Westfield Insurance Co. v. TCFI Bell SPE III LLC

          ENTRY ON CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT

          TANYA WALTON PRATT, JUDGE

         This matter is before the Court on cross-motions for partial summary judgment filed pursuant to Federal Rule of Civil Procedure 56 by Plaintiff Westfield Insurance Company (“Westfield”) (Filing No. 99; Filing No. 143) and Defendant Bell Aquaculture LLC (“Bell”) (Filing No. 108). After suffering a significant loss resulting from an incident at its facilities, Bell submitted a claim to Westfield to obtain insurance proceeds to cover its losses. A dispute arose between Westfield and Bell regarding the coverage provided by the insurance policy for Bell's claims. This litigation followed. The parties filed cross-motions for partial summary judgment regarding coverage under a specific endorsement in the policy, and Westfield filed a motion for partial summary judgment on Bell's counterclaim for insurance bad faith. For the following reasons, Westfield's motion for partial summary judgment on coverage is granted in part and denied in part, Bell's motion on coverage is granted in part and denied in part, and Westfield's motion for partial summary judgment on the bad faith counterclaim is granted.

         I. BACKGROUND

         Westfield is an insurance company based out of Westfield Center, Ohio. Westfield issued a commercial package insurance policy, No. CAG 4 490 989, to Bell, which policy was effective during the policy period of August 15, 2014, to August 15, 2015. The policy provides certain first-party property and third-party liability coverages and includes “Equipment Breakdown Coverage, ” which is provided by an endorsement attached to and forming a part of the “Commercial Property Coverage Part” of the policy (“the EBC Endorsement”) (Filing No. 100 at 2-3; Filing No. 100-1 at 16, 46).

         Bell is in the business of aquaculture, which is,

the breeding, rearing, and harvesting of fish in all types of water environments including indoors, ponds, rivers, lakes, and the ocean. Aquaculture can be in fresh or marine water. There are different types of aquaculture - net pen, land-based, closed-containment, flow through and recirculating. Bell Farms uses a land-based, closed-containment RAS (Recirculating Aquaculture System).

(Filing No. 100-32 at 5.) Bell was founded in 2005 and is based in Redkey, Indiana. Id. at 2. It's commercial fish farm is located in Albany, Indiana, where Bell has farmed trout, salmon, and perch to be sold to various customers such as restaurants and grocery stores (Filing No. 108-1 at 2; Filing No. 100-33 at 5). Bell's aquaculture operation consists of several buildings where fish eggs and fingerlings are hatched, reared, and grown out in recirculating tanks. The fish are moved to the various tanks as they grow and become ready for processing. Once the fish have grown to the desired size, they are shipped to Bell's processing site in Redkey where they are processed, packaged, and sold. Id.

         Westfield had insured Bell's commercial fish farm since at least 2008 (Filing No. 108-2 at 2). During the course of the insuring relationship, Westfield visited Bell's facility with one of these visits occurring on July 1, 2015 (Filing No. 108-12 at 2). Electricity is required to operate Bell's fish farm. One piece of equipment that Bell relied on to sustain the electrical current being supplied to Bell's facilities was an ASCO Power Technologies 7000 Series Automatic Transfer Switch. The automatic transfer switch is a three-phase electrical switch through which electrical power flows and, when operating correctly, helps keep Bell's pumps and other equipment functioning. The automatic transfer switch does not independently supply electricity; rather, it is supposed to transfer an electrical load to a backup generator when there is a power outage (Filing No. 100 at 4-5; Filing No. 100-13 at 5).

         In the early morning hours of July 22, 2015, the automatic transfer switch, which was to provide protection to the Row 3 Building in the event of a power outage, failed (Filing No. 108-1 at 3). While making his rounds, the night watchman walked by the automatic transfer switch and smelled burning or smoldering wires. He opened the door to the building and noticed that the lights were off, and it was quiet. When everything is operating properly, it is noisy. He immediately knew something was wrong and called the farm manager to have him come back to the farm (Filing No. 100-11 at 6).

