Atlantic Specialty Insurance Company v. Mr. Charlie Adventures, LLC et al
ORDER, GRANTING Plaintiff's 37 Motion for Partial Summary Judgment and summary judgment; granting in part and denying in part 44 Motion for Summary Judgment; finding as moot 58 Motion to Strike ; finding as moot 59 Motion to Strike ; denying 62 Motion for Oral Argument. The parties are ORDERED to submit a proposed judgment on or before 11/21/2014 and to advise the court of any remaining issues. The Pretrial Conference scheduled for Monday, November 10, 2014 is CANCELLED. Signed by Judge Callie V. S. Granade on 11/7/2014. (mab)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ALABAMA
MR. CHARLIE ADVENTURES, LLC
and KIM P. KORNEGAY,
) CIVIL ACTION NO. 13-458-CG-N
MEMORANDUM OPINION AND ORDER
This matter is before the court on Plaintiff’s motion for partial summary
judgment (Doc. 37), Defendants’ amended motion for summary judgment (Doc. 44),
Defendants’ opposition to Plaintiff’s motion for partial summary judgment (Doc. 52),
Plaintiff’s opposition to Defendants’ motion for summary judgment (Doc. 54),
Plaintiff’s reply in support of its motion for partial summary judgment (Doc. 57),
Defendants’ reply in support of its motion for summary judgment (Doc. 60),
Plaintiff’s motions to strike testimony of experts David Stegall and Richard Schiehl
(Docs. 58 & 59), Defendants’ motion for oral argument (Doc. 62), Defendants
opposition to Plaintiff’s motions to strike (Docs. 65 & 66), and Plaintiff’s reply in
support of its motions to strike (Doc. 67). After review of the pending motions, the
court finds that oral argument is not necessary and therefore denies said motion.
The court further finds that for the reasons stated below, Plaintiff’s motion for
partial summary judgment should be granted and Defendant’s motion for summary
judgment should be granted in part and denied in part.
This case involves an insurance claim for damage to Defendants’ yacht, the
“Mr. Charlie,” and its contents by a fire that occurred on March 3, 2013. Plaintiff,
Atlantic Specialty Insurance Company (“Atlantic”) filed its complaint seeking a
declaration that it does not owe coverage for the fire and Defendants asserted
counterclaims for breach of contract and bad faith. (Docs. 1, 16).
Atlantic issued a yacht-insurance policy to Mr. Charlie Adventures, LLC
effective June 15, 2012 to June 15, 2013. (Doc. 36-3). Defendant Kim P. Kornegay is
named in the policy as additional “Insured Person.” (Doc. 36-3, p. 6). The policy
covered the yacht up to an agreed value of $800,000 and for personal effects such as
the contents of the yacht up to $5,000. (Doc. 36-3, p. 3). The policy covered
“[a]ccidental, direct physical loss of or damage to the insured property” but
contained an exclusion stating that it would not pay “any loss, damage or expense
caused by or resulting from:”
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;
Your failure to maintain the covered yacht in good condition and
(Doc. 36-3, p. 11).
On March 3, 2013, while Mr. Kornegay was operating the yacht, it reportedly
caught fire and burned to the waterline. (Doc. 16, p. 3). Atlantic was notified of the
fire the next day and the claim was assigned to Atlantic’s Senior Claims Adjuster,
Rita Boggan. (Doc. 33-1, p. 182). Ms. Boggan’s supervisor, Joe Gallagher, is
responsible for making the final decision on whether to pay or deny the claim. (Doc.
44-2, pp. 3-4). On March 4, 2013, Atlantic hired Guy Plaisance, a marine surveyor,
to investigate the loss. (Doc. 44-5, p. 3). On March 19, 2013, Atlantic hired Gary
Jones, a fire investigator, to determine cause and origin of the fire. (Doc. 44-8, p. 3).
On March 29, 2013, Plaisance wrote to Atlantic stating that he believed the
starboard main engine severely overheated as a result of the raw water inlet
strainer on the bottom being heavily impacted with marine growth. (Doc. 44-5, p.
