Nat'l Mfg. Co. v. Citizens Ins. Co. of Am.

NATIONAL MANUFACTURING CO., INC., Plaintiff, v. CITIZENS INSURANCE COMPANY OF AMERICA and THE HANOVER INSURANCE GROUP, INC., Defendants, v. JANED ENTERPRISES, INC., Third-Party Defendant.

Civil Action No. 13-314

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

December 30, 2016

Not for Publication

OPINION

John Michael Vazquez, U.S.D.J.

This case involves an insurance coverage dispute. Presently, four motions are pending before the Court: (1) Plaintiff National Manufacturing Co., Inc.'s ("National" or "Plaintiff") Daubert motion to exclude or in the alternative to limit expert testimony (D.E. 93); (2) National's motion for partial summary judgment related to subrogation (D.E. 94); (3) National's motion for partial summary judgment (D.E. 96); and (4) Defendant Citizens Insurance Company of America's ("Citizens" or "Defendant") motion for summary judgment (D.E. 98).¹ Third-Party DefendantJaned Enterprises, Inc. ("Janed"), joined National's motion regarding subrogation. All motions are opposed.

The Court held oral argument on these motions on November 18, 2016. D.E. 150. The Court has considered all submissions as well as the parties' oral arguments. This opinion will first discuss the motions for summary judgment followed by a discussion on subrogation. In light of the Court's ruling on the summary judgment motions, it is not necessary to review the Daubert motion. For the reasons stated below, the Court grants in part and denies in part Defendant's Motion for Summary Judgment, and grants in part and denies in part Plaintiff's Motion for Partial Summary Judgement. Specifically, Defendant's motion is denied as it relates to coverage. Defendant's motion is granted as to the issue of bad faith. Plaintiff's Motion for Summary Judgment is granted on the issues of coverage and cooperation. Plaintiff's motion is denied on the issue of subrogation.

I. BACKGROUND²

This action is a dispute over insurance coverage. Plaintiff is a company engaged in the business of producing "precision deep drawn and shallow drawn metal components," including stainless steel battery casings used in pacemakers in the medical field. Compl. ¶¶ 10, 14; see also Staudinger Aff. ¶¶ 1, 3. The current suit stems from pitting to the metal casings. The manufacturing process to make the metal parts varies slightly depending on the type of part, but generally includes the following steps. First, National receives stainless steel coils that, after inspection, are fed into stamping machines, which results in a "final three-dimensional product." D.E. 99, Def. Statement of Facts ¶ 3. The parts are then lubricated with oil prior to being shaped to reduce friction. Staudinger Aff. ¶ 32. The shaped part is then cleaned and passivated³ in a degreasing system. Id. ¶ 33. Finally, the partially complete product is annealed by a third-party. Annealment involves placing the metal parts into an oven and heating them to a certain temperature to realign the steel grains. Id. Depending on the part, it goes through the forming, degreasing, and annealing steps one or more times. Id.; MacDonald Dep. Tr. 11:14-20.

During the degreasing process, the casings are submerged in a passivation bath. The passivation chemical used in this case, MetalMedic 7017 ("MetalMedic") was supplied by Third-Party Defendant Janed. Id. ¶ 10. However, National did not use MetalMedic for passivation; instead, it used the chemical to wash and degrease the parts. Id. ¶ 11. The pacemaker batterycasings at issue went through the MetalMedic solution "one to five times for approximately [five] to seven minute exposures within the production cycle." Id.; MacDonald Dep. Tr. 24: 1-3 ("[T]he parts are actually exposed to the passivating solution probably for at least 24 to 30 minutes."). After being exposed to the MetalMedic, the parts are sent through a water bath to clean them. Staudinger Aff. ¶ 33.

In or about April 2011, customers of National began reporting that there were "microscopic pits on the surface of pacemaker battery cases," which resulted in customers rejecting the casings as unusable. Id. ¶¶ 4, 7, 14; Compl. ¶ 15. A pit renders a casing unusable when it exceeds a depth of 0.002" (two thousandths of an inch). Staudinger Aff. ¶ 5. The walls of the pacemaker battery casings are approximately 0.008-0.016 thick. Id. Therefore, the pits at issue in this claim, which exceed two thousandths of an inch in depth, went more "than 12.5% - 25% through the wall of the part." Id. National refers to these pits as "classic chloride electrochemical pitting." D.E. 97, Pl. Statement of Facts ¶ 11.

