach of contract and
UCPA claims; (3) the jury erred in finding it liable under the UCPA; (4)
the district court erred in refusing to offset the judgment by the amount
already paid on the claim; and (5) the district court erred in granting
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attorney fees as special damages. Coast cross-appeals, arguing that the
district court erred in offsetting the judgment by amounts obtained in
settlements and in its calculation of prejudgment interest.
DISCUSSION
Categorizing Coast's loss under the policy was a question of law for the
district court to decide
Federal Insurance argues that the district court erred in
allowing the jury to determine which policy provision, PD or BIJEE,
applied to Coast's increased scrap. We agree.
In contract matters, the jury may be charged with deciding
any factual disputes. State, Univ. & Cmty. Coll. Sys. v. Sutton, 120 Nev.
972, 983,103 P.3d 8, 15
(2004). But "in the absence of ambiguity or other
factual complexities,' contract interpretation presents a question of law"
for the district court to decide, "with de novo review to follow in this
court." Galardi v. Naples Polaris, L.L.C., 129 Nev. „ 301 P.3d 364,
366(2013) (quoting Ellison v. Cal. State Auto. Ass'n,106 Nev. 601, 603
,
797 P.2d 975, 977(1990)); see also Farmers Ins. Exch. v. Neal,119 Nev. 62, 64
,64 P.3d 472, 473
(2003) (noting that the task of interpreting a contract
is a question of law).
Here, deciding which policy provision, PD or BI/EE, applies to
Coast's increased scrap is a question of contract interpretation, and thus,
is a question of law. Because categorizing Coast's loss under the policy is
a question of law, the district court erred in sending it to the jury.
Moreover, because the policy provision dispute is a question of law, "[t]his
court is obligated to make its own independent determinations and should
not defer to those of the district court." Musser v. Bank of Am., 114 Nev.
945, 947,964 P.2d 51, 52
(1998); see also Hartford Accident & Indem. Co.
v. Wesolowski, 305 N.E.2d 907, 909-10 (N.Y. 1973) (interpreting an
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insurance policy, even though the issue was wrongly sent to the jury
below, where the policy was unambiguous and the parties agreed that no
extrinsic evidence bearing on the parties' intent existed).
Accordingly, as the parties have fully briefed the legal
interpretation issue before this court, we will now address whether the
policy's PD provision or the MEE provision covered Coast's increased
scrap.
Interpretation of the insurance policy
"An insurance policy is a contract that must be enforced
according to its terms to accomplish the intent of the parties." Farmers
Ins. Exch., 119 Nev. at 64,64 P.3d at 473
. We consider an insurance
policy as a whole, giving it a reasonable and harmonious reading. Century
Sur. Co. v. Casino W., Inc., 130 Nev. „ 329 P.3d 614, 616 (2014). "If
a provision in an insurance contract is unambiguous, a court will interpret
and enforce it according to the plain and ordinary meaning of its terms."
Powell v. Liberty Mut. Fire Ins. Co., 127 Nev. „ 252 P.3d 668, 672
(2011); cf. Grand Hotel Gift Shop v. Granite State Ins. Co., 108 Nev. 811,
819,839 P.2d 599, 604
(1992) (stating that ambiguous or unclear terms in
an insurance contract are resolved in favor of the insured). "[W]hether an
insurance policy is ambiguous turns on whether it creates reasonable
expectations of coverage as drafted." Powell, 127 Nev. at , 252 P.3d at
672(quoting United Nat'l Ins. Co. v. Frontier Ins. Co.,120 Nev. 678, 684
,
99 P.3d 1153, 1157 (2004)). This court "will not rewrite contract
provisions that are otherwise unambiguous . . . [or] increase an obligation
to the insured where such was intentionally and unambiguously limited
by the parties." Farmers Ins. Grp. v. Stonik ex rel. Stonik, 110 Nev. 64, 67,
867 P.2d 389, 391 (1994).
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Here, prior to determining, as a matter of law, whether
Coast's increased scrap is covered by the policy's PD provision or the
BI/EE provision, one factual question must be resolved by the jury: on
what date did Coast become aware that continued use of its machines
would result in the production of an increased amount of scrap? We
conclude that increased scrap produced after this date is covered by the
policy's BI/EE provision, and increased scrap produced before this date is
covered by the policy's PD provision.'