35). Plaisance further stated that the overheating condition could have created an
intense exhaust heating which would have melted the neoprene rubber hose
connecting the fiberglass exhaust tube to the riser and discharge tube. (Doc. 44-5, p.
Atlantic retained mechanics Tom Elliot and Ralph Holloway of Middleton
Marine to examine the engines. (Doc. 33-1, p. 88; Doc. 44-5, p. 9). On April 18, 2013
Middleton tore down the starboard engine for inspection and found the engine did
not show signs of overheating. (Doc. 32-5, p. 11; Doc. 44-5, pp. 230-231). The engine
was later stored at the Dog River Marina outside, exposed to the weather. (Doc. 445, pp. 4-5). On April 20, 2013, Plaisance sent an email to Gary Jones, Tom Elliot
and Ralph Holloway with a copy going to Rita Boggan asking whether it was
possible for the exhaust temperature to get above 257 degrees Fahrenheit with
limited seawater flow through the engine and the engine not drastically overheat to
a point of failure, yet the hot exhaust gas start burning the hose and gas pipe. (Doc.
34-1, pp. 27-31). His email stated that this was his primary question. Plaisance did
not know if he ever got an answer to his question. (Doc. 34-1, p. 32-33). Plaisance is
sure somebody concurred, whether in writing or orally, but Gary Jones did not
respond, there is no record of a response from anyone else and Plaisance does not
remember whom or if anyone responded. (Doc. 34-1, pp. 32-34). Boggan and
Gallagher were aware that the engines did not overheat. (Doc. 44-4, p. 9; Doc. 44-2,
Atlantic retained Dr. Kendall Clarke, a metallurgist, to determine the
percent reduction in flow area on both the starboard and port seawater intake
screens. (Doc. 44-9). On June 28, 2013, Gary Jones issued a report classifying the
fire as undetermined, pending the materials testing to be completed by Dr. Clarke.
(Doc. 44-8, p. 7). Dr. Clarke determined that the intake screen from the port engine
had an open area of 3.55 inches squared and the starboard screen had an open area
of 3.85 inches squared. (Doc.44-9, p. 3). Plaisance relied on an employee of the
company that manufactures the intake screens to calculate whether the pump
would flow enough water through the screens. (Doc. 44-10, p. 18). However,
Plaisance did not know Moran’s qualifications and only spoke to Moran over the
phone. (Doc. 34-1, pp. 36-38, 57-58). Additionally, Plaisance initially sent Mr.
Moran the data sheet for a different engine than is at issue here. (Doc. 34-1, pp. 364
38). Plaisance later realized the mistake and informed Moran, but Moran did not
recalculate the flow rate. (Doc. 34-1, p. 44). Jones recommended to Plaisance that
several items be inspected because they “will provide physical documentation to
prove or disprove this theory” but Jones did not know if they were ever done. (Doc.
35-1, pp. 14-18).
Guy Plaisance and Gary Jones ultimately concluded that the fire originated
in the engine compartment in the vicinity of the aft end of the starboard engine and
resulted from the seawater intake screen for the starboard strainer being restricted
by marine growth. (Docs. 34-2, 35-6). Atlantic denied the insurance claim based on
the reports of Jones and Plaisance. Atlantic concluded that coverage was excluded
by the policy because the loss results from “marine life” and/or Defendants’ “failure
to maintain the covered yacht in good condition and repair.”
Defendants moved to exclude the opinions of Guy Plaisance and Gary Jones
under Rules 403 and 702. (Docs. 34 & 35). This court granted Defendants’ motions
to exclude, finding that Plaisance and Jones’ determination of the cause of the fire
did not stem from a reliable methodology, sufficient factual basis, and reliable
application of the methodology to the facts. (Doc. 75).
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a) provides that summary judgment shall
be granted: “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.” The trial court’s
function is not “to weigh the evidence and determine the truth of the matter but to
determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 249 (1986). “The mere existence of some evidence to support the
non-moving party is not sufficient for denial of summary judgment; there must be
‘sufficient evidence favoring the nonmoving party for a jury to return a verdict for
that party.’” Bailey v. Allgas, Inc., 284 F.3d 1237, 1243 (11th Cir. 2002) (quoting
Anderson, 477 U.S. at 249). "If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted." Anderson, at 249-250.
