Pyramid Technologies, Inc. v. Hartford Casualty Insurance Co

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PYRAMID TECHNOLOGIES, INC., No. 11-56304

Plaintiff-Appellant,

D.C. No.

ALLIED PUBLIC ADJUSTERS, INC.; 8:08-cv-00367-

DOUGLAS W. SCHROEDER, Lien AHS-RNB

Claimant / Former Attorney for

Plaintiff Pyramid Technologies, Inc., OPINION

Claimants,

v.

HARTFORD CASUALTY INSURANCE

COMPANY, Indiana corporation,

Defendant-Appellee.

Appeal from the United States District Court

for the Central District of California

Alicemarie H. Stotler, District Judge, Presiding

Argued and Submitted

April 11, 2013—Pasadena, California

Filed May 19, 2014

Before: Johnnie B. Rawlinson and Jay S. Bybee, Circuit

Judges, and Michael H. Simon, District Judge.*

*

The Honorable Michael H. Simon, United States District Judge for the

District of Oregon, sitting by designation.

2 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

Opinion by Judge Simon;

Dissent by Judge Rawlinson

SUMMARY**

Expert Testimony

The panel affirmed in part and reversed in part the district

court’s summary judgment entered in favor of an insurer in a

diversity insurance coverage action, and remanded for a trial.

The panel held that the district court erred by not allowing

a jury to resolve contested but otherwise admissible expert

testimony. The district court further held that the district

court erred in granting summary judgment against the

insured’s claims because genuine issues of material fact

existed as to whether the insurer breached its contract with

the insured and breached the implied covenant of good faith.

The panel also held that to the extent such claims were

premised on the insured’s business interruption theory, no

material issues of fact existed, and the district court did not

err in granting summary judgment against that theory of

liability.

Judge Rawlinson dissented because she did not agree that

the district court abused its discretion in ruling that the

proposed expert testimony of the insured’s experts should be

excluded. Judge Rawlinson also disagreed that summary

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 3

judgment was improperly granted, and would affirm the

district court’s judgment in its entirety.

COUNSEL

Herbert Dodell (argued), The Dodell Law Corporation,

Woodland Hills, California, for Plaintiff-Appellant.

Miriam A. Vogel (argued), David F. McDowell and Purvi G.

Patel, Morrison & Foerster, LLP, Los Angeles, California, for

Defendant-Appellee.

OPINION

SIMON, District Judge:

After a flood occurred in the warehouse of a business that

purchased and resold electronic parts, a dispute arose between

the business and its insurer. The insured sued, alleging

express breach of contract and breach of the implied covenant

of good faith. The insurer moved for summary judgment.

Without holding a Daubert hearing,1 the district court

excluded the insured’s expert witnesses and granted summary

judgment to the insurer, finding insufficient evidence that the

flood caused damage to the insured’s inventory. Because the

district court abused its discretion by not allowing a jury to

resolve contested but otherwise admissible expert testimony,

we reverse and remand for trial.

1

Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993).

4 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

FACTS

Pyramid Technologies, Inc. (“Pyramid”) purchased an

insurance policy (the “Policy”) from Hartford Casualty

Insurance Company (“Hartford”). The Policy provides

coverage limits of $1 million for building replacement costs,

$5.5 million for business personal property replacement costs,

and $3 million for lost business income and additional

expenses due to the interruption of business operations. To

trigger coverage for building or business personal property

replacement costs, the Policy requires damage to property or

its direct physical loss.

Pyramid purchased and resold electronic parts, many of

which were out-of-date or not state-of-the-art. It did not test

the inventory unless required to do so by a customer or

prospective customer. Pyramid stored its inventory on shelves

in a warehouse that did not have air conditioning or humidity

control. Pyramid had approximately 52 million items in its

warehouse at the time of the flood.

In the morning hours of August 11, 2005, Pyramid

employees arrived at work to find the warehouse and certain

other building locations flooded with one to two inches of

water. Although the flood water did not reach the shelves on

which inventory items were located, several employees saw

visible condensation on packages in the lower three to four

shelves. ServPro, a professional cleanup company, performed

cleanup operations from August 11 through August 16, 2005.

After discovering the flood, Pyramid was concerned about

the humidity level in the warehouse and the condensation

found on its packages. Pyramid asked Hartford to test the

inventory. Hartford’s expert, Peter Helms from Belfor USA

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 5

Technical Services, visited the site after cleanup and, relying

on humidity tests conducted after most of the water had been

removed and drying equipment had been in place for more

than 24 hours, determined that the humidity did not reach a

level that could have caused damage to any of the inventory.

Hartford refused to test the inventory, which would have cost

more than $13 million to test every item. Hartford based its

decision largely on Helms’ conclusion that the inventory was

not damaged by the flood.

While Hartford was visiting the site after the flood, a

potential Pyramid customer, WMS Gaming, Inc. (“WMS”),

was conducting a quality control site visit before approving

Pyramid as a parts supplier. The Hartford representative told

this potential customer that the water intrusion was “no big

deal” and that Hartford would not test the parts. The customer

replied that the flood was a “big deal” to WMS. Shortly

thereafter, WMS declined to approve Pyramid as a parts

supplier.

One month after the flood, Pyramid hired Allied Public

Adjusters, Inc. to assist in pursuing an insurance claim.

Pyramid also hired its own expert, David Spiegel, to

determine what the humidity levels were at the time of the

water intrusion. Spiegel opined that the humidity level in the

warehouse rose to more than 90% and that the conditions

caused by the flood exceeded the protection levels of the

moisture-proof packaging. During routine inventory checks

after the flood, Pyramid employees quarantined more than

250,000 items, looking for visible signs of corrosion, tarnish,

or discoloration. In August 2007, Hartford finally agreed to

conduct limited testing of a small subset of parts identified by

Pyramid as being damaged.

6 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

Hartford retained Dr. Arum Kumar of SEAL Laboratories

to conduct tests on 374 items out of Pyramid’s inventory.

These parts were selected by Pyramid as exhibiting signs of

water damage. Dr. Kumar determined that 147 of those items

exhibited corrosion, tarnish, or discoloration. Dr. Kumar

conducted additional tests on those 147 items. He found that

two parts failed the additional testing, and they were deemed

unsuitable for commercial applications. Dr. Kumar stated that

corrosion, tarnish, and discoloration are always caused by

moisture, but he concluded that the August 11, 2005 flood

was not the cause of the corrosion damage to the parts he

examined.

Pyramid hired two additional experts, Del Mortenson and

Ken Pytlewski, to evaluate the validity of Dr. Kumar’s report.

Mortenson questioned Dr. Kumar’s opinion on the grounds

that Dr. Kumar used “military” standards of suitability

instead of “commercial” standards. Pytlewski challenged

other opinions of Dr. Kumar’s, including his opinions that

any corrosion caused by the flood would necessarily have

been uniform and that visible corrosion is not a failure criteria

under military standards. Pytlewski also noted the internal

inconsistency in Dr. Kumar’s report between his statement

that the cause of the moisture-related corrosion cannot be

determined and his conclusion that the flood was not the

cause of any moisture-related damage. Pytlewski testified at

a deposition that in his opinion, some of the corrosion to

Pyramid’s inventory occurred as a result of the high humidity

caused by the August 11, 2005 flood.

