Custom Container Solutions, LLC v. Century Sur. Co.

606 F.Supp.3d 113

CUSTOM CONTAINER SOLUTIONS, LLC, et al., Plaintiffs/Counterclaim Defendants,

v.CENTURY SURETY COMPANY, Defendant/Counterclaim Plaintiff.

No. 4:20-CV-01793

United States District Court, M.D. Pennsylvania.

Signed June 10, 2022

Richard M. Williams, Hourigan, Kluger and Quinn, P.C., Kingston, PA, Kevin Martin Walsh, Jr., Attorney-at-Law, Kingston, PA, for Plaintiffs/Counterclaim Defendants.

Carolyn B. Kelly, AmeriTrust Group, Inc., Richboro, PA, John C. Falls, Falls & DeMarco, P.C., Oreland, PA, for Defendant/Counterclaim Plaintiff.

MEMORANDUM OPINION

Matthew W. Brann, Chief United States District Judge

I. BACKGROUND

Custom Container Solutions, LLC, Valley Can Custom Container, LLC, and Custom Container Valley Can Real Estate, LLC (collectively "Plaintiffs") filed suit against Century Surety Company ("Century") in the Court of Common Pleas of Union County, Pennsylvania, alleging breach of contract (Count One), detrimental reliance (Count Two), and bad faith (Count Three), related to Century's decision to deny insurance coverage for damage caused by a fire at Plaintiffs’ property.¹ Century thereafter removed the matter to this Court.²

This disputes arises out of a commercial property policy issued by Century to Plaintiffs with effective dates of November 22, 2019 to November 22, 2020 (the "Policy").³ The Policy provided property coverage—including building and personal property—along with business income coverage.⁴ The Policy also contained a number of protective safeguard endorsements that limited or denied coverage if the endorsements were not met.⁵ Those endorsements required, inter alia , that Plaintiffs store any "[u]sed or soiled rags ... in self-closing metal containers and remove[ them] daily" and maintain a "[f]ully functional, actively engaged NFPA 33 approved Spray booth with proper exhaust system and fire extinguishing system."⁶

On May 16, 2020, a fire occurred in a spray paint booth (the "Booth") on Plaintiffs’ property that damaged both the Booth and the building that housed the Booth.⁷ The Booth had been shut down at approximately 2:45 p.m. on May 15, 2020.⁸ The fire was discovered by Plaintiffs’ employees on the evening of May 16 and was extinguished by the William Cameron Engine Company at approximately 9:20 p.m., although the Booth and building nevertheless sustained significant damage from the fire.⁹ Two days later, Plaintiffs filed a claim with Century pursuant to the Policy.¹⁰

Century hired NEFCO Fire Investigations ("NEFCO") to conduct a fire cause and origin investigation, as well as a fire scene analysis.¹¹ NEFCO inspected the building and Booth on May 20, 2020 and June 9, 2020.¹² NEFCO thereafter issued a report in which it concluded that cotton rags were laying on the floor near where the fire had occurred, and the fire suppression system did not function properly at the time of the fire.¹³ NEFCO ultimately determined that the fire was caused by a spontaneous combustion of cotton rags that were left in the Booth.¹⁴

As a result of this report, Century denied Plaintiffs’ insurance claim.¹⁵ Century informed Plaintiffs that it had denied their claim because certain protective safeguards were not employed at the time of the fire, including: (1) the absence of a fully functional, actively engaged NFPA 33 approved Spray booth with proper exhaust system and fire extinguishing system; (2) Plaintiffs’ failure to keep all flammables in an approved storage cabinet; and (3) Plaintiffs’ failure to store used or soiled rags in a self-closing metal container and remove them daily.¹⁶

Century has now moved for summary judgment, asserting that judgment is appropriate in its favor as to Plaintiffs’ claims of detrimental reliance, bad faith, and breach of contract, and as to Century's counterclaim for declaratory judgment.¹⁷ Century first argues that summary judgment is appropriate for Plaintiffs’ detrimental reliance claim because Century made no misrepresentations; any alleged misrepresentations were instead made by Plaintiffs’ insurance brokers.¹⁸

