9th Circuit Says Engineering and Metallurgy Expert Witnesses Wrongly Barred from Insurance Dispute

Case:

Pyramid Technologies, Inc., et al. v. Hartford Casualty Insurance Co., No. 11–56304, Ninth Circuit U.S. Court of Appeals; May 19, 2014

Background:

Pyramid Technologies, Inc., which purchased and resold electronic parts, had coverage for business interruption, building replacement and business personal property replacement under a policy with Hartford Insurance Co. Pyramid had more than 52 million items in its warehouse. The insured filed a claim for lost inventory following a 2005 flood in its warehouse. Approximately one to two inches of water covered the floor. The water never reached the shelves on which the electronics were stored. However, Pyramid alleged that visible condensation from the water damaged the products on the lower three or four shelves.

Hartford’s expert, relying on humidity tests conducted after most of the water had been removed and drying equipment had been in place for more than 24 hours, determined that the humidity did not reach a level that could have caused damage to any of the inventory. Hartford refused to spend $13 million to test the inventory. Two years later it agreed to test some parts identified by Pyramid as corroded. While it found some damage, Hartford said it was not caused by the flood. Hartford denied the claim.

A potential Pyramid customer refused Pyramid as a parts supplier because of the potential for condensation damage.

Pyramid sued for breach of contract and breach of the duty of good faith and fair dealing. He asserted that Hartford failed to properly investigate the claims, improperly denied the claim, failed to respond to the building restoration claim, made a low-ball estimate and refused to pay for business interruption. 1

Engineering and Metallurgy Expert Witnesses:

In response to Hartford’s motion for summary judgment, Pyramid presented water damage and restoration testimony from David Spiegel. He opined that the humidity level in the warehouse rose to more than 90%. These conditions exceeded the protection levels of the moisture-proof packaging on the parts.

Two additional Pyramid experts, Del Mortenson and Ken Pytlewski, evaluated the validity of Hartford’s expert, Dr. Arum Kumar. Mortenson questioned Kumar’s opinion on the grounds that he used “military” standards of suitability instead of “commercial” standards for the electronic parts. Pytlewski, a professional engineer and metallurgist, challenged other opinions, including that any corrosion caused by the flood would necessarily have been uniform and that visible corrosion is not a failure criteria under military standards. He also noted the internal inconsistency in Kumar’s report between his statement that the cause of the moisture-related corrosion cannot be determined and his conclusion that the flood was not the cause of any moisture-related damage. Pytlewski concluded that some of the corrosion to Pyramid’s inventory occurred as a result of the high humidity caused by the flood.

Without holding a hearing under Daubert v. Merrell Dow Pharm. Inc. (509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 [1993]), the U.S. District Court for the Central District of California excluded the reports of Mortenson and Pytlewski, first as being “illegible,” and later as being unreliable. The District Court excluded Spiegel because he was not qualified. Also because, his report was not based on sufficient facts or data and was not the product of reliable principles and methods. The court granted summary judgment to Hartford. Pyramid appealed.

Admissibility of Engineering and Metallurgy Expert Witnesses:

A panel of the Ninth Circuit U.S. Court of Appeals found the District Court abused its discretion in finding Spiegel was not qualified and did not use reliable methods. Spiegel used weather data from the time of the incident, thermo-hygrometer and infrared data, and ambient condition data to opine on the level of humidity in the warehouse at the time of the flood. A certified thermographer, certified indoor environmentalist, certified master restorer, certified water control journeyman, and certified mold remediator, with decades of experience, Spiegel was qualified, the panel said.

“Because the district court provided no explanation or analysis for rejecting these qualifications, the district court abused its discretion in summarily determining that Spiegel was not qualified as an expert,” the panel said.

Regarding his methodology, the panel said, “Although not discussed by the district court, Spiegel relies on more facts and data in reaching his expert conclusions than did Hartford’s expert witness.”

The panel said that if Spiegel’s report had been admitted, the district court would have been required to view it in the light most favorable to Pyramid when considering Hartford’s motion for summary judgment. Because the report could assist a trier of fact in inferring that the flood caused sufficiently high humidity to damage Pyramid’s parts and that Helms’ contrary conclusion was not reliable, the exclusion of Spiegel’s report was prejudicial to Pyramid.

Regarding Pytlewski, the panel said his opinion was within the knowledge and experience of a metallurgist. The exclusion of Pytlewski’s report is prejudicial because his report provides evidence from which a fact finder could disregard the opinion of Kumar. They could also reasonably infer damages and causation relating to the flood. Further, Pytlewski’s deposition testimony links the flood as at least a partial cause of the damage to Pyramid’s inventory. Thus, the District Court abused its discretion in excluding Pytlewski’s expert report and testimony, the panel said.

However, the District Court did not err in excluding Mortenson’s opinion regarding military standards, the panel said. Mortenson said he is not aware of the governing commercial standards because that is not his field of expertise. Thus, Mortenson’s testimony that Kumar should not have used military standards and should have used commercial standards was not based on facts or data known to Mortenson. Therefore it is inadmissible under Federal Rule of Evidence 703, the panel said. Additionally, Mortenson’s testimony is not reliable because he did not have the knowledge or experience required under Rule 702. Thus, the panel said Mortenson’s exclusion was not an abuse of discretion.

Finally, the panel said the District Court erred in granting summary judgment against Pyramid’s claims because genuine disputes of material fact exist.