Atlantic Specialty Insurance Company v. Mr. Charlie Adventures, LLC, et al

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 15-12657
Non-Argument Calendar
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D.C. Docket No. 1:13-cv-00458-CG-N
ATLANTIC SPECIALTY INSURANCE
COMPANY,
Plaintiff-Counter
Defendant-Appellee,
versus
MR. CHARLIE ADVENTURES, LLC,
KIM P. KORNEGAY,
Defendants-Counter
Claimants-Appellants.
________________________
Appeal from the United States District Court
for the Southern District of Alabama
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(February 29, 2016)
Before TJOFLAT, MARCUS, and WILLIAM PRYOR, Circuit Judges.
PER CURIAM:
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Mr. Charlie Adventures, LLC, and Kim P. Kornegay (collectively,
“Kornegay”), appeal the district court’s grant of summary judgment in favor of
Atlantic Specialty Insurance Company (“Atlantic”) on Kornegay’s bad-faith claim
arising out of an insurance policy Atlantic had issued to provide coverage for a 40-
foot yacht, called the “Mr. Charlie.” On appeal, Kornegay argues that the district
court erred in granting Atlantic’s motion for summary judgment on Kornegay’s
bad-faith counterclaim because Atlantic had no arguable reason to deny the
insurance claim. After careful review, we reverse and remand.
We review a district court’s order granting summary judgment de novo,
applying the same standard as the district court. Nat’l Parks Conservation Ass’n v.
Norton, 324 F.3d 1229, 1236 (11th Cir. 2003). We view the material presented
and draw all factual inferences in the light most favorable to the non-movant. Id.
Summary judgment is proper where “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.” Fed. R. Civ. P. 56(a). Where the defendant moves for summary judgment, it
bears the initial responsibility of pointing to the pleadings and other record
evidence to demonstrate the absence of a genuine issue of material fact on an
essential element of the plaintiff’s claim. Fitzpatrick v. City of Atlanta, 2 F.3d
1112, 1115-16 (11th Cir. 1993). The burden then shifts to the plaintiff to point to
evidence that creates a triable issue on that element. Id. at 1116.
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The relevant background is this. On March 3, 2013, while Kornegay was
operating the Mr. Charlie, a fire started in the engine room, which caused the Mr.
Charlie to burn to the water line, completely destroying the yacht and its contents.
Kornegay reported the loss to Atlantic and filed a claim under the insurance policy
for the policy limits. The policy covered damages to the Mr. Charlie and its
contents, up to agreed-upon limits, but provided that Atlantic would not pay for:
[A]ny loss, damage or expense caused by or resulting from:
1. Wear and tear; gradual deterioration; weathering; bubbling;
osmosis; blistering; delamination of fiberglass or plywood;
corrosion; rusting; electrolysis; mold; rot; inherent vice; vermin;
insects or marine life; [or]
2. Your failure to maintain the covered yacht in good condition
and repair.
On September 16, 2013, Atlantic sent Kornegay a letter, notifying him that it
was denying the claim based on reports by Guy Plaisance and Gary Jones -- a
marine surveyor and a fire-cause-and-origin investigator Atlantic had hired to
investigate the fire -- that concluded that the fire had been “caused by or resulted
from growth of marine life on or in the vessel, which restricted the intake or flow
of water to cool the engine and exhaust system.” Atlantic also said that Plaisance’s
and Jones’s reports “note[d] maintenance problems related to the loss.”
After denying Kornegay’s claim, Atlantic filed a declaratory judgment
action in district court, seeking a declaration that it did not owe coverage for the
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fire damage. Kornegay counterclaimed, seeking damages for breach of contract
and bad-faith refusal to pay the insurance claim. The parties thereafter cross-
moved for summary judgment. As for the bad-faith claim, Atlantic argued that it
had an arguable reason for denying Kornegay’s insurance claim -- namely,
Plaisance’s and Jones’s reports that concluded that the growth of marine life on the
starboard engine’s seawater intake screen had caused the fire. Kornegay also
moved to exclude expert testimony from Plaisance and Jones.
Notably, the district court granted Kornegay’s motion to exclude the experts,
on the ground that the reports were unreliable for five reasons under Fed. R. Evid.
702, which governs expert testimony. First, the district court found that the reports
incorrectly stated the percentage of open area on the yacht’s intake screens, which
had been calculated by engineer and metallurgist Dr. Kendall Clarke. The reports
provided that, due to marine growth, the intake screen for the starboard engine was
only 20% open, while the intake screen for the identical port engine -- where no
fire started -- was 26% open. Plaisance opined that the port screen’s 6% additional
open area was sufficient to keep the port engine from catching fire. But during
discovery, it came to light that Plaisance had reversed the numbers and relied on
26% open for the starboard intake screen, and 20% open for the port intake screen.
