Pennsylvania Judge Denies Insurer’s Motion to Exclude Accounting Expert in Business Shutdown

Case:

U.S. Fire Insurance Co. v. Kelman Bottles, No. 11cv0891, U.S. District Court for the Western District of Pennsylvania; Aug. 8, 2014

Background:

Kelman Bottles owns a glass manufacturing facility. On the date in question, only one furnace was operating. Molten glass escaped from that furnace, resulting in physical damage to the furnace and other property. At issue is whether the incident was a “breakdown” as defined in Kelman’s insurance policy with Continental Insurance Co.

Accounting, Adjusting and Engineering Experts:

Kelman’s expert, certified public accountant Gregory S. Barach, opined that Kelman would have been able to sustain its business operations but for the March 15, 2011 incident. He also calculated the company’s business income losses and its enterprise value.

Plaintiff expert Randolph Goodman, a public adjuster, opined regarding the scope of Kelman’s damages and its costs of repair. Continental sought to exclude his testimony because he relied on a report prepared by Henry F. Teichmann, Inc., a company that specializes in the building, repair, and renovation of glass melting furnaces.

Furthermore, Kelman moved to exclude testimony from Continental’s experts David Boothe and Dr. Dennis McGarry that Kelman expected the molten glass leak that occurred on March 15, 2011.

Admissibility of Accounting, Adjusting and Engineering Experts:

Judge D. Michael Fisher of the U.S. District Court for the Western District of Pennsylvania denied Continental’s motion to exclude Barach’s testimony.

The judge found that Barach’s expert report describes his review of Kelman’s books and records. Specifically, accounts receivable, sales and cash flow, payroll liabilities, short-term debt liabilities, and future plans for expansion.

“Because Barach, as an accountant, relied upon Kelman’s financial books and documents in reaching his conclusions, the Court concludes that his methodology was reliable under Rule 702,” the judge held.

The court found that any dispute Continental has with the factual underpinning of Barach’s lost business income testimony can be effectively tested on cross-examination. Barach supported his conclusions with the rationale that Kelman had shown increased production in the months leading up to the incident, and was on track to continue to do so.

Additionally, Barach can testify based upon the mechanical computation. The court was not persuaded by Continental’s argument that Barach’s methodology was an improper synthesis of two accepted methodologies. However, Barach followed the “mechanical computation” methodology, which is an acceptable alternative to the requirements applicable to his profession under certain circumstances.

Regarding Goodman, the judge rejected Continental’s argument that he was required to possess particular knowledge and skills relative to the design and construction of glass-making furnaces. Experts routinely rely upon records produced by those with knowledge in a particular field when formulating their opinions, the judge said.

“In this case, the Court finds that Goodman’s report is reliable because he personally hired Teichmann to prepare the estimates and provided Teichmann with specific instructions as to the information to include in the report,” the judge said.

Regarding Booth and McGarry, the court held neither can testify that Kelman or its employees expected a leak to occur.

“Such testimony amounts to little more than their ‘subjective belief or unsupported speculation,’ which is not permitted under Rule 702,” the judge held. However, the judge said those experts can still testify based upon their knowledge and experience about the nature of leaks in a glass furnace, how they can spiral out of control, what constitutes a sign of danger, and what can be done to avoid a catastrophic loss when one does occur.

Consequently, the case was resolved through mediation on August 18.