Second, Century contends that judgment should be entered in its favor as to Plaintiffs’ claim of bad faith since Century properly investigated Plaintiffs’ insurance claim and had a reasonable basis to deny that claim based upon the NEFCO report that determined Plaintiffs failed to store used or soiled rags in a self-closing metal container and remove them daily, and that Plaintiffs’ fire extinguishing system was not fully functional and actively engaged.¹⁹ Third, Century asserts that this Court should find that the Policy does not provide coverage for Plaintiffs’ claim related to the fire, as the protective safeguard endorsements were prerequisites to coverages and the evidence—Century alleges—unambiguously establishes that Plaintiffs failed to comply with two of the endorsements, meaning that Century properly denied coverage.²⁰

Plaintiffs respond that summary judgment should largely be denied.²¹ Although Plaintiffs concede that summary judgment is warranted as to their detrimental reliance claim,²² they argue that the remainder of Century's motion fails. With respect to their claim of bad faith, Plaintiffs assert that there is ample evidence of bad faith, including evidence that soiled rags were properly stored and removed daily, that cotton rags discovered in the Booth were not discovered for weeks after the fire and may have been introduced into the Booth after the fire, and that Plaintiffs had installed a fully functioning fire suppression system in the Booth.²³ Finally, Plaintiffs argue that summary judgment should be denied as to its breach of contract claim because the endorsements are ambiguous, Plaintiffs maintained a fully functioning fire extinguishing system, and they ceded control of that system to another entity for maintenance purposes.²⁴

Century has filed a reply brief, and Plaintiffs have filed a sur-reply brief, rendering this matter ripe for disposition.²⁵ For the following reasons, the motion will be granted in part.

II. DISCUSSION

A. Standard of Review

Under Federal Rule of Civil Procedure 56, summary judgment is appropriate 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."²⁶ Material facts are those "that could alter the outcome" of the litigation, "and disputes are ‘genuine’ if evidence exists from which a rational person could conclude that the position of the person with the burden of proof on the disputed issue is correct."²⁷ A defendant "meets this standard when there is an absence of evidence that rationally supports the plaintiff's case."²⁸ Conversely, to survive summary judgment, a plaintiff must "point to admissible evidence that would be sufficient to show all elements of a prima facie case under applicable substantive law."²⁹

The party requesting summary judgment bears the initial burden of supporting its motion with evidence from the record.³⁰ When the movant properly supports its motion, the nonmoving party must then show the need for a trial by setting forth "genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party."³¹ The nonmoving party will not withstand summary judgment if all it has are "assertions, conclusory allegations, or mere suspicions."³² Instead, it must "identify those facts of record which would contradict the facts identified by the movant."³³

In assessing "whether there is evidence upon which a jury can properly proceed to find a verdict for the [nonmoving] party,"³⁴ the Court "must view the facts and evidence presented on the motion in the light most favorable to the nonmoving party."³⁵ Moreover, "[i]f a party fails to properly support an assertion of fact or fails to properly address another party's assertion of fact as required by Rule 56(c)," the Court may "consider the fact undisputed for purposes of the motion."³⁶ Finally, although "the court need consider only the cited materials, ... it may consider other materials in the record."³⁷

B. Analysis

The dispute in this matter largely involves questions regarding the language of the Policy and, "[i]n interpreting the relevant provisions of the insurance policies at issue ... [this Court is] guided by the polestar principle that insurance policies are contracts between an insurer and a policyholder."³⁸ It is well-established that, in interpreting insurance policies, courts must "effectuate the intent of the contracting parties as reflected by the written language of the insurance policies," which requires that, "[i]f policy terms are clear and unambiguous, [courts] give those terms their plain and ordinary meaning, unless they violate a clearly established public policy."³⁹

"Conversely, when a provision of a policy is ambiguous, the policy provision is to be construed in favor of the policyholder and against the insurer, as the insurer drafted the policy and selected the language which was used therein."⁴⁰ "Policy terms are ambiguous if they are subject to more than one reasonable interpretation when applied to a particular set of facts."⁴¹ In reading the terms of a contract, "a court should be careful not to create an ambiguity and, likewise, it should avoid rewriting the policy language in such a way that it conflicts with the plain meaning of the language."⁴²

1. Bad Faith

The Court first considers Plaintiffs’ claim of bad faith. "[T]o prevail in a bad faith insurance claim ... a plaintiff must demonstrate, by clear and convincing evidence, (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew or recklessly disregarded its lack of a reasonable basis in denying the claim."⁴³ Mere negligence or bad judgment is not sufficient to establish bad faith,⁴⁴ and any inquiry as to bad faith is "fact specific and depend[s] on the conduct of the insurer toward its insured."⁴⁵ In Pennsylvania, clear and convincing...