The BI I EE provision applies to excess scrap produced after Coast
became aware that continued use of its machines would result in the
production of an increased amount of defective bags
The parties dispute whether Coast knew that the continued
use of its machines would produce an increased number of defective bags.
Federal Insurance argues that as of October 2003, Coast was aware of the
machinery and electrical problems and decided to continue to use those
machines to manufacture bags, despite being aware that scrap would be
produced at a higher rate than norma1. 2 Coast contends that, while it
became aware of electrical problems in September 2003 and of the
resulting damaged bags in October 2003, it investigated those issues and
only continued production after it was determined that the problems had
been fixed. Coast further asserts that it was not until additional damaged
'The record indicates that even under normal manufacturing
conditions, at least some scrap was produced. Accordingly, coverage under
both the BI/EE provision and PD provision will only apply to scrap that is
produced in excess of the normal amount.
2The record suggests that Coast normally produced around 8%
scrap, which increased to upwards of 20% sometime after the electrical
problems began.
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bags were returned and additional investigation was conducted that it
became aware of the full extent of the damaged machinery and the
connection to the defective bags. It is undisputed, however, that Coast
continued bag production throughout the relevant period in order to meet
its obligations to customers.
We conclude that the proper interpretation of the insurance
policy is that the BI/EE provision applies to increased scrap produced after
Coast became aware that continued use of its machines would result in
the production of an increased amount of defective bags. The BI/EE
provision applies to increased scrap produced after this date for two
reasons.
First, increased scrap produced after this date unambiguously
fits the definition of an extra expense under the policy. The policy defines
extra expense in relevant part as "necessary expenses you incur: in an
attempt to continue operations, over and above the expenses you would
have normally incurred." Defective bags produced after the date Coast
was aware that continued production would lead to increased scrap fits
the definition of an "extra expense," because it was an expense above that
associated with normal production, which Coast incurred "in an attempt to
continue operations" in order to fulfill customer obligations despite
ongoing electrical problems.
Second, scrap produced after this date cannot be categorized
as property based on the implied requirement of fortuity; hence, it can
only be covered under the policy's BITEE provision. It is well recognized
that insurable loss of or damage to property must be occasioned by a
fortuitous, noninevitable, and nonintentional event. See City of
Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38, 47-48 (2d Cir. 2003);
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Univ. of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1277, 1281 (6th
Cir. 1995) ("The application of the implied requirement of fortuity [to
insurance contracts] is universally recognized." (internal quotation
omitted)); see also Avis v. Hartford Fire Ins. Co., 195 S.E.2d 545, 547-49
(N.C. 1973). In other words, a loss occasioned by the insured's own
decision to act in a way that will predictably result in a loss is not
fortuitous; and thus, such a loss is generally not covered. See, e.g., Univ.
of Cincinnati, 51 F.3d at 1282 ("[C]ourts generally do not recognize
deliberate actions that produce predictable and anticipated damages as
fortuitous events under all-risk insurance policies."). Further, the fortuity
principle applies even if not explicitly written into the insurance contracts
Thus, under the implied requirement of fortuity, the PD provision cannot
apply to scrap produced as a result of Coast's decision to continue
production despite being aware that damaged bags would be produced at a
higher rate than normal.
In sum, deciding when Coast became aware that continued
production would lead to increased scrap is a factual question for the jury.
However, once the jury determines when that occurred, the district court
must then apply that fact and conclude, as a matter of law, that increased
scrap produced after that date is covered under the insurance policy's
BIJEE provision.
3 Here,Coast's duties under the policy included "ltlak[ingl every
reasonable step to protect the covered property from further damage."
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The PD provision applies to excess scrap produced before Coast
became aware that continued use of its machines would result in the
production of an increased amount of defective bags
Here, the PD provision covered "direct physical loss or
damage to . . . personal property caused by or resulting from a peril." The
policy defines personal property as "all your business personal property;
business personal property in which you have an insurable interest;
patterns, molds and dies." Included in business personal property is
"stock." The policy splits "stock" into four subcategories: (1) raw stock, (2)
stock in process, (3) finished stock, and (4) goods held in storage for sale.
"Raw stock" is defined as "material in the state in which you receive it for
conversion into finished stock." "Stock in process" is defined as "raw stock
that has undergone any aging, seasoning, mechanical or other process of
manufacture, but which has not become finished stock." Finally, "finished
stock" is defined as "goods you have manufactured which are in their
completed state and ready for sale."
