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Binghamton-Johnson City Joint Sewage Bd. v. Am. Alternative Ins. Corp.

United States District Court, N.D. New York

May 13, 2015

BINGHAMTON-JOHNSON CITY JOINT SEWAGE BD.; CITY OF BINGHAMTON; and VILLAGE OF JOHNSON CITY, Plaintiffs,
v.
AM. ALTERNATIVE INS. CORP., Defendant.

ERIC F. EISENBERG, ESQ., JAMES J. BARRIERE, ESQ., NATHAN R. SABOURIN, ESQ., HINCKLEY, ALLEN & SNYDER, LLP, Albany, NY, Counsel for Plaintiffs.

TERENCE S. HANNIGAN, ESQ., HANNIGAN LAW FIRM PLLC Albany, NY, Counsel for Defendant.

DECISION and ORDER

GLENN T. SUDDABY, District Judge.

Currently before the Court, in this insurance action filed by Binghamton-Johnson City Joint Sewage Board, the City of Binghamton and the Village of Johnson City ("Johnson City") ("Plaintiffs") against Defendant American Alternative Insurance Corporation ("Defendant"), are Plaintiffs' motion for summary judgment and Defendant's motion for summary judgment. (Dkt. Nos. 47, 49.) For the reasons set forth below, Plaintiffs' motion is denied, and Defendant's motion is denied.

TABLE OF CONTENTS I. RELEVANT BACKGROUND 3 A. Plaintiffs' Complaint 3 B. Parties' Briefing on Plaintiffs' Motion 3 1. Plaintiffs' Memorandum of Law 3 2. Defendant's Opposition Memorandum of Law 4 3. Plaintiffs' Reply Memorandum of Law 7 C. Parties' Briefing on Defendant's Motion 8 1. Defendant's Memorandum of Law 8 2. Plaintiffs' Opposition Memorandum of Law 10 3. Defendant's Reply Memorandum of Law 11 D. Statements of Undisputed Material Facts 111. Undisputed Facts Material to Plaintiffs' Motion 11 2. Undisputed Facts Material to Defendant's Motion 20 II. GOVERNING LEGAL STANDARD 32 III. ANALYSIS 35 A. Plaintiffs' Motion 35 B. Defendant's Motion 39

I. RELEVANT BACKGROUND

A. Plaintiffs' Complaint

Generally, in their Complaint, Plaintiffs assert claims for declaratory judgment and breach of contract, in an attempt to recover, under a property damage and general liability insurance policy provided by Defendant, $3, 555, 993.94 in costs resulting from a structural wall collapse at the Binghamton-Johnson City Joint Sewage