Ingenco Holdings, LLC v. Ace American Insurance Company
921 F.3d 803
9th Cir.2019Background
- Ingenco (owner/operator) ran a Washington landfill gas purification plant (Cedar Hills) whose nitrogen rejection unit (NRU) uses diffuser baskets and adsorbent beads to filter nitrogen.
- On Oct. 1, 2010, metal straps securing a diffuser basket bottom plate on vessel V32 broke; the bottom plate fell away, V32’s 30,000 lbs of adsorbent beads were pulverized, and the plant shut down; dust later contaminated other vessels and produced a second shutdown in March 2011.
- Ingenco waited until May 2011 to notify insurer ACE of the initial October failure and bead loss; ACE denied coverage under an all-risks policy citing lack of an “external cause” and several exclusions (defective materials, wear and tear, etc.).
- District court (applying Washington law) ruled ACE prevailed: determined loss was internal/inherent (no external cause), excluded under policy and Endorsement, limited business-interruption to hypothetical repair period, and sanctioned Ingenco for discovery violations (precluding damages evidence for statutory claims).
- Ninth Circuit affirmed choice of Washington law and sanctions, but reversed summary judgment for ACE and remanded for trial—finding triable issues on fortuity/externality, ensuing-loss exception, and Endorsement coverage.
Issues
| Issue | Plaintiff's Argument (Ingenco) | Defendant's Argument (ACE) | Held |
|---|---|---|---|
| Choice of law | Washington law should govern because Cedar Hills is the primary subject of the policy by insured value | Virginia contacts (Insured POB, negotiations) favor Virginia | Washington law applies (location of subject matter weighed heavily) |
| Failure to notify as condition precedent | Late notice did not prejudice ACE; Washington requires insurer to show prejudice | Ingenco’s delay deprived ACE of ability to investigate/reconstruct | Triable issue exists as ACE’s expert said photos sufficed; district court’s prejudice finding reversed as to coverage (court had found notice issue non-dispositive under Washington law) |
| Coverage under “all risks” (external cause/fortuity) | Loss was fortuitous and caused by unexpected resonant vibrations or undiffused external landfill gas—thus covered | Loss resulted from inherent/system defect (internal), so excluded | Reversed summary judgment: genuine disputes of material fact on fortuity and whether cause was internal/inherent vs external; case remanded for trial |
| Ensuing-loss exception & Boiler/Machinery Endorsement | Even if shield failure was excluded, ensuing damage to beads is covered; Endorsement also covers sudden accidental breakdown | Either the bead loss was the excluded event or the Endorsement excludes depletion/wear | Court: ensuing-loss exception can apply to bead damage (triable fact); Endorsement coverage also presents a triable issue as to sudden accidental breakdown |
| Business-interruption period | Actual 16-month downtime should be compensable (actual time relevant) | Recovery should be limited to theoretical period of restoration | Actual repair time is relevant where repairs are complete; but length must still be measured by "due diligence and dispatch"—triable issues remain |
| Discovery sanction for statutory claims | Sanction was abuse; Ingenco promptly provided info when requested | Ingenco willfully failed to disclose damages under Rule 26; exclusion and dismissal appropriate | Ninth Circuit affirmed sanctions and exclusion of damages evidence for state statutory claims (no abuse of discretion) |
Key Cases Cited
- Patton v. Cox, 276 F.3d 493 (9th Cir.) (choice-of-law in diversity governed by forum state rules)
- Mutual of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wash.2d 411 (Wash. 2008) (Washington law: insurer must show prejudice for notice breaches)
- Vision One, LLC v. Philadelphia Indem. Ins. Co., 174 Wash.2d 501 (Wash. 2012) (ensuing-loss clause interpretation under Washington law)
- Standard Structural Steel Co. v. Bethlehem Steel Corp., 597 F. Supp. 164 (D. Conn.) (definition and limits of “external cause” in all-risks policies)
- Morrison Grain Co. v. Utica Mut. Ins. Co., 632 F.2d 424 (5th Cir.) (fortuity focus can obviate external-cause proof in all-risks context)
- Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440 (3d Cir.) (fortuity as implicit requirement in all-risks policies)
- City of Burlington v. Indem. Ins. Co. of N. Am., 332 F.3d 38 (2d Cir.) (intrinsically caused losses may still be fortuitous)
- R&R Sails, Inc. v. Ins. Co. of Pennsylvania, 673 F.3d 1240 (9th Cir.) (standard of review for discovery sanctions)
- Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir.) (de novo review of summary judgment)