By May 2010, approximately 17 million of Pyramid’s 52

million parts in inventory at the time of the flood had been

sold, and approximately 35 million parts remained in

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 7

Pyramid’s inventory. In October 2010, Pyramid sold most of

its remaining inventory at a distress sale price of $125,000.

PROCEDURAL BACKGROUND

Pyramid filed this civil action in California state court.

Hartford removed the lawsuit to federal court. On March 21,

2011, Hartford moved for summary judgment. In opposition

to Hartford’s motion, Pyramid offered the expert reports of

Spiegel, Mortenson, and Pytlewski, among other evidence. In

reply to Pyramid’s opposition, Hartford argued that the expert

reports of Spiegel, Mortenson, and Pytlewski, and much of

the testimony of Tony Mavusi, the president of Pyramid, was

inadmissible. The district court did not hold a Daubert

hearing.

The district court also did not hold oral argument on

Hartford’s motion for summary judgment. Instead, on June 1,

2011, the district court granted summary judgment in favor of

Hartford, sustained many of Hartford’s objections to the

testimony of Mavusi, and excluded the expert reports of

Spiegel, Mortenson, and Pytlewski. The district court

excluded the reports of Mortenson and Pytlewski as being

“illegible,” and the court excluded the Spiegel report on the

grounds that Spiegel was not a qualified expert and that his

report was not based on sufficient facts or data and was not

the product of reliable principles and methods.

Pyramid moved for reconsideration and submitted

enlarged and more legible versions of the Mortenson and

Pytlewski reports. The district court accepted the enlarged

reports as sufficiently readable, but then excluded them as

unreliable and not based on sufficient facts or data. The

district court also concluded that even if these reports were

8 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

admissible, they fail to raise a genuine dispute of material fact

because they do not sufficiently address causation. The

district court denied Pyramid’s motion for reconsideration.

STANDARD OF REVIEW

We review a district court’s order granting summary

judgment de novo. Ford v. City of Yakima, 706 F.3d 1188,

1192 (9th Cir. 2013) (per curiam). We review evidentiary

rulings for abuse of discretion and reverse if the exercise of

discretion is both erroneous and prejudicial. Nev. Dep’t of

Corr. v. Greene, 648 F.3d 1014, 1018 (9th Cir. 2011). We

review underlying factual determinations for clear error.

United States v. Lukashov, 694 F.3d 1107, 1114 (9th Cir.

2012).

DISCUSSION

A. Exclusion of Pyramid’s Expert Witnesses

1. Legal Standards

Rule 702 of the Federal Rules of Evidence provides that

expert opinion evidence is admissible if: (1) the witness is

sufficiently qualified as an expert by knowledge, skill,

experience, training, or education; (2) the scientific, technical,

or other specialized knowledge will help the trier of fact to

understand the evidence or to determine a fact in issue;

(3) the testimony is based on sufficient facts or data; (4) the

testimony is the product of reliable principles and methods;

and (5) the expert has reliably applied the relevant principles

and methods to the facts of the case. Fed. R. Evid. 702.

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 9

Under Daubert, 509 U.S. at 579, and its progeny,

including Daubert v. Merrell Dow Pharm., Inc., 43 F.3d 1311

(9th Cir. 1995), a district court’s inquiry into admissibility “is

a flexible one.” Alaska Rent-A-Car, Inc. v. Avis Budget Grp.,

Inc., 738 F.3d 960, 969 (9th Cir. 2013) (citation omitted),

cert. denied, 134 S. Ct. 644 (2013). In evaluating proffered

expert testimony, the trial court is “a gatekeeper, not a fact

finder.” Primiano v. Cook, 598 F.3d 558, 565 (9th Cir. 2010)

(citation and quotation marks omitted).

“[T]he trial court must assure that the expert testimony

‘both rests on a reliable foundation and is relevant to the task

at hand.’” Id. at 564 (quoting Daubert, 509 U.S. at 597).

“Expert opinion testimony is relevant if the knowledge

underlying it has a valid connection to the pertinent inquiry.

And it is reliable if the knowledge underlying it has a reliable

basis in the knowledge and experience of the relevant

discipline.” Id. at 565 (citation and quotation marks omitted).

“Shaky but admissible evidence is to be attacked by cross

examination, contrary evidence, and attention to the burden

of proof, not exclusion.” Id. at 564 (citation omitted). The

judge is “supposed to screen the jury from unreliable

nonsense opinions, but not exclude opinions merely because

they are impeachable.” Alaska Rent-A-Car, 738 F.3d at 969.

Simply put, “[t]he district court is not tasked with deciding

whether the expert is right or wrong, just whether his

testimony has substance such that it would be helpful to a

jury.” Id. at 969–70.

Like the test for admissibility in general, the test of

reliability is also flexible. Estate of Barabin v. AstenJohnson,

Inc., 740 F.3d 457, 463 (9th Cir. 2014) (en banc). To

determine reliability, the Supreme Court has suggested

several factors: “1) whether a theory or technique can be

10 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

tested; 2) whether it has been subjected to peer review and

publication; 3) the known or potential error rate of the theory

or technique; and 4) whether the theory or technique enjoys

general acceptance within the relevant scientific community.”

Id. (quoting United States v. Hankey, 203 F.3d 1160, 1167

(9th Cir. 2000)); see also Primiano, 598 F.3d at 564. These

factors are “meant to be helpful, not definitive, and the trial

court has discretion to decide how to test an expert’s

reliability as well as whether the testimony is reliable, based

on the particular circumstances of the particular case.”

Primiano, 598 F.3d at 564 (citations and quotation marks

omitted); see also Barabin, 740 F.3d at 463. The test “is not

the correctness of the expert’s conclusions but the soundness

of his methodology,” and when an expert meets the threshold

established by Rule 702, the expert may testify and the fact

finder decides how much weight to give that testimony.

Primiano, 598 F.3d at 564–65.

After an expert establishes admissibility to the judge’s

satisfaction, challenges that go to the weight of the evidence

are within the province of a fact finder, not a trial court judge.

A district court should not make credibility determinations

that are reserved for the jury.

2. Spiegel

Spiegel is a certified restorer with the National Institute

of Disaster Restoration. He is also a certified: (1) master

restorer and water, fire and odor control journeyman with the

Institute of Inspection, Cleaning, and Restoration; (2) indoor

environmentalist and mold remediator with the Indoor Air

Quality Association; and (3) Level I thermographer with the

Infrared Training Center. Spiegel is also a general and

specialty licensed contractor with the state of California and

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 11

has 38 years of experience in property damage repair and

more than 15 years of experience in construction defect

investigation.

In two conclusory sentences and without analysis or

explanation, the district court held that Spiegel was not a

qualified expert “on the scientific, technical, or specialized

data on which he purports to opine” and that his opinion

regarding relative humidity was not based on sufficient facts

or data and was not the product of reliable principles and

methods. The district court abused its discretion in reaching

these conclusions.