         The farm manager arrived back at the farm around 1:00 a.m. He smelled burning, he noticed that the lights were off in the Row 3 Building, and he could hear that the pumps were off. The automatic transfer switch box was hot to the touch. After opening the front panel of the box, it was apparent that something had burned up inside. The head of maintenance, who the farm manager had called, then arrived at the farm around 1:30 a.m. to help (Filing No. 100-12 at 4-8). He opened the inner part of the automatic transfer switch box and noticed melted plastic, black soot, and ash. The purpose of the automatic transfer switch was to transfer power to the backup generator in the event of a power outage from the line power, but the backup generator was not running, and thus, the tank pumps were not functioning. With the help of an electrical contractor, they eventually were able to restore power through the generator around 5:00 a.m. (Filing No. 100-13 at 4-6).

         When the automatic transfer switch failed and there was a loss of electricity, the tanks could not recirculate water, introduce oxygen to the fish, or remove waste. As a result, approximately 800, 000 of Bell's fish died. These fish were nearly ready for harvesting, processing, and sale (Filing No. 108-1 at 3). Bell would later submit a claim for insurance coverage for the fish loss in the amount of $1, 649, 118.00, consisting of the loss of the fish inventory itself ($1, 551, 712.00) as well as the loss of the fish feed ingredient inventory ($97, 406.00). Id. at 4.

         At approximately 4:42 a.m. that same morning, Bell notified an independent adjusting firm of the incident and property loss. The property loss notice was then promptly submitted to Westfield at about 4:56 a.m. The notice requested immediate assistance from an adjuster (Filing No. 100-10 at 2-3). After Westfield received the notice, it opened a claim, acknowledged receipt of the loss notice, began an investigation, and assigned responsibility to conduct Westfield's investigation and claim adjustment to Timothy Call (“Call”) (Filing No. 100 at 3). Westfield had entered into a reinsurance agreement with The Hartford Steam Boiler Inspection and Insurance Company (“HSB”), pursuant to which HSB reinsured the policy's EBC Endorsement. Thus, Westfield notified HSB, its equipment breakdown reinsurer, of the loss notice, and HSB also opened a claim and undertook an investigation. Id.

         On July 23, 2015, the day after the incident, Call traveled from his office in West Virginia to Bell's commercial fish farm in Albany, Indiana. He inspected the equipment and other property involved in the reported loss, took photographs of his observations, and spoke with Bell's CEO, Robert Davis. He also reviewed a comprehensive business background report on Bell, which revealed a default judgment, a tax penalty, and other risk factors for Bell. Call decided to retain a forensic accounting consultant, subrogation counsel, and an electrical engineering consultant to assist Westfield with the continued investigation of Bell's claim (Filing No. 100 at 4; Filing No. 144 at 2-3).

         On July 24, 2015, Call and Westfield's subrogation counsel and electrical engineering consultant visited Bell's facility with Steven Smith (“Smith”), who was assigned responsibility by HSB to investigate and adjust the claim. They conducted additional inspections of the equipment and other property involved in the reported loss, took photographs, and interviewed some of Bell's employees. Smith asked Bell for maintenance records and quotes for the replacement of the automatic transfer switch (Filing No. 147 at 3; Filing No. 144 at 3).

         Westfield and HSB decided, based on their initial investigation, that Bell had suffered an equipment breakdown accident, and they so advised Bell and proceeded with their claim adjustment efforts (Filing No. 100 at 5). On July 29, 2015, Westfield issued an initial reservation of rights letters to Bell, which identified various issues related to coverage, including exclusions for losses to animals (Filing No. 100-14 at 2-5).

         On August 4, 2015, Call, Smith, and Joseph Rauch (“Rauch”), a member of Westfield's special investigation unit, traveled to Bell's facility. They again inspected the automatic transfer switch, and Rauch took the recorded statements of Bell's night watchman, farm manager, maintenance manager, and CEO. Smith again requested that Bell provide documentation to support its claim (Filing No. 147 at 3; Filing No. 100 at 4; Filing No. 100-11; Filing No. 100-12; Filing No. 100-13).

         In early August 2015, Westfield issued an advance payment of $200, 000.00 to Bell under the equipment breakdown coverage (Filing No. 100-19 at 2; Filing No. 100-16 at 3). Throughout the following weeks and months, Westfield and HSB sent correspondence to Bell requesting additional documentation and information to support Bell's claim, requesting sworn statements for proof of loss, and discussing the various policy provisions that they understood to create coverage issues for Bell's claim. Bell generally responded with counter arguments to the insurers' coverage positions and requested additional advance payments in the amount of one million dollars. Westfield and Bell also each retained forensic accounting consultants to evaluate Bell's business loss claim (Filing No. 100-15; Filing No. 100-16; Filing No. 147-1; Filing No. 100-17; Filing No. 100-18; Filing No. 144-1; Filing No. 108-5).