(internal citations omitted).
The basic issue before the court on a motion for summary judgment is
“whether the evidence presents a sufficient disagreement to require submission to a
jury or whether it is so one-sided that one party must prevail as a matter of law.”
See Anderson, 477 U.S. at 251-252. The moving party bears the burden of proving
that no genuine issue of material fact exists. O'Ferrell v. United States, 253 F.3d
1257, 1265 (11th Cir. 2001). In evaluating the argument of the moving party, the
court must view all evidence in the light most favorable to the non-moving party,
and resolve all reasonable doubts about the facts in its favor. Burton v. City of Belle
Glade, 178 F.3d 1175, 1187 (11th Cir. 1999). “If reasonable minds could differ on
the inferences arising from undisputed facts, then a court should deny summary
judgment.” Miranda v. B&B Cash Grocery Store, Inc., 975 F.2d 1518, 1534 (11th
Cir. 1992) (citing Mercantile Bank & Trust v. Fidelity & Deposit Co., 750 F.2d 838,
841 (11th Cir. 1985)).
Once the movant satisfies his initial burden under Rule 56(c), the non-moving
party "must make a sufficient showing to establish the existence of each essential
element to that party's case, and on which that party will bear the burden of proof
at trial." Howard v. BP Oil Company, 32 F.3d 520, 524 (11th Cir. 1994)(citing
Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986)). Otherwise stated, the nonmovant must “demonstrate that there is indeed a material issue of fact that
precludes summary judgment.” See Clark v. Coats & Clark, Inc., 929 F.2d 604, 608
(11th Cir. 1991). The non-moving party “may not rely merely on allegations or
denials in its own pleading; rather, its response .... must be by affidavits or as
otherwise provided in this rule be set out specific facts showing a genuine issue for
trial.” Vega v. Invsco Group, Ltd., 2011 WL 2533755, *2 (11th Cir. 2011). “A mere
‘scintilla’ of evidence supporting the [non-moving] party’s position will not suffice;
there must be enough of a showing that the jury could reasonably find for that
party.” Walker v. Darby, 911 F.2d 1573, 1577 (11th Cir. 1990) (citation omitted).
“[T]he nonmoving party may avail itself of all facts and justifiable inferences in the
record taken as a whole.” Tipton v. Bergrohr GMBH-Siegen, 965 F.2d 994, 998 (11th
Cir. 1992). “Where the record taken as a whole could not lead a rational trier of fact
to find for the non-moving party, there is no genuine issue for trial.” Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 at 587 (1986) (internal
quotation and citation omitted).
B. Motions to Strike the Testimony of David Stegall and Richard Schiehl
Atlantic moves to strike testimony by marine-surveyor Richard Schiehl
concerning his opinion of Mr. Plaisance’s handling of the investigation of the fire
and testimony by insurance expert, David Stegall, concerning Atlantic’s
interpretation of the exclusion clauses contained in the insurance policy at issue in
this case. After reviewing the testimony, the court finds that the disposition of
these motions to strike would have no effect on the court’s decision below to grant
Atlantic’s motion for partial summary judgment on Defendants’ bad faith claim.
Nor, would they have any bearing on Defendants’ motion for summary judgment on
their breach of contract claim. Accordingly, the court finds the motions to strike
(Docs. 58 & 59) are MOOT.
C. Motions for Summary Judgment
Plaintiff moved for summary judgment of Defendants’ counterclaim for bad
faith. (Doc. 37). Defendants have moved for summary judgment on both their
counterclaim for breach of contract and for bad faith.
1. Counterclaim for Breach of Contract
The elements for a breach of contract claim are: “(1) the existence of a valid
contract binding the parties in the action, (2) [plaintiff’s] own performance under
that contract, (3) the defendant’s nonperformance, and (4) damages.” Southern Med.
Health Sys., Inc. v. Vaughn, 669 So.2d 98, 99 (Ala. 1995) (citations omitted). There
is no dispute that a valid contract existed, that the defendants performed under
that contract and that defendants sustained damages. The only issue is whether
Atlantic’s denial of the claim constitutes nonperformance.