Spiegel used weather data from the time of the incident,

thermo-hygrometer and infrared data, and ambient condition

data to opine on the level of humidity in the warehouse at the

time of the flood. As noted, Spiegel is a certified

thermographer, certified indoor environmentalist, certified

master restorer, certified water control journeyman, and

certified mold remediator, with decades of experience. This

expertise and experience is relevant to the issues on which

Spiegel opined. Because the district court provided no

explanation or analysis for rejecting these qualifications, the

district court abused its discretion in summarily determining

that Spiegel was not qualified as an expert. See Barabin,

740 F.3d at 464 (holding the district court “failed to assume

its role as gatekeeper” when it excluded expert testimony for

“dubious credentials” without conducting a Daubert hearing

or assessing expert’s findings). Spiegel’s many relevant

certifications and decades of relevant experience render him

qualified to issue his expert opinion.

In addition, in preparing his report Spiegel conducted two

site visits to Pyramid’s warehouse, interviewed several

12 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

Pyramid employees who saw the water intrusion and its

immediate aftermath, reviewed ServPro’s ambient condition

measurements, and recorded his own ambient data during his

visits, including data from a 5:30 a.m. visit designed to

compare the difference in indoor and outdoor conditions

when the warehouse was closed and locked (as it was during

the flood). Spiegel also took digital photographs and

electronic thermo-hygrometer readings, performed infrared

imaging, reviewed www.weatherunderground.com to

determine the weather conditions at a nearby airport at the

time of the flood, and reviewed the Helms report. These facts

and data constitute a sufficient basis for Spiegel’s expert

report.

Although not discussed by the district court, Spiegel relies

on more facts and data in reaching his expert conclusions than

did Hartford’s expert witness. Hartford’s expert Helms spent

approximately two hours conducting a visual inspection of

the warehouse but did not take any measurements,

thermographic readings, infrared images, or other data.

Although Helms contacted ServPro for its readings, Helms

did not learn the locations from which ServPro obtained its

readings, what ServPro did to get its readings, or what kind

of detection machine ServPro used. The day after his two-

hour site visit, Helms completed his report and concluded that

based on the humidity levels measured by ServPro, no

damage occurred to the components in question.

Spiegel also adequately explained his methodology in

reaching his opinion. Spiegel described how the data he

collected and reviewed helped him determine the conditions

of the warehouse at the time of the event and at the time of

ServPro’s measurements (which were relied on by Helms to

determine that no damage from humidity could have

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 13

occurred). Unlike Helms, however, Spiegel took into

consideration the fact that the warehouse doors were closed

and locked during the flood but open during ServPro’s

measurements, and Spiegel calculated and considered the

difference between the indoor and outdoor conditions during

his 5:30 a.m. visit. Spiegel applied that difference to the

weather data at the nearby airport on the night of the incident

to extrapolate the indoor conditions on the night of the flood.

Spiegel also used the infrared temperature readings of the

packages on the shelves in comparison to the air temperature

taken during his visit to determine the likely temperature of

the packages on the night of the incident.

The record shows that the knowledge underlying

Spiegel’s report “has a reliable basis in the knowledge and

experience of the relevant discipline,” rendering his report

reliable. Primiano, 598 F.3d at 565 (citation and quotation

marks omitted). The record also shows that Spiegel’s reliance

on the nearby airport weather information from

www.weatherunderground.com is acceptable in the industry,

for Helms testified that he relied on the same data. Spiegel

also explained how he applied the data to reach his

conclusions and how Helms failed to rely on proper data to

reach his conclusion. In short, Spiegel’s principles and

methods were reliable and his report is not one of the

“unreliable nonsense opinions” that should be screened from

use. Alaska Rent-A-Car, 738 F.3d at 969. Thus, the district

court abused its discretion in excluding this evidence.

Excluding the Spiegel report was both erroneous and

prejudicial. Spiegel’s expert report provides evidence that:

(1) the Helms report relied on improper data to conclude that

no damage was caused by humidity following the flood;

(2) during the flood, the humidity exceeded 90% and was

14 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

above the dew point; (3) the applicable standards for

moisture-proof packaging require a one-year shelf life and

humidity below 90% to prevent failure; (4) the vast majority

of the parts stored in moisture-proof packaging was well

beyond the one-year warranty protection; and (5) the

conditions during the flood “without question” put the

affected moisture-proof packages outside the packing

standards. Thus, as Spiegel opines, the humidity and

condensation caused by the flood may have compromised the

packaging and possibly the components themselves. This is

admissible evidence from which causation and damage

reasonably may be inferred. Although Spiegel did not say

with certainty that the humidity from the flood caused

damage to Pyramid’s inventory, a jury could reasonably infer

causation from Spiegel’s report and Pyramid’s other

evidence. It is not necessary for Spiegel’s report to establish

every element of Pyramid’s claim in order for it to be

admissible in evidence. See Primiano, 598 F.3d at 564

(“Reliable expert testimony need only be relevant, and need

not establish every element that the plaintiff must prove, in

order to be admissible.”) (citation omitted).

If Spiegel’s report had been admitted, the district court

would have been required to view it in the light most

favorable to Pyramid when considering Hartford’s motion for

summary judgment. Because the report could assist a trier of

fact in inferring that the flood caused sufficiently high

humidity to damage Pyramid’s parts and that Helms’ contrary

conclusion was not reliable, the exclusion of Spiegel’s report

is prejudicial to Pyramid. See Messick v. Novartis Pharm.

Corp., No. 13-15433, 2014 WL 1328182, at *3–5 (9th Cir.

Apr. 4, 2014) (reversing grant of summary judgment where

expert’s testimony, which would have created a genuine issue

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 15

of material fact, was excluded because it was erroneously

deemed unreliable and irrelevant).

3. Pytlewski

The district court also excluded the Pytlewski report

under Rule 702, stating that it was not the product of reliable

principles and methods, and under Rule 701,2 stating that the

report does not explain how the opinions are rationally based

on the perceptions of the witness. Because Pytlewski was

proffered as an expert witness, however, only Rule 702

applies.

Pytlewski was retained to review and comment on the

report prepared by Hartford’s expert Dr. Kumar of SEAL

Laboratories. The district court appears to have accepted

Pytlewski as a qualified expert, excluding his report solely

based on reliability. The district court concluded that

Pytlewski’s report was not the product of reliable principles

and methods.

An expert opinion is reliable “if the knowledge

underlying it has a reliable basis in the knowledge and

experience of the relevant discipline.” Alaska Rent-A-Car,

738 F.3d at 969 (quoting Primiano, 598 F.3d at 565).

Pytlewski’s opinions are based on his knowledge and

experience as a professional engineer and metallurgist. For

2

Fed. R. Evid. 701 provides: “If a witness is not testifying as an expert,

testimony in the form of an opinion is limited to one that is: (a) rationally

based on the witness’s perception; (b) helpful to clearly understanding the

witness’s testimony or to determining a fact in issue; and (c) not based on

scientific, technical, or other specialized knowledge within the scope of

Rule 702.”