The policy explicitly defines these terms because the loss
payment basis for "finished stock" is different than the loss payment basis
for "raw stock" or "stock in process." Specifically, the loss payment basis
for "finished stock" is the "selling price less the value of discounts and
costs you would have incurred." In contrast, the loss payment basis for
"raw stock" is the cash valueS or replacement value, and the loss payment
basis for "stock in process" is the "cost of raw materials and costs expended
as of the date of loss or damage." Because of the different loss payment
basis, damaged property that is deemed to be "finished stock" may be
valued much higher than property deemed to be another type of stock.
Based on the evidence presented at trial and the jury's award of more than
$4 million for Coast's breach of contract claim, it can be inferred that the
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jury categorized the increased scrap as not only property, but also as
"finished stock."
Federal Insurance argues that even if the increased scrap is
covered by the PD provision, it cannot be "finished stock," because the
defective bags were not "in their completed state and ready for sale."
Federal Insurance argues that the bags were not "completed" because
their defects resulted in them being returned. In contrast, Coast argues
that the defective bags were "finished stock," because they had completed
the manufacturing process and were sold.
First, we conclude that the PD provision applies to excess
scrap produced before Coast became aware that continued use of its
machines would result in the production of an increased number of
defective bags. The PD provision covers "stock" as business personal
property. The policy's definition of "stock" refers to the goods Coast
produced. Thus, Coast's "stock" included the plastic bags, defective or
otherwise, that it was in the business of producing. Accordingly, the
defective bags produced by Coast were business personal property covered
by the policy's PD provision.
Second, we conclude that the increased scrap that is covered
by the PD provision unambiguously fits the definition of "finished stock,"
which is defined as "goods you have manufactured which are in their
completed state and ready for sale." While the bags were ultimately
returned to Coast because of defects, the defective bags had completed the
manufacturing process and were sold to Coast's customers. In other
words, the bags were in their "completed state," because there were no
additional steps for Coast to take in the manufacturing process prior to
sale. See Merriam-Webster's Collegiate Dictionary 254 (11th ed. 2007)
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(defining "complete" as "having all necessary parts, elements, or steps").
Reading the policy as a whole, it is clear that the definition of "finished
stock" was intended to include bags that have completed the
manufacturing process but are ultimately returned for defects caused by a
covered peril. This is evidenced by the fact that the loss payment basis for
"finished stock" is the sales price of the goods. The policy provides that
Coast be compensated for the sales price of the defective bags because, but
for the covered peril—the damaged machinery—the defective bags would
not have been returned and Coast would have realized the sales price from
its customers.
In sum, we conclude that the PD provision applies to excess
scrap produced before Coast became aware that continued use of its
machines would result in the production of an increased amount of
defective bags. We further conclude that the excess scrap covered by the
PD provision must be categorized as "finished stock," and should be valued
as such under the terms of the policy.
Determining which PD policy limit applies was a question of law for the
district court to decide
Coast originally had PD coverage of $2 million which it later
increased to $5 million The parties now dispute whether the applicable
PD policy limit is $2 million or $5 million. The district court left this
decision to the jury. However, in Nevada, determining whether an
insurance policy applies to ongoing property damage is decided using the
"manifestation rule," a legal principle. See Jackson v. State Farm Fire &
Gas. Co., 108 Nev. 504, 509,835 P.2d 786, 789
(1992). Accordingly, we
conclude that determining which PD policy limit applies presents a
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question of law; and thus, the district court erred in sending the issue to
the jury. 4 Because determining which PD policy limit applies presents a
question of law, this court will resolve the issue by making our "own
independent determinations and [will] not defer to those of the district
court." Musser v. Bank of Am., 114 Nev. 945, 947,964 P.2d 51, 52
(1998).
Legal determination of the PD policy limit
Federal Insurance argues that the district court erred in not
adopting a legal rule to govern the question of whether the increased limit
applies. Federal Insurance further argues that under applicable law, the
$2 million policy limit applies because Coast knew or should have known
of ongoing property damage when it applied for the policy limit increase on
August 27, 2003. In response, Coast argues that the jury's award of
$4,005,866 in breach of contract damages implies that the jury found that
the $5 million policy limit applies, and that such a finding is supported by
substantial evidence.