After National's customers started rejecting its parts in spring of 2011, National began investigating the cause of the chemical pitting. Staudinger Aff. ¶¶ 28, 30, 36. This effort involved "hiring experts, performing scientific laboratory analysis, inspecting 100% of outgoing parts under microscopes, consulting with customers, vendors, and otherwise conducting a company-wide study of variables that could be the cause of the pitting." Id. ¶ 30. This was an "all hands on deck" investigation, which required National to work at a faster pace to meet customer demands. Id. ¶ 36. In essence, National spent more time and used more resources to generate less product while attempting to determine the cause of the pitting.

On August 25, 2011, National ceased using MetalMedic, although it was not completely certain of the cause of the pitting. Id. ¶ 15. After the removal of MetalMedic, National contendsthat no chemical pitting was detected in any of its parts. Id. ¶ 17. Between August 25, 2011 and June 2012, National continued to investigate and confirmed its theory that the cause of the pitting was the MetalMedic solution. Id. ¶ 18. This conclusion was determined by National's corrosion expert, Dr. Digby Macdonald, who discovered that the MetalMedic contained a higher than expected level of chlorides, which chemically corroded the stainless steel, causing the pits. Id. ¶ 37. Dr. Macdonald's conclusion as to causation, however, was contested by Citizens' expert.

On February 12, 2011, Plaintiff purchased from Defendant an insurance policy which provided coverage "for the building, for the business and for the stock and inventory." D.E. 94, Ex. 2 ¶ 11, Citizens' Insurance Policy (hereinafter the "Policy").⁴ The Policy provided coverage to National from February 12, 2011 to February 12, 2012. Id. at 1. According to National, the policy is an "all risk" policy. D.E. 97, Pl. Statement of Facts ¶ 5. National reported the pitting damage to Citizens and demanded payment under the policy. Compl. ¶ 18. On or around November, 2011, Citizens accepted National's insurance claim. Staudinger Aff. ¶ 19. Subsequently, on July 26, 2012, Citizens formally denied National's claim. D.E. 94-5, Citizens' Denial Letter dated July 26, 2012 (stating that "the policy in question does not provide coverage for [National's] loss"). Plaintiff then field this suit. Plaintiff alleges that Defendants have failed to pay Plaintiff's covered claims and losses, including the following: damage to inventory and insured property, costs and expenses related to the loss, damage to personal business property, and damages resulting from business interruption and extra expenses. Compl. ¶ 36.

The Insurance Policy

There are three sections of the Policy applicable to the current dispute: (1) the Building and Personal Property Coverage Form (Form CP 00 10) (the "BPP Form"); (2) the Cause of Loss - Special Form (Form CP 10 30) (the "Cause of Loss Form"); and (3) the Advantage Choice Property Broadening Endorsement (the "Broadening Endorsement").

The BPP Form provides that "[Citizens] will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss." Policy at 57. "Covered Property" includes "Stock," which is defined as "merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in packing or shipping." Id. at 71. While the BPP Form denotes losses that are covered, it does so by merely referring the Cause of Loss Form. See id. at 59 ("Covered Causes of Loss[:] See applicable Causes of Loss Form as shown in the Declarations."); id. at 64 (referring to the "applicable Causes of Loss Form as shown in the Declarations" in describing "Exclusions and Limitations"). Additionally, the BPP Form contains a section for "Coverage Extensions," including those for "[National's] Business Personal Property." Id. at 62. This section permits extensions of the Policy in cases where "this policy covers [National's] Business Personal Property." Id. Lastly, the BPP Form describes the parties' duties in the event of loss or damage, including permitting Citizens to "inspect the property proving the loss or damage," and "to take samples of damaged and undamaged property for inspection, testing and analysis." Id. at 66. Likewise, National has duty to cooperate with Citizens in an investigation of loss or damage. Id.

The Cause of Loss Form indicates, in Section A, that a cause of loss covered under the Policy is any "Risk[] of Direct Physical Loss"⁵ that is not excluded in Section B or limited in Section C of the form. Id. at 81. Neither party has relied on the Section C limitations and thereforethe Court will only address the Section B exclusions. Section B contains tiers of exclusions, beginning with the Section B1 Exclusions, which contains an anti-concurrent causation clause ("loss or damage is excluded regardless of any other cause or event that contributes concurrently"), as well as an anti-sequential loss clause ("loss or damages is excluded regardless of any other cause or event that contributes . . . in any sequence to the loss"). Id. B1 exclusions are not at issue in this case, although they are pertinent to National's bad faith claim against Citizens.

The exclusions relevant to the coverage determination in this matter are found in ...