16 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

example, Pytlewski countered Dr. Kumar’s statement that the

damage to Pyramid’s inventory could not have been caused

by the flood because the corrosion was not uniform by

explaining that metal exposed to moisture would not oxidize

uniformly. This opinion is within the knowledge and

experience of a metallurgist. See, e.g., Stilwell v. Smith &

Nephew, Inc., 482 F.3d 1187, 1192–93 (9th Cir. 2007)

(holding admissible metallurgist’s expert testimony that nails

were poorly manufactured and could have been designed to

last longer); White v. Ford Motor Co., 312 F.3d 998, 1008

(9th Cir. 2002) opinion amended on denial of reh’g, 335 F.3d

833 (9th Cir. 2003) (describing metallurgist’s testimony that

was “well within his metallurgical expertise” when he

“identified wear on the ratchet wheel of the brake that showed

repeated tip-on-tip engagement rather than the proper

engagement”); see also 6 Am. Jur. Trials 555 (describing

common use of expert metallurgists to describe, among other

things, causes and effects of corrosion). The “reliability” test

is flexible and should be applied based on the circumstances

of the case. Given the subject matter and type of opinions that

Pytlewski rendered and his knowledge and experience,

Pytlewski’s opinion is reliable. See Messick, 2014 WL

1328182, at *3.

The exclusion of Pytlewski’s report is prejudicial because

his report provides evidence from which a fact finder could

disregard the opinion of Dr. Kumar and reasonably infer

damages and causation relating to the flood. Further,

Pytlewski’s deposition testimony links the flood as at least a

partial cause of the damage to Pyramid’s inventory. Thus, the

district court abused its discretion in excluding Pytlewski’s

expert report and testimony.

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 17

4. Mortenson

The district court also excluded the Mortenson report

under Rule 702, stating it was not reliable, and under Rule

703,3 stating it was not based on facts or data known to

Mortenson. Mortenson opined that it was improper for

Hartford’s expert Dr. Kumar to use military standards of

suitability instead of commercial standards in testing the

selected parts from Pyramid’s inventory. Mortenson testified

at deposition, however, that he did not know what standards

should have been used and that he is not aware of the

governing commercial standards because that is not his field

of expertise. Thus, Mortenson’s testimony that Dr. Kumar

should not have used military standards and should have used

commercial standards was not based on facts or data known

to Mortenson and is inadmissible under Rule 703.

Additionally, Mortenson’s testimony is not reliable because

he did not have the knowledge or experience required under

Rule 702 to permit him to give expert testimony in this

matter. The exclusion of Mortenson’s report by the district

court was not an abuse of discretion. See Kumho Tire Co. v.

Carmichael, 526 U.S. 137, 153–54 (1999) (holding trial court

did not abuse its discretion to exclude expert testimony on

grounds that expert’s methodology in analyzing relevant data

was unreliable, even though the expert was qualified, where

3

Fed. R. Evid. 703 provides: “An expert may base an opinion on facts

or data in the case that the expert has been made aware of or personally

observed. If experts in the particular field would reasonably rely on those

kinds of facts or data in forming an opinion on the subject, they need not

be admissible for the opinion to be admitted. But if the facts or data would

otherwise be inadmissible, the proponent of the opinion may disclose them

to the jury only if their probative value in helping the jury evaluate the

opinion substantially outweighs their prejudicial effect.”

18 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

there was no evidence that other experts in the industry used

the expert’s particular approach).

B. Grant of Summary Judgment Against Pyramid’s

Claims

In its complaint, Pyramid alleges that Hartford breached

its insurance contract and the implied covenant of good faith

and fair dealing by: (1) failing properly to investigate and

then improperly denying Pyramid’s claim for an alleged loss

of inventory, including refusing to test the inventory;

(2) failing properly to respond to the building restoration

claim, including making a “low-ball” estimate for damage

that was one-fourteenth of the value ultimately paid by

Hartford and unreasonably delaying final payment on the

restoration claim; and (3) refusing to pay for an alleged

business interruption. Pyramid appeals the district court’s

grant of summary judgment in favor of Hartford and against

both of Pyramid’s claims.

1. Legal Standards

A party is entitled to summary judgment if 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). The moving party has the burden of

establishing the absence of a genuine dispute of material fact.

Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

In this diversity action, the substantive law governing

Pyramid’s breach of contract claim is California law. See

Neely v. St. Paul Fire & Marine Ins., 584 F.2d 341, 345 (9th

Cir. 1978). Whether evidence on a particular issue is

sufficient to raise a question of fact for the jury, however, is

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 19

governed by federal law. Id. The federal test is whether a

“reasonable jury viewing the summary judgment record could

find by a preponderance of the evidence that the plaintiff is

entitled to a favorable verdict.” Narayan v. EGL, Inc.,

616 F.3d 895, 899 (9th Cir. 2010) (citation omitted). The

judge is not to weigh the evidence, draw legitimate

inferences, or make credibility determinations. Id. “The

evidence of the non-movant is to be believed and all

justifiable inferences drawn in his favor.” Id. (citation and

quotation marks omitted). An inference is justifiable if it is

rational or reasonable—it does not need to be the most likely

or most persuasive inference. Id. The inferences must have a

sufficient evidentiary basis. Neely, 584 F.2d at 345–46.

“Where conflicting inferences may be drawn from the facts,

the case must go to the jury.” Munger v. City of Glasgow

Police Dep’t, 227 F.3d 1082, 1087 (9th Cir. 2000) (citation

and quotation marks omitted).

2. Pyramid’s Claim of Loss of Inventory

Pyramid argues that Hartford breached the insurance

contract by both failing properly to investigate and denying

Pyramid’s claim under the Policy for loss of inventory. Under

the Policy, the burden is on Pyramid to initiate and support its

claim. See 1231 Euclid Homeowners Ass’n v. State Farm Ins.

& Cas. Co., 37 Cal. Rptr. 3d 795, 802 (Cal. Ct. App. 2006).

To succeed on its breach of contract claim, Pyramid must

establish a contract, Pyramid’s performance or excuse for

nonperformance, Hartford’s breach, and resulting damages to

Pyramid. Abdelhamid v. Fire Ins. Exch., 106 Cal. Rptr. 3d 26,

32–33 (Cal. Ct. App. 2010). The disputed issues in this case

are whether Pyramid suffered damage to any of its inventory

and, if so, whether that damage was caused by the flood.

20 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

a. Damages

It is undisputed that at least some of Pyramid’s inventory

had visible corrosion, tarnish, or discoloration. Hartford’s

expert Dr. Kumar identified visible corrosion, tarnish, or

discoloration on more than 40% of the items he tested.

Pyramid quarantined more than 250,000 items as showing

visible signs of corrosion, tarnish, or discoloration. Dr.

Kumar testified that corrosion constituted actual physical

damage. Thus, at least some of Pyramid’s inventory had

actual, physical damage. When there is actual, physical

damage, then the diminution of market value may be a proper

measure of damages. See State Farm Fire & Cas. Co. v.