In Jackson v. State Farm Fire & Casualty Co., this court
adopted the so-called "manifestation rule." 108 Nev. at 509, 835 P.2d at
4 The jury was given an instruction vaguely defining the
"manifestation rule," but was not instructed on how this legal principle
should be applied to its factual findings. Jury instruction No. 27 provided:
[s]ometimes an event happens that causes
continuing damage over time In such a situation,
insurance coverage is provided by the particular
insurance in effect at the point in time appreciable
damage occurs, and is or should be known to
insured such that a reasonable insured would be
aware that his notification duty under the policy
has been triggered. This is known as the damage
manifestation rule.
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789. Under the "manifestation rule," an insurer is only liable under an
insurance policy if the policy was in effect when the loss became manifest.
Id. at 506,835 P.2d at 788
. A loss becomes manifest at the "point in time
when appreciable damage occurs and is or should be known to the insured,
such that a reasonable insured would be aware that his notification duty
under the policy has been triggered." Id. at 509,835 P.2d at 790
(internal
quotation omitted). Further, "[t]he manifestation date will generally be a
question of fact" for the jury; however, a court can decide the
manifestation date "where the undisputed evidence establishes that no
damage had been discovered before a given date." Id.
Here, the parties dispute when "manifestation" occurred.
Because the date of manifestation is "generally. . . a question of fact," we
conclude that determining when "manifestation" occurred is a question of
fact for the jury to decide. See id. However, once the jury determines
when "manifestation" occurred, the district court must then apply that
fact to the law and determine which policy limit applies. Specifically, if
the jury finds that Coast knew or should have known of "appreciable
[property] damage" prior to increasing its PD coverage to $5 million, then
the increase in coverage does not apply, and an award for breach of
contract based on property damage cannot exceed $2 million. See id.
(internal quotation omitted). In contrast, if the jury finds that Coast did
not know or should not have known of "appreciable [property] damage"
prior to increasing the PD coverage to $5 million, then the increase does
apply and an award for breach of contract based on property damage
cannot exceed $5 million See id. (internal quotation omitted).
Coast's UCPA claim is dependent on a proper interpretation of the contract
At trial, Coast presented evidence suggesting that Federal
Insurance violated the UCPA, in part because Federal Insurance
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incorrectly determined that excess scrap was covered under the policy's
BI/EE provision. Thus, Coast's UCPA claim must await the district
court's determination of how the excess scrap should be categorized under
the policy pending the jury's finding of when Coast became aware that
continued production would lead to increased scrap. FGA, Inc. v. Giglio,
128 Nev. „ 278 P.3d 490,496 (2012) (holding that a verdict cannot
stand where one of several "overlapping factual theories support a single
theory of recovery" and one of those theories is challenged on appeal).
Accordingly, judgment on the jury's verdict regarding Federal Insurance's
liability under the UCPA is vacated, and the issue is remanded for a new
trial.
CONCLUSION
First, we conclude that because contract interpretation is a
question of law, the district court should have decided, as a matter of law,
whether Coast's loss was covered under the policy's PD provision or its
BI/EE provision. Thus, the district court erred in submitting this question
to the jury. We further conclude that under a proper interpretation of the
policy, losses incurred after Coast became aware that electrical problems
would cause increased scrap to be produced are covered under the policy's
BI/EE provision. Conversely, we conclude that losses incurred before
Coast became aware that electrical problems would cause increased scrap
to be produced are covered under the policy's PD provision, and should be
valued as "finished stock."
Second, we conclude that determining which PD policy limit
applies is a question of law for the district court to decide. Specifically,
once the jury determines when Coast knew or should have known of
"appreciable [property] damage," the district court must then apply the
"manifestation rule" and determine which policy limit applies to Coast's
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property loss. Once the policy limit is established, a breach of contract
award based on property damage cannot exceed that amount.
Finally, we conclude that because the jury's verdict on Coast's
UCPA claim was influenced by an improper interpretation of the contract,
the verdict must be vacated. We therefore vacate in part, and reverse and
remand for further proceedings consistent with this opinion.'
, C.J.
Gibbons
Pickering
J.
Haraty
nStressate, J.
Parraguirre
5 Based upon our holding, we vacate the award of attorney fees and
do not address the other issues raised by the parties. Although we could
address the remaining issues of law raised, many of these issues depend
on the insurance coverage issue. Therefore, we conclude that it is not
appropriate to address them at this time.
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