         Westfield issued additional advance payments to Bell, with Bell's mortgage company listed on the checks as an additional payee pursuant to the insurance policy. The following advance payments were made: $200, 000.00 on September 4, 2015; $250, 000.00 on September 18, 2015; $350, 000.00 on October 21, 2015; and $65, 772.00 on January 8, 2016. The last payment included Dymax as an additional payee on the check, which was issued to replace the automatic transfer switch. Each of these payments was issued to Bell with a reservation of rights and an explanation that the payments were not for the loss of Bell's fish (Filing No. 100-20; Filing No. 100-21; Filing No. 100-22; Filing No. 100-23).

         At Westfield's requests, Bell submitted sworn statements for proof of loss in October 2015, January 2016, and March 2017, claiming more than six million dollars for its loss (Filing No. 100-24; Filing No. 100-25; Filing No. 100-26; Filing No. 100-27). Following receipt of Bell's proofs of loss, Westfield and HSB asked to take examinations under oath of Bell's CEO, farm manager, and director of sales integration/business operations. Westfield conducted these examinations under oath on February 29, March 1, June 7, and June 8, 2016. Westfield and HSB then continued their investigation and claim adjustment efforts, gathering and reviewing additional documents, working with a forensic accountant, and further assessing the coverage issues presented by Bell's claim (Filing No. 100 at 6-7).

         Westfield issued a coverage position letter to Bell on August 24, 2016 (Filing No. 100-33), and the following day, Westfield removed this case to from the Marion Superior Court (Indiana) to federal court, based on diversity jurisdiction (Filing No. 1).

         Co-defendant TCFI Bell SPE III LLC (“TCFI”) had purchased and was the holder of various promissory notes executed by Bell (Filing No. 1-2 at 56-57). Bell defaulted on its payment obligations under those notes, and TCFI filed a complaint with the Marion Superior Court to collect on the notes. That case was styled as TCFI Bell SPE III LLC v. Bell Aquaculture LLC, Cause No. 49D04-1604-CC-013622. On July 19, 2016, the State Court granted TCFI a default judgment against Bell in the original principal amount of $7, 715, 649.70. Based on its understanding that Bell had submitted insurance claims to Westfield, TCFI filed a “Verified Motion for Entry of Asset Garnishment Order” in the state court on August 4, 2016, less than a month after TCFI obtained a default judgment against Bell (Filing No. 1-2 at 60). Following removal of the state court action to this Court and after an October 13, 2016 status conference, the Court entered an “Order Realigning Parties” (Filing No. 23), which realigned Westfield as the plaintiff and Bell and TCFI as defendants. The Order also required Westfield to file a complaint on or before October 28, 2016.

         On October 28, 2016, Westfield filed its Complaint for Declaratory Judgment and Damages (Filing No. 26). On November 18, 2016, Bell filed its Answer and also asserted counterclaims against Westfield, which included a claim for insurance bad faith and punitive damages (Filing No. 28). Bell and Westfield filed cross-motions for partial summary judgment regarding their coverage dispute about the “animal exclusion” in the EBC Endorsement, and Westfield filed a motion for partial summary judgment on Bell's counterclaim for bad faith. Co-defendant TCFI did not respond to or participate in these summary judgment motions regarding coverage and the bad faith claim. Additional facts will be provided as needed in the discussion section below.

         II. SUMMARY JUDGMENT STANDARD

         The purpose of summary judgment is to “pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Federal Rule of Civil Procedure 56 provides that summary judgment is appropriate if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Hemsworth v. Quotesmith.com, Inc., 476 F.3d 487, 489-90 (7th Cir. 2007). In ruling on a motion for summary judgment, the court reviews “the record in the light most favorable to the non-moving party and draw[s] all reasonable inferences in that party's favor.” Zerante v. DeLuca, 555 F.3d 582, 584 (7th Cir. 2009) (citation omitted). “However, inferences that are supported by only speculation or conjecture will not defeat a summary judgment motion.” Dorsey v. Morgan Stanley, 507 F.3d 624, 627 (7th Cir. 2007) (citation and quotation marks omitted). Additionally, “[a] party who bears the burden of proof on a particular issue may not rest on its pleadings, but must affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact that requires trial.” Hemsworth, 476 F.3d at 490 (citation omitted). “The opposing party cannot meet this burden with conclusory statements or speculation but only with appropriate citations to relevant admissible evidence.” Sink v. Knox County Hosp., 900 F.Supp. 1065, 1072 (S.D. Ind. 1995) (citations omitted).

         “In much the same way that a court is not required to scour the record in search of evidence to defeat a motion for summary judgment, nor is it permitted to conduct a paper trial on the merits of [the] claim.” Ritchie v. Glidden Co., 242 F.3d 713, 723 (7th Cir. 2001) (citations and quotation marks omitted). “[N]either the mere existence of some alleged factual dispute between the parties nor the existence of some metaphysical doubt as to the material facts is sufficient to defeat a motion for summary judgment.” Chiaramonte v. Fashion Bed Grp., Inc., 129 F.3d 391, 395 (7th Cir. 1997) (citations and quotation marks omitted).

         These same standards apply even when each side files a motion for summary judgment. The existence of cross-motions for summary judgment does not imply that there are no genuine issues of material fact. R.J. Corman Derailment Serv., LLC v. Int'l Union of Operating Eng'rs., 335 F.3d 643, 647 (7th Cir. 2003). The process of taking the facts in the light most favorable to the non-moving party, first for one side and then for the other, may reveal that neither side has enough to prevail without a trial. Id. at 648. “With cross-motions, [the Court's] review of the record requires that [the Court] construe all inferences in favor of the party against whom the motion under consideration is made.” O'Regan v. Arbitration Forums, Inc., 246 F.3d 975, 983 (7th Cir. 2001) (citation and quotation marks omitted).

         III. DISCUSSION

         The parties filed cross-motions for partial summary judgment regarding their coverage dispute over the “animal exclusion” in the EBC Endorsement. Westfield also filed a motion for partial summary judgment on Bell's counterclaim for bad faith. The Court will first address the cross-motions on the coverage issue and then turn to the motion on the bad faith claim.

         A. The Animal Exclusion in the EBC Endorsement

         The parties' cross-motions for partial summary judgment present a narrow issue for the Court to resolve: whether the “animal exclusion” provision in the EBC Endorsement of Westfield's policy excludes coverage under the EBC Endorsement for Bell's claim for its lost fish. Westfield asserts that the language in the endorsement clearly excludes coverage for Bell's fish loss because the language unambiguously excludes coverage for loss of animals, and fish are animals. Bell argues that fish are not animals, and thus, its fish loss is not excluded from coverage by the endorsement's language. Alternatively, Bell argues there are ambiguities in the policy, which must be resolved in favor of providing coverage.

         The Court begins with the well-known and settled case law in Indiana regarding the interpretation of insurance policies. The interpretation of an insurance policy is a question of law that is particularly appropriate for summary judgment. State Auto. Mut. Ins. Co. v. Flexdar, Inc., 964 N.E.2d 845, 848 (Ind. 2012). The goal of a court interpreting a policy is to “ascertain and enforce the parties['] intent as manifested in the insurance contract.” Buckeye State Mut. Ins. Co. v. Carfield, 914 N.E.2d 315, 318 (Ind.Ct.App. 2009). Courts “construe the insurance policy as a whole and consider all of the provisions of the contract and not just the individual words, phrases or paragraphs.” Id. “If the language is clear and unambiguous, we give the language its plain and ordinary meaning.” Id. “An unambiguous provision in an insurance policy must be enforced, even if it results in a limitation of the insurer's liability.” Nat'l Fire & Cas. Co. v. W. by & Through Norris, 107 F.3d 531, 535 (7th Cir. 1997) (citation and quotation marks omitted).

         “If, on the other hand, there is an ambiguity in the terms of an insurance policy, the terms should be construed both to favor the insured and to further indemnity.” Id. “An ambiguity exists where a provision is susceptible to more than one interpretation and reasonable persons would differ as to its meaning. However, an ambiguity does not exist merely because the parties proffer ...