Superior Court, 264 Cal. Rptr. 269, 274–75 (Cal. Ct. App.

1989) (diminution of value is not a cause of a loss but a

measure of damages).

The parties dispute whether visible corrosion, tarnish, or

discoloration of a part is sufficient to constitute a “failure”

under “military standards” of suitability. Dr. Kumar

determined that only two out of the 147 parts failed under that

standard, whereas Pytlewski noted that under the Department

of Defense Test Method Standards of Microcircuits visible

corrosion is included as a failure criterion. Whether visible

corrosion constitutes a “failure” of a part under military

standards is a factual dispute for the jury to resolve.

In addition, and even more importantly, regardless of this

dispute over whether visible corrosion, tarnish, or

discoloration constitutes a failure under military standards,

two of the 374 parts (0.535 percent) actually tested by

Dr. Kumar failed, even under Dr. Kumar’s standards.

Extrapolating this failure percentage to 52 million parts is

evidence of at least some failure (approximately 278,200

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 21

parts). There is also evidence in the record that some

customers returned a few parts because of corrosion. The

failure of some parts and the return of other parts are

evidence from which a jury reasonably could infer that

Pyramid was harmed by the presence of corrosion on at least

some of its inventory.

Additionally, if the inventory items were damaged by the

flood, which Hartford admits was a covered event, the

inability to sell the items due to the physical damage,

regardless of whether those items would fail a Department of

Defense test under military standards, would constitute a

covered loss. See, e.g., MRI Healthcare Ctr. of Glendale, Inc.

v. State Farm Gen. Ins. Co., 115 Cal. Rptr. 3d 27, 37 (2010)

(“In modern [insurance] policies, ‘physical loss or damage’

is typically the trigger for coverage. Clearly, this threshold is

met when an item of tangible property has been ‘physically

altered’ by perils such as fire or water.” (citation omitted));

see also Allstate Ins. Co. v. Smith, 929 F.2d 447, 450 (9th Cir.

1991) (describing an “easy to imagine” situation where a

“leaky roof could lead to water damage to [someone’s]

property. Presumably, water damage would be an ensuing

loss covered by the policy but repairing the roof would not be

covered.”); Meridian Textiles, Inc. v. Indem. Ins. Co. of N.

Am., No. CV 06-4766 CAS, 2008 WL 3009889 at, *4–6

(C.D. Cal. Mar. 20, 2008) (yarn that was water-damaged, had

a tangible change such as odor, mold or mildew, or had a

detectable change such that the yarn was likely to develop

odor, mold or mildew and was, therefore, unable to be sold,

is a covered loss); Columbiaknit, Inc. v. Affiliated FM Ins.

Co., No. Civ. 98-1134-HU, 1999 WL 619100 at, *5–6 (D. Or.

Aug. 4, 1999) (fabric with mold, odor, or with increased

microbial counts that will develop mold or odor and unable

to be sold, is a covered loss). Drawing all reasonable

22 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

inferences in favor of Pyramid, a reasonable fact finder could

find that some of the inventory items had moisture-related

damage that diminished their market value. That diminution

in market value is a recoverable measure of damages. See

State Farm, 264 Cal. Rptr. at 274–75.

Because there are at least some parts that have actual

physical damage and some parts that failed testing or were

returned by customers, there is evidence from which a jury

could determine that Pyramid suffered harm to its inventory.

The fact that some, but not all, of the inventory was damaged

does not support the granting of summary judgment against

Pyramid’s loss of inventory claim. Determining the amount

of harm suffered is for the jury.

b. Causation

Hartford argues that Pyramid failed to produce any

evidence that the components’ corrosion, tarnish, or

discoloration was caused by the flood of August 11, 2005, as

opposed to the age of the parts, the lack of climate control in

the warehouse, or other potential causes. Because California

provides the substantive law in this case, we follow

California’s law on causation in an insurance coverage claim.

Under California law, the “efficient proximate cause”

doctrine is “the preferred method for resolving first party

insurance disputes involving losses caused by multiple risks

or perils, at least one of which is covered by insurance and

one of which is not.” Julian v. Hartford Underwriters Ins.

Co., 110 P.3d 903, 906 (Cal. 2005) (citations omitted); see

also Brown v. Mid-Century Ins. Co. 156 Cal. Rptr. 3d 56, 67

(Cal. Ct. App. 2013) (noting that “the efficient proximate

cause doctrine applies when a loss is caused by a combination

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 23

of a covered and specifically excluded risks”) (citation and

quotation marks omitted).

The “‘efficient proximate cause’ of a loss is the

predominant, or most important cause of a loss.” Julain,

110 P.3d at 907 (citation omitted). Coverage would not exist

“if the covered risk was simply a remote cause of the loss” or

if an excluded risk was the efficient proximate cause of the

loss. Id; see also California Ins. Code. § 530 (“An insurer is

liable for a loss of which a peril insured against was the

proximate cause, although a peril not contemplated by the

contract may have been a remote cause of the loss; but he is

not liable for a loss of which the peril insured against was

only a remote cause.”). “If more than one peril contributes to

a loss, the question which is the efficient proximate cause

generally is a factual matter for the jury to resolve.” Julian v.

Hartford Underwriters Ins. Co., 123 Cal. Rptr. 2d 767, 770

(Cal. Ct. App. 2002), review granted and opinion superseded

sub nom. Julian v. Hartford Underwriters, 57 P.3d 362 (Cal.

2002), and aff’d, 35 Cal. 4th 747, 110 P.3d 903 (2005); see

also Garvey v. State Farm Fire & Cas. Co., 770 P.2d 704,

714 (Cal. 1989) (en banc) (“Coverage should be determined

by a jury under an efficient proximate cause analysis.”).

The evidence in the record, including both the Spiegel

report and the testimony by employees that they saw

condensation on the packaging of the parts stored on the

lower shelves, supports an inference that the humidity

reached a high enough level during the flood to cause

significant condensation on the packaging of the parts kept on

the lower three or four shelves. There is also evidence that

although Pyramid’s moisture-sensitive inventory was

generally stored in moisture-proof packaging, most of that

packaging was either unsealed or had been compromised by

24 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

age or the high humidity levels, allowing moisture to reach

the components. Pyramid’s employees testified that many of

the moisture-proof packages were unsealed and some of those

had been folded down and held closed only with a paperclip.

The Spiegel report noted that the vast majority of Pyramid’s

moisture-proof packages were much older than the industry

standard packaging shelf-life recommendation of 12 months

and that the moisture-proof package standards require lower

than dew-point humidity. Thus, there is evidence from which

a jury could infer that moisture from the flood may have

reached moisture-sensitive components because the

packaging was not fully sealed, failed from age, or failed

because the humidity caused by the flood reached above the

dew point.

Pytlewski, Pyramid’s expert metallurgist, acknowledged

in his report the difficulty in determining causation, but

testified at a deposition that he believed that at least some of

the damage was caused by the water intrusion that occurred

during the flood. Although he could not state definitively that

the water intrusion caused all of the harm, “[l]ack of certainty

is not, for a qualified expert, the same thing as guesswork.”