Second, the reports relied on information Plaisance had received from
John Moran, an employee of the screen manufacturer, who advised that the
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starboard screen on the Mr. Charlie had been too clogged to flow the required
amount of water to cool the engine exhaust. The district court found that the
information Plaisance received from Moran was not sufficiently reliable because:
(a) Plaisance did not know Moran’s qualifications; (b) Plaisance incorrectly told
Moran that the starboard screen was only 20% open; (c) Plaisance initially
provided Moran with the data sheet for a different engine than the one at issue in
this case, and Moran did not run new calculations once Plaisance provided him
with the data sheet for the correct engine, and (d) Moran told Plaisance only that he
“[thought]” there “probably” would not be enough water flow to cool the exhaust.
Third, the district court found that Plaisance and Jones violated the scientific
method by forming a conclusion first and then attempting to find support for that
conclusion. The district court noted that on March 29, 2013, Plaisance wrote -- in
an email to Atlantic’s claims adjuster Rita Boggan -- that he believed the starboard
engine had overheated as a result of the seawater intake screen being too occluded
to allow sufficient water flow to cool the engine exhaust. But about one month
later, two mechanics Atlantic hired to examine the engines determined that the
starboard engine had not overheated. Subsequently, Plaisance sent an email to
Jones and the two mechanics, with a copy to Boggan, asking whether it was
possible that, due to limited seawater flow through the intake screen, the exhaust
temperatures could exceed 257 degrees Fahrenheit, such that the engine would not
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overheat, but the exhaust tube would start to burn. Plaisance concluded in his final
report that the fire had started in this manner. During his deposition, however,
Plaisance could not confirm that he had ever gotten an answer to his question about
this theory, and Atlantic proffered no evidence showing that he had.
Fourth, Plaisance’s and Jones’s reports incorrectly said that the exhaust tube
could withstand temperatures up to 259 degrees, when, in fact, the exhaust tube
was rated to withstand temperatures up to 350 degrees. While Atlantic claimed
that the discrepancy did not matter because the engine’s internal exhaust ranged
from 900-1100 degrees, neither expert had determined what temperature the
exhaust gases would have had in the starboard engine after having been cooled by
whatever water came in through the partially occluded screen.
Finally, Plaisance and Jones had recommended additional inspections on
other parts of the starboard and port engines to test their theory that restricted
seawater flow through the starboard intake screen had caused the starboard exhaust
tube to burn. These extra inspections were never done, yet in their final reports,
Plaisance and Jones concluded that the fire had, in fact, occurred in this way. The
district court noted that, while all of the requested inspections may not have been
needed for the experts to reach a reliable conclusion, when it became clear that the
starboard engine did not overheat as Jones and Plaisance had originally believed,
“more testing or analysis was clearly needed to explain the circumstances.”
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The district court then determined that, once Plaisance’s and Jones’s reports
were excluded, Atlantic had no admissible evidence to meet its burden to prove
that the fire damage to the Mr. Charlie was excluded under Kornegay’s policy.
See Acceptance Ins. Co. v. Brown, 832 So. 2d 1, 12 (Ala. 2001). Accordingly, the
district court granted Kornegay’s motion for summary judgment on Atlantic’s
declaratory judgment claim and on Kornegay’s breach-of-contract counterclaim. It
also held, however, that Kornegay had proffered no evidence showing that, at the
time it denied his claim, Atlantic knew or had reason to know that the expert
reports were unreliable. The district court thus concluded that the reports provided
Atlantic with an arguable basis for the denial, and granted Atlantic’s motion for
summary judgment on the bad-faith claim. This appeal follows.
This is a diversity case, and the parties agree that Alabama law applies.
Under Alabama law, a bad-faith claim comes in two varieties: “normal” and
“abnormal.” Emps.’ Benefit Ass’n v. Grissett, 732 So. 2d 968, 976 (Ala. 1998).
(quotations omitted). In the normal case, the plaintiff must prove four elements:
(a) “an insurance contract between the parties and a breach thereof by the
defendant;” (b) “an intentional refusal to pay the insured’s claim;” (c) “the absence
of any reasonably legitimate or arguable reason for that refusal (the absence of a
debatable reason);” and (d) “the insurer’s actual knowledge of any legitimate or
arguable reason.” Id. (quotations omitted). In the abnormal case, where the
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plaintiff relies on the defendant’s reckless or intentional failure to properly
investigate his claim, the plaintiff must prove elements (a) through (c), plus
(e) “the insurer’s intentional failure to determine whether there is a legitimate or
arguable reason to refuse to pay the claim.” Id. (quotation omitted).
Alabama courts have made clear that, “[w]hen a claim is ‘fairly debatable,’
the insurer is entitled to debate it, whether the debate concerns a matter of fact or
law.” Nat’l Sec. Fire & Cas. Co. v. Bowen, 417 So. 2d 179, 183 (Ala. 1982).
Thus, a plaintiff seeking to prove a bad-faith claim has a heavy burden. Shelter
Mut. Ins. Co. v. Barton, 822 So. 2d 1149, 1154 (Ala. 2001). To establish a prima
facie case, the plaintiff “must show that the insurer’s decision not to pay was
without any ground for dispute.” Id. (quotation omitted). In so doing, the plaintiff
“must eliminate any arguable reason propounded by the insurer for refusing to pay
the claim.” Id. (quotations omitted). In assessing whether the insurer had an
arguable reason for denying the claim, the court must look to the information
before the insurer at the time it denied the claim. See Bowen, 417 So. 2d at 183.
Generally, in a normal bad-faith case, to prove the absence of a debatable
reason to deny the claim, the plaintiff must demonstrate that he is entitled to a
pre-verdict judgment as a matter of law on his breach-of-contract claim. Grissett,
732 So. 2d at 976. Thus, if a factual dispute makes judgment as a matter of law for
the plaintiff inappropriate on the breach-of-contract claim, the defendant is entitled
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to judgment as a matter of law on the plaintiff’s bad-faith claim. Id. Where the
plaintiff is entitled to judgment as a matter of law on his breach-of-contract claim,
the defendant may still be entitled to judgment as a matter of law on the plaintiff’s
bad-faith claim if the defendant can show that it had an arguable reason to deny the
claim: for example, if it relied on a legal position that was arguable, but was
rejected by the trial court. Safeco Ins. Co. of Am. v. Sims, 435 So. 2d 1219, 1225
(Ala. 1983) (Jones, J., concurring); see Attorneys Ins. Mut. of Ala., Inc. v. Smith,
Blocker & Lowther, P.C., 703 So. 2d 866, 869-71 (Ala. 1996) (affirming grant of
judgment as a matter of law for the insurer on bad-faith claim, where the insurer
denied the insurance claim based on an arguable reading of the insurance policy,
even though the trial court had rejected the insurer’s policy interpretation in
granting judgment as a matter of law for the insured on breach-of-contract claim).
In the abnormal case, where the plaintiff relies on the defendant’s reckless or
intentional failure to properly investigate his claim, a factual dispute on the
breach-of-contract claim is not fatal to the plaintiff’s bad-faith claim. Grissett,
732 So. 2d at 976. However, the plaintiff must still prove that the defendant lacked
a debatable reason to deny the claim. State Farm Fire and Cas. Co v. Brechbill,
144 So. 3d 248, 258 (Ala. 2013). Evidence of the defendant’s intentional failure to
determine whether a lawful basis existed may be used as proof that no such basis,
in fact, existed. Cont’l Assurance Co. v. Kountz, 461 So. 2d 802, 805 (Ala. 1984).
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In this case, Kornegay has sought to prove both a normal and abnormal case
of bad faith, and argues that the district court erred in determining that Plaisance’s
and Jones’s reports provided Atlantic with an arguable reason to deny the claim.
We agree. Kornegay has proffered sufficient evidence to create a triable issue as to
whether Atlantic should have known the reports were unreliable -- indeed, the very
evidence the district court relied upon in finding the reports unreliable.
Specifically, there are numerous emails from Plaisance to Boggan, in which
Plaisance informed Boggan of: (1) his initial theory that restricted seawater flow
through the starboard intake screen had caused the starboard engine to overheat;
(2) the mechanics’ investigation that determined the starboard engine had not
overheated; (3) Plaisance’s question to Jones and the mechanics as to whether it
was possible that restricted seawater flow through the starboard intake screen could
have caused the exhaust pipe to burn without overheating the engine; and
(4) Plaisance and Jones’s recommendation that additional testing be done on the
engine parts to prove or disprove that theory. In addition, Boggan testified in her
deposition that: (1) she did not know if Plaisance had ever gotten an answer to his
question as to whether it was possible for restricted seawater flow to cause the
exhaust pipe to burn without overheating the engine; and (2) she did not know
whether additional testing had been done on the engine parts to prove or disprove
Plaisance and Jones’s theory.
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On this record, Kornegay has proffered sufficient evidence to create a triable
issue as to whether Atlantic had an arguable reason to deny his claim. See Lord v.
Allstate Ins. Co., 47 F. Supp. 3d 1288, 1308-09 (N.D. Ala. 2014) (concluding that
the opinion of an inexperienced adjuster did not provide an arguable basis for
denying the plaintiff’s claim, where, among other things, the adjuster
recommended that the insurer obtain an engineer’s evaluation but the insurer failed
to do so); see also Affiliated FM Ins. Co. v. Stephens Enters., 641 So. 2d 780,
783-84 (Ala. 1994) (affirming the trial court’s denial of the defendant’s motion for
judgment as a matter of law on the plaintiff’s bad-faith claim, where the defendant
relied on expert reports that had been prepared with inaccurate information the
experts had been given by the defendant). While Atlantic cannot be found liable to
the extent its conduct constituted mere negligence, see Davis v. Cotton States Mut.
Ins. Co., 604 So. 2d 354, 359 (Ala. 1992), a reasonable jury could find that
Atlantic knew or had reason to know that Plaisance’s and Jones’s reports were
unreliable and that the reports did not provide an arguable basis for concluding that
the fire damage to the Mr. Charlie had, in fact, been caused by the growth of
marine life on the starboard intake screen. Accordingly, we reverse the district
court’s grant of summary judgment for Atlantic on Kornegay’s bad-faith claim,
and remand the case for proceedings consistent with this opinion.
REVERSED AND REMANDED.
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