Atlantic claims it performed under the contract because Defendants’
insurance claim was excluded by the policy. Specifically, Atlantic claims it was
excluded because the loss resulted from “marine life” and/or Defendants’ “failure to
maintain the covered yacht in good condition and repair.” However, the opinions of
Atlantic’s experts, Guy Plaisance and Gary Jones, as to the cause of the fire have
been excluded as unreliable. As such, Atlantic has no reliable evidence as to the
cause of the fire and cannot support its contention that the fire was caused by
marine life and/or Defendants’ failure to maintain the yacht. The insurer bears the
burden of demonstrating that these exclusions apply. Acceptance Ins. Co. v. Brown,
832 So.2d 1, 12 (Ala. 2001) (citing Fleming v. Alabama Farm Bureau Mut. Cas. Ins.
Co., 293 Ala. 719, 310 So.2d 200, 202 (1975)). Thus, Atlantic has no evidence to
counter Defendants’ contention that their fire claim was covered by the policy and is
due to be paid. Accordingly, the court finds that summary judgment should be
granted in favor of Defendants as to their counterclaim for breach of contract.
2. Counterclaim for Bad Faith
The tort of bad-faith refusal to pay a claim has four elements:
(a) a breach of insurance contract, (b) the refusal to pay claim, (c) the
absence of arguable reason, (d) the insurer's knowledge of such
absence—with a conditional fifth element: “(e) if the intentional failure
to determine the existence of a lawful basis is relied upon, the plaintiff
must prove the insurer's intentional failure to determine whether
there is a legitimate or arguable reason to refuse to pay the claim.”
EMCASCO Ins. Co. v. Knight, 2014 WL 5020044, *15 (N.D. Ala. Oct. 7, 2014)
(quoting National Sec. Fire & Cas. Co. v. Bowen, 417 So.2d 179, 183 (Ala. 1982)).
“The plaintiff asserting a bad-faith claim bears a heavy burden.” Shelter Mut. Ins.
Co. v. Barton, 822 So.2d 1149, 1154 (Ala. 2001) (citing LeFevre v. Westberry, 590
So.2d 154, 159 (Ala. 1991)). “[A] finding of bad faith based upon rejection of an
insurer's legal argument should be reserved for extreme cases.” Id. (quoting Safeco
Ins. Co. of America v. Sims, 435 So.2d 1219, 1226 (Ala. 1983) (Jones, J., concurring
specially)). “The right of an insurer to deny a claim on any arguable legal issue is to
be as zealously guarded as is its right to decline benefits on any debatable issue of
fact, the test of reasonableness being the same.” Id. (quoting Safeco supra).
In the instant case, the court determined above that there has been a breach
of the insurance contract and there is no dispute that Atlantic has refused to pay
the claim. However, Atlantic contends that it had an arguable reason for denying
the claim and that it did not intentionally fail to determine whether there was a
legitimate or arguable reason. Atlantic reports that it diligently investigated the
claim and relied on the opinions of its experts, Guy Plaisance and Gary Jones.
Although this court has now excluded those opinions, there is no evidence Atlantic
knew that the opinions should not be relied upon. “To defeat a bad faith claim, the
defendant does not have to show that its reason for denial was correct, only that it
was arguable.” Liberty Nat. Life Ins. Co. v. Allen, 699 So.2d 138, 143 (Ala. 1997).
Accordingly, at the time of the denial Atlantic appears to have had an arguable
reason to deny the claim.
Defendants cite three cases to support their contention that Atlantic cannot
rely on its expert reports as an arguable reason for denial: White v. State Farm &
Cas. Co., 953 So.2d 340, 350 (Ala. 2006); Alfa Mut. Fire Ins. Co. v. Thomas, 738
So.2d 815, 822-23 (Ala. 1999); and Livingston v. Auto Owners Ins. Co., 582 So.2d
1038, 1042-43 (Ala. 1991). However, this court does not find that these cases apply
to this case.