Primiano, 598 F.3d at 565. Additionally, as discussed above,

there is evidence supporting an inference that the

condensation may have breached the packaging and reached

the components. Further, the fact that more than 250,000

items were quarantined because they showed visible signs of

moisture-related damage after the flood is evidence

supporting an inference of causation.

The existence of material factual issues relating to

causation is further evident in reviewing the reports of

Hartford’s experts. Although Helms opined that the humidity

caused by the flood could not have caused any damage to

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 25

Pyramid’s inventory, there is evidence in the record from

which a reasonable fact finder could discredit Helms’

conclusion. Helms spent only two to three hours conducting

a visual inspection of Pyramid’s warehouse and did not

conduct any tests, take any building measurements, or

otherwise investigate the inventory. It took Helms one day to

complete his report, and he relied exclusively on ServPro’s

readings and assumed they were accurate. Helms also does

not appear to have considered that ServPro’s measurements

were taken more than 24 hours after the drying operation

began and with open warehouse doors or that the moisture-

proof packaging was compromised on many items. It is the

jury’s province to determine how much weight, if any, to give

the conclusions reached by Helms or any of the experts at

trial.

Dr. Kumar did not provide a definitive statement on

causation and gave contradictory statements. His declaration

and part of his report state that the water intrusion did not

cause the corrosion found in his testing, but his deposition

testimony and another portion of his report state that the

cause cannot be determined because it could have been the

water intrusion or it could have been age or some other

exposure to moisture. Under California’s efficient proximate

cause doctrine, whether the damage found by Dr. Kumar was

caused by the flood or by some other cause is an issue for the

jury. See Julian, 123 Cal. Rptr. 2d at 770.

Analyzing the causal chain is “necessarily speculative”

and “[c]hoosing between the speculations is ordinarily a

question for the trier of fact, who must determine the balance

of probabilities.” Shawmut Bank, N.A. v. Kress Assocs.,

33 F.3d 1477, 1496 (9th Cir. 1994) (citation omitted). This is

not a case where the party with the burden of proof at trial

26 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

submitted “no evidence” from which causation could be

inferred, thereby requiring summary judgment. Id. at

1497–98. There is sufficient evidence in the record, drawing

all reasonable inferences in Pyramid’s favor, from which a

reasonable jury “could find by a preponderance of the

evidence that the plaintiff is entitled to a favorable verdict.”

Narayan, 616 F.3d at 899 (citation omitted). Whether those

inferences should be drawn in favor of Pyramid after

considering and weighing all of the evidence is for a jury to

decide. Thus, summary judgment is inappropriate against

Pyramid’s claim of loss of inventory.

3. Pyramid’s Claim of Business Interruption

Pyramid submitted, withdrew, re-submitted, and then

modified its business interruption claim. The only lost

business currently claimed by Pyramid is from WMS, a

potential customer. The burden is on Pyramid to initiate and

support this claim under the Policy. See 1231 Euclid, 37 Cal.

Rptr. 3d at 802. Thus, to defeat summary judgment against its

business interruption claim against Hartford, Pyramid must

show that there are material factual issues about whether its

loss of potential WMS business is a covered loss under the

Policy.

Business interruption is covered under the Policy, through

an endorsement entitled “Gross Earnings” that deleted and

replaced the Policy’s original “Business Income” and “Extra

Expense” provisions. The Gross Earnings endorsement

provides:

We will pay for the actual loss of Business

Income you sustain and the actual, necessary

and reasonable Extra Expense you incur due

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 27

to the necessary interruption of your business

“operations” during the “Period of

Restoration” due to the direct physical loss of

or direct physical damage caused by or

resulting from a Covered Cause of Loss to

property at “Scheduled Premises.”

Pyramid must, therefore, show that it actually lost business

income from WMS because of the flood in order to prevail on

its claim that Hartford breached the insurance contract by

failing to cover Pyramid’s alleged business interruption.

Pyramid fails to show that there are material issues of fact

that it actually lost WMS business as a result of the flood.

Whether WMS would have contracted with Pyramid if there

was no flood, and for what amount, is too speculative to

support Pyramid’s claim. Although Carmine Greco, the

senior buyer at WMS, testified that he had “committed” to

buy at least $1 million dollars of inventory from Pyramid, he

also explained that any purchase by WMS from Pyramid was

subject to the approval of WMS quality control people and

subject to additional negotiation. Pyramid and WMS, thus,

were still negotiating and had not yet entered into a binding

and enforceable contract.

Greco further testified that he and Pyramid had discussed

contract terms for only a few parts, although he “anticipated”

more parts would be purchased from Pyramid. He added that

after learning of the flood, he needed the inventory tested

before he would consider purchasing any of it. He also stated

that if the product had been tested, he “probably” would have

bought it.

28 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

WMS’s quality control manager, Nick Savich, also

participated in the site visit at Pyramid. Savich sent a letter to

Pyramid after the visit, stating that WMS did not approve

Pyramid as a supplier based on water intrusion. Savich

testified at deposition, however, that if he had known that

Pyramid did not have humidity control in its warehouse, that

fact alone would have disqualified Pyramid as a supplier.

To find for Pyramid on its claim of business interruption,

a jury would need to speculate that Savich would not have

discovered the fact that the warehouse did not have humidity

control, that WMS quality control people would have signed

off on Pyramid as a supplier, that Greco and Pyramid would

have successfully negotiated pricing and other terms for many

additional parts, and that Greco would have followed through

with a large purchase. The record evidence does not support

– and the law does not permit – such speculation. See Neely,

584 F.2d at 346 (“Parties are entitled to have the

determination of their rights rest on more than speculation

and guesswork. Here, the connection between the proffered

evidence and the conclusions is too tenuous to permit a jury

to make it.”). Accordingly, we affirm the district court’s grant

of the motion for summary judgment against Pyramid on the

claim of business interruption.

4. Pyramid’s Claim of Good Faith and Fair Dealing

“The covenant of good faith and fair dealing has

‘particular application’ to insurers because they are ‘invested

with a discretionary power affecting the rights of another.’”

Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161

(9th Cir. 2002) (quoting Carma Developers (Cal.), Inc. v.

Marathon Dev. Cal., Inc., 826 P.2d 710, 726 (Cal. 1992)).

Under California law, to establish a breach of the implied

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 29

covenant of good faith and fair dealing, “a plaintiff must

show: (1) benefits due under the policy were withheld; and

(2) the reason for withholding benefits was unreasonable or

without proper cause.” Guebara v. Allstate Ins. Co., 237 F.3d

987, 992 (9th Cir. 2001) (citing Love v. Fire Ins. Exch.,

271 Cal. Rptr. 246, 255 (Cal. Ct. App. 1990)). The

reasonableness of an insurer’s conduct is ordinarily a question

of fact. Amadeo, 290 F.3d at 1161.

An insured’s claim of breach of the implied covenant of

good faith and fair dealing may be dismissed on summary

judgment if the defendant insurer can show that there was a

“genuine dispute” as to liability. Guebara, 237 F.3d at 992.

This genuine dispute doctrine should be applied on a case-by-

case basis and does not protect allegedly biased

investigations. Id. at 994, 996. Biased investigation claims

include circumstances where: (1) the insurer misrepresents

the nature of the investigatory proceedings; (2) the insurer’s

employees lie during depositions or to an insured; (3) the

insurer dishonestly selects experts; (4) the insurer’s experts

were unreasonable; or (5) the insurer fails to conduct a

thorough investigation. Id. at 996.

Pyramid argues that Hartford breached the implied

covenant of good faith and fair dealing by: (1) improperly

refusing to test Pyramid’s inventory for more than two years

and conducting inadequate testing; (2) denying coverage on

Pyramid’s claim of inventory loss; (3) making a “low-ball”

building restoration estimate and delaying payment on the

agreed-upon supplemental building restoration amount for

four months; and (4) conducting a biased investigation

through dishonestly selecting unreasonable experts and an

inadequate investigation. Hartford argues that it did not act

unreasonably because there was a genuine dispute as to

30 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

coverage, its investigation was proper, its coverage denial

was based on expert opinions, and it ultimately paid all of the

building restoration amounts making any delay harmless.

There is evidence in the record supporting an inference

that Hartford acted unreasonably or with bias. Pyramid

submitted testimony stating that a Hartford representative,

while visiting Pyramid’s premises to assess damages, said

that it is Pyramid’s job to try to collect under the insurance

policy and Hartford’s job to make sure Pyramid does not

collect. Pyramid also provided evidence that Hartford’s

adjuster Todd Klingaman “downplayed” the flood damage

during his site visit by comparing it to a “bucket of water”

and suggesting to Pyramid that it did not need to tell its

customers about it. Pyramid’s employees also testified that at

the conclusion of Hartford’s site visit, before Helms had

completed his report, Hartford jumped to an early conclusion

that no damage had occurred and thus refused to test any

inventory. Additionally, Hartford relied on Helms’ conclusion

that humidity could not have caused damage, even though

Helms conducted only a cursory investigation, relied on

readings taken after the drying operation had largely

concluded and under different conditions, and was not

familiar with many of the electronic components or how

moisture affected them.4 Moreover, Hartford did not test any

4

Although courts have found reliance on experts can trigger the genuine

dispute doctrine, these cases generally involve multiple experts that are

clearly independent. See, e.g., Guebara, 237 F.3d at 994–95 (holding that

the conclusions of three independent investigators and suspicious conduct

by the insured provide a sufficient basis for applying genuine dispute

doctrine); Fraley v. Allstate Ins. Co., 97 Cal. Rptr. 2d 386, 391 (Cal. Ct.

App. 2000) (“The ‘genuine dispute’ doctrine may be applied where the

insurer denies a claim based on the opinions of experts.”); Phelps v.

Provident Life & Accident Ins. Co., 60 F. Supp. 2d 1014, 1021 (C.D. Cal.

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 31

of Pyramid’s inventory until two years after the flood and

only after Pyramid had engaged its own expert and after

Helms supplemented his report to suggest testing a

representative sample might be appropriate. Finally,

Hartford’s initial estimate of building damage was very low,

$6,640.34, and Hartford did not agree to additional sums for

eight months and then delayed for another four months before

paying the additional $88,480.01. To the extent a jury finds

coverage was required for the inventory loss claim, this

evidence further supports an inference that Hartford’s

conduct was unreasonable and not entitled to protection under

the genuine dispute doctrine.

Further, the admitted portions of the declaration and

report of Gene Irizarry, Pyramid’s insurance claim expert,

support an inference that Hartford did not handle the claim in

good faith. Irizarry opined that Hartford could not have

reasonably concluded that Pyramid’s inventory was not

damaged in the absence of any testing or investigation and

should have conducted testing under the adjustment expense

that accompanies every claim. Irizarry also concluded that

Hartford was not responsive to the needs of Pyramid and

failed to assist Pyramid as Hartford was obligated to do and

that Hartford forced Pyramid to engage experts and conduct

an investigation that should have been done by Hartford.

Irizarry further stated that Hartford made an unreasonable,

“low-ball” estimate for the building repairs and unreasonably

delayed in investigating and finalizing the building

restoration claim.

1999) (surveillance film and reports from three independent doctors gave

rise to genuine dispute concerning whether insured was entitled to

benefits).

32 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

Hartford also relied on Dr. Kumar’s report, issued two

years after the flood, to deny Pyramid’s claim. An expert

report alone, however, does not demonstrate a “genuine

dispute.” See Guebera, 237 F.3d at 996. Further, even if Dr.

Kumar’s report provides Hartford with a “genuine dispute” as

of August 2007, the two-year delay and the lack of a thorough

investigation during the time period between the August 2005

flood and the August 2007 Kumar report supports Pyramid’s

claim for breach of the implied covenant of good faith and

fair dealing. See, e.g., Amadeo, 290 F.3d at 1163 (good faith

decisions based on an inadequate investigation can support a

claim for breach of good faith and fair dealing) .

“[W]hether an insurer’s denial of a claim is unreasonable

is dependent upon the facts in each case. The issue remains a

question of fact unless only one inference may be drawn from

the evidence.” Paulfrey v. Blue Chip Stamps, 197 Cal. Rptr.

501, 504 (Cal. Ct. App. 1983) (emphasis in original)

(citations omitted). Summary judgment cannot be granted

under the genuine dispute doctrine in a bad faith claim unless

“it is undisputed or indisputable that the basis for the

insurer’s denial of benefits was reasonable—for example,

where even under the plaintiff’s version of the facts there is

a genuine issue as to the insurer’s liability under California

law.” Amadeo, 290 F.3d at 1161 (citation omitted). Pyramid

produced evidence from which a reasonable jury could draw

more than one inference concerning Hartford’s conduct.

Thus, summary judgment against Pyramid’s claim for breach

of the implied covenant of good faith is inappropriate.

CONCLUSION

The district court abused its discretion in excluding the

expert evidence of David Spiegel and Ken Pytlewski. Such

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 33

evidence is admissible. The district court did not abuse its

discretion in excluding the expert evidence of Del Mortenson.

The district court erred in granting summary judgment

against Pyramid’s claims because genuine disputes of

material fact exist as to whether Hartford breached its

contract with Pyramid and breached the implied covenant of

good faith. To the extent such claims are premised on

Pyramid’s business interruption theory, however, no material

issues of fact exist, and the district court did not err in

granting summary judgment against that theory of liability.

AFFIRMED IN PART, REVERSED IN PART, and

REMANDED FOR TRIAL. The parties shall bear their own

costs on appeal.

RAWLINSON, Circuit Judge, dissenting:

I respectfully dissent because I do not agree that the

district court abused its discretion in ruling that the proposed

expert testimony of Plaintiff’s experts should be excluded. I

also disagree, in any event, that summary judgment was

improperly granted.

The central issue in this case was whether the inventory

in Plaintiff’s warehouse was damaged as a result of

floodwaters that did not even reach the shelves on which

inventory was stored. Therefore, the only potential source of

damage to the inventory was condensation. The critical

question was whether that condensation originated from the

flood waters or from some other source of humidity. Because

neither of the excluded experts opined as to that critical

34 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

causation question, the district court acted within its

discretion when it excluded their testimony.

We review the district court’s decision to admit or

exclude expert testimony for abuse of discretion. See Estate

of Barabin v. AstenJohnson, Inc., 740 F.3d 457, 460 (9th Cir.

2014) (en banc). The district court is given “broad latitude”

in performing this gatekeeping function and no Daubert1

hearing is required. Id. at 463. A district court abuses its

discretion only if it uses an incorrect legal standard or makes

factual findings that are “illogical, implausible, or without

support in inferences that may be drawn from facts in the

record. . . .” United States v. Hinkson, 585 F.3d 1247, 1262

(9th Cir. 2009) (en banc) (citation, footnote reference and

internal quotation marks omitted). None of these judicial

infractions was committed by the district court judge.

Admission or exclusion of expert opinion testimony in

federal courts is governed by Rule 702 of the Federal Rules

of Evidence. That rule provides:

A witness who is qualified as an expert by

knowledge, skill, experience, training, or

education may testify in the form of an

opinion or otherwise if:

(a) the expert’s scientific, technical, or other

specialized knowledge will help the trier of

fact to understand the evidence or to

determine a fact in issue;

1

Daubert v. Merrell Dow Pharm. Inc., 509 U.S. 579 (1993).

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 35

(b) the testimony is based on sufficient facts

or data;

(c) the testimony is the product of reliable

principles and methods; and

(d) the expert has reliably applied the

principles and methods to the facts of the

case.

At a minimum, the proffered testimony must be “relevant

and reliable.” Barabin, 740 F.3d at 463. To be relevant, the

proffered evidence must “logically advance a material aspect

of the party’s case.” Id. (citation omitted).

The district court rejected the opinion testimony of

proffered expert Spiegel on the basis that Spiegel was not

“qualified as an expert on the . . . specialized data on which

he purports to opine. . . .” This ruling by the district court

was not “illogical, implausible or without support in

inferences that may be drawn from facts in the record. . . .”

Hinkson, 585 F.3d at 1262. It is undisputed that Spiegel

never inspected or tested the inventory or its packaging. In

addition, Spiegel’s calculation of “ambient air conditions in

the warehouse” was performed in October, 2005, two months

after the flood, utilizing weather information from

www.weatherground.com for the John Wayne International

Airport seven miles away. The district court acted well

within its discretion in concluding that this less than scientific

process was not “relevant and reliable,” Barabin, 740 F.3d at

463, especially given that Spiegel never actually opined on

the cause of the condensation.

36 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

Similarly, the district court excluded the opinion

testimony of proffered expert Pytlewski because he failed to

explain “what principles and methods he uses to challenge the

report [from Defendant’s expert].” The district court noted

that Pytlewski did not visit the warehouse or conduct any

independent testing. Pytlewski also failed to link his opinions

to the perceptions of the witnesses he interviewed. These

rulings were well within the discretion of the trial judge, and

we have no license to second-guess. See Barabin, 740 F.3d

at 462 (explaining that the evidentiary rulings of the trial

judge “should not be reversed absent clear abuse of

discretion”).

Even if the expert testimony should have been admitted,

any error in excluding the testimony was harmless because

neither proffered expert opined that the floodwaters caused

damage to Plaintiff’s inventory. In his report, Spiegel

expressed “concerns, that the condensation (water-films)

observed on the packaging may have compromised the

packaging and possibly the electronic components within

those packages.” (emphasis added). Rather than opining

definitively on causation, as opposed to “concerns,” Spiegel

recommended that “a qualified electronic professional should

perform independent testing, to evaluate if this inspector’s

concerns are justified.” Not only did Spiegel fail to opine on

the causation issue, he all but admitted that he was not

qualified to do so.

When asked specifically about damage to the inventory,

Pytlewski also hedged. To the question whether the

electronic components were damaged by the flood, Pytlewski

responded:

PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS 37

I certainly think that some element of

corrosion occurred as a result of that high

humidity. I don’t know that all of it did. In

fact, if it was on the shelf for a long time

there’s going to be some element of aging and

corrosion. Corrosion would occur as a result

of the aging, but I can’t tell from the

information I had necessarily, you know,

which ones that applies to without even seeing

them myself.

(Emphases added).

Pytlewski’s response failed to connect the flood to any

damaged inventory. He even conceded that the corrosion he

described could occur as a result of the inventory sitting on

the shelves for considerable lengths of time. By the end of

his statement, he admitted that he “[could not] tell from the

information [he had]” which items were corroded and which

were not.

Under California law, failure to raise a material issue of

fact regarding causation is fatal to Plaintiff’s breach of

contract claim as well as its bad faith claim. See MRI

Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins.,

187 Cal. App. 4th 766, 779 (2010) (explaining that the

covered property must be damaged and the damage must

directly “occur by the action of the fortuitous event triggering

coverage”); see also Guebara v. Allstate Ins. Co., 237 F.3d

987, 992 (9th Cir. 2001) (“Under California law, a bad faith

claim can be dismissed on summary judgment if the

defendant can show that there was a genuine dispute as to

coverage[.]”).

38 PYRAMID TECH. V. ALLIED PUBLIC ADJUSTERS

The majority opinion relies on the fact that some of

Plaintiff’s inventory displayed “corrosion, tarnish, or

discoloration.” Majority Opinion, p. 20. But that says

nothing about the cause of the corrosion, tarnish or

discoloration. After all, one of Plaintiff’s experts conceded

that corrosion could occur as a function of inventory sitting

on the shelves unused. The best the majority can muster is

“that the vast majority of [Plaintiff’s] moisture-proof

packages were much older than the industry standard

packaging shelf-life recommendation of 12 months and that

the moisture-proof package standards require lower than

dewpoint humidity. . . .” Id. at 24. Glaringly absent is any

reference to opinion testimony that any damage to the

inventory was directly caused by the floodwaters. See MRI

Healthcare, 187 Cal. App. 4th at 779. The majority faults

Defendant’s expert for failing to disprove causation. See

Majority Opinion, pp. 24–25. However, it was Plaintiff’s

burden to raise a material issue of fact regarding coverage of

its claimed loss. See Oglio Ent’mt Group, Inc. v. Hartford

Cas. Ins. Co., 200 Cal. App. 4th 573, 582 (2011). Plaintiff

failed to meet its burden, and the district court properly

entered summary judgment in favor of Defendant. See

Trishan Air, Inc. v. Federal Ins. Co., 635 F.3d 422, 434 (9th

Cir. 2011).

I agree with the majority that the district court properly

excluded Mortenson’s expert report and properly rejected

Plaintiff’s business interruption claim. As discussed, I

fervently disagree with the balance of the majority opinion.

I would affirm the district court’s judgment in its entirety. I

respectfully dissent.