In White, the insurance company denied a portion of a claim for replacing a
damaged roof based on a notation in the file that the quoted roof was an “upgrade”
and that that fact had been “confirmed by the contractor.” 953 So.2d at 350. The
policy in question did not mention “upgrades” but required that damaged property
be replaced with property “of like kind and quality.” Id. There were no expert
reports on the issue, in fact little if any investigation was done at all on the issue,
and other evidence in the case indicated that the roof was not an upgrade but was
in fact a downgrade. Id. However, also at issue in White, unlike the instant case,
was the fact that two insurance agents had allegedly told the insured that the claim
would be paid the next day and that the insured could proceed with the quoted
repairs. Id. The insured was never told that there was any question whether the
claim would be paid and the insured signed a contract to have the roof repaired and
the work began a few days later. Id. at 344. When the insured did not receive the
check he tried to contact the insurance agent, but could never reach her. Id. The
insured finally spoke to the agent’s team leader and was told that the agent had not
done a good job on the claim and that she did not normally handle that type of
claim. Id. Ultimately, the insured learned that the insurance company would only
pay a portion of the claim. Id. The White Court discussed the circumstances, but
merely found that further proceedings were necessary before it could be determined
whether the insurance company breached its contract with the insured and whether
it was in bad faith. Id. at 351. The White case is not analogous to the instant case
as the insurance company did not rely on the opinion of an expert, but on a notation
by its agent who the insurance company knew had done a poor job. Additionally, in
this case there is no allegation that Atlantic told Defendants it would pay the claim
in full and then delayed payment before it ultimately denied Defendants’ claim.
Moreover, the White Court did not determine whether it was proper for the
insurance company to rely on the notation, but merely found that the case should
In Thomas, the insurance company denied a claim for coverage of a house
that was damaged by Hurricane Opal. 738 So.2d 815. The insurance company
asserted that it had an arguable basis for denying coverage because when it sent its
agent and an adjuster to investigate the claim, they found no damage. Id. at 822.
However, there was evidence that the agent and the adjuster “stayed at the home
for only a few minutes; made no attempt to see if [the insured] was at home or to
discuss with her the reported damage; took some pictures of the residence; did not
walk around the entire house; and made no attempt to inspect the roof.” Id. at 819.
Additionally, a neighbor testified that the damage to the roof, the siding, and the
outbuilding was obvious. Id. The Thomas Court found that there was sufficient
evidence for the claim to go to the jury. Id. at 822. In the instant case, unlike
Thomas, a determination of whether the claim should be paid was not made on
evidence that was open and obvious to the insurance agent. The insurance agent in
Thomas did not rely on any expert report. In this case, Atlantic agreed that there
was damage but could not determine whether the damage was covered by the policy
without relying on experts to determine the cause of the fire. There has been no
suggestion that Atlantic’s agents were knowledgeable about yacht engines or fire
investigation. There is no evidence in this case that the agents had reason to
disbelieve the final conclusions of the experts.
In Livingston, the insured’s house was destroyed by fire. 582 So.2d at 1039.
The insurance company hired an independent adjuster, an appraiser, and a fire
investigator to investigate the claim and the cause of the fire. Id. There was
evidence that the fire was incendiary but the insureds were not living in the house
at the time of the fire and the insurance company was unable to uncover any real
evidence that the insureds were responsible for the fire. Id. at 1039-40. The
adjuster, the fire investigator and the state fire marshal completed their
investigations and found no evidence that could remotely tie the insureds to the
setting of the fire Id. A month after all the reports were complete, the insurance
company had still not paid the claim and the insureds sued for breach of contract,
misrepresentation and bad faith failure to pay. Id. a 1040. The Livingston Court
held that the Insurance company’s investigation was protracted and that its delay
was unwarranted and amounted to a denial of the claim. Id. at 1042. The court
further found that mere suspicion and speculation that new evidence will present
itself at some future date is not reasonable grounds upon which to deny a claim. Id.
at 1043 (citing Chavers v. National Sec. Fire & Cas. Co., 405 So.2d 1 (Ala. 1981)).
The insurance company in Livingston did not rely on their expert reports, in fact if
it had, it would have paid the claim promptly. The Livingston case is not analogous
to the instant case because there is no allegation that after the experts completed
their investigation and found no reason to deny the claim, Atlantic denied it
anyway. Nor did Atlantic unreasonably delay the status of the claim hoping that
some defensive matter could possibly emerge.
Defendants also contend that Atlantic intentionally failed to determine the
existence of a lawful basis to deny the claim by (1) intentionally or recklessly failing
to investigate, (2) intentionally or recklessly failing to properly subject the claim to
cognitive evaluation or review, (3) creating its own debatable reason for denying the
claim and (4) relying on an ambiguous portion of the policy as a lawful basis to deny
the claim. However, since the court has found that Atlantic had an arguable reason
to deny the claim, it is questionable whether an intentional failure to determine
whether there is a legitimate or arguable reason is even relevant. As the U.S.
District Court for the Middle District of Alabama has explained:
Although the insured can use the intentional failure to determine
whether or not there was any lawful basis for refusal of the claim (i.e.,
tier two of the Chavers test) as evidence that no lawful basis for refusal
ever existed, the fact remains that in order for the insureds to recover
on the tort of bad faith, no lawful basis must exist for the insurer's
denial of the claim. See Barnes, 405 So.2d at 924; and Lavoie, 470
So.2d at 1082 (Torbert, C.J., dissenting). In other words, an insurer's
intentional, reckless or negligent failure to investigate or evaluate a
claim is only an element by which the insured may prove that no
lawful basis for refusal existed. The insurer's “subpar” investigation
cannot in and of itself sustain a tort action for bad faith.
State Farm Fire & Cas. Co. v. Balmer, 672 F.Supp. 1395, 1405 (M.D. Ala. 1987).
“No matter how badly the insurer acted in investigating and evaluating the claim, if
there was a debatable reason for refusing to pay the claim, when payment was
refused, the insured was not entitled to prompt payment.” Id. at 1406 (italics and
citation omitted). “The lack of proper investigation and evaluation is significant in
proving [the crucial] element of the tort, namely knowledge by the insurer of the
lack of a debatable reason.” Id. (citation omitted). In the instant case, looking at the
case in the light most favorable to Defendants, the court finds that the evidence
does not show that Atlantic knew there was no debatable reason.
Although the agents knew the initial investigation left the cause of the fire
undetermined and that the engine was found to have not overheated, there is no
evidence that Atlantic or its claim agents had any reason to disbelieve the experts
when they ultimately opined that the cause of the fire was marine growth on the
screens. As previously mentioned, there is no evidence that the agents were
knowledgeable on yacht engines or fire investigation. Nor is there any evidence
that Atlantic had any notice that the experts’ reports should not have been relied
Defendants also point to the language of the policy, contending that the
provision relied upon to deny the claim is ambiguous. However, even if the policy
provisions were found to be ambiguous, Atlantic can rely on any arguable reason for
denial. Thus, their interpretation of the policy need only be arguable, not the
correct and only possible interpretation.
For the reasons stated above, Plaintiff’s motion for partial summary
judgment (Doc. 37), is GRANTED and summary judgment is hereby granted
in favor of Plaintiff as to Defendants’ counterclaim for bad faith.
Defendants’ amended motion for summary judgment (Doc. 44), is GRANTED in
part and DENIED in part, to the extent that summary judgment is granted
in favor of Defendants on their counterclaim for breach of contract and
Defendants’ motion for summary is denied as to their counterclaim for bad
faith. Plaintiff’s motions to strike the testimony of experts David Stegall and
Richard Schiehl (Docs. 58 & 59) have been found to be MOOT. And lastly,
Defendants’ motion for oral argument (Doc. 62) is DENIED.
Although the parties did not actually move for summary judgment on
Plaintiff’s claim for declaratory judgment, the above rulings appear to conclude that
claim as well. The parties are ORDERED to submit a proposed judgment on or
before November 21, 2014 and to advise the court of any remaining issues. The
Pretrial Conference scheduled for Monday, November 10, 2014 is hereby
DONE and ORDERED this 7th day of November, 2014.
/s/ Callie V. S. Granade
UNITED STATES DISTRICT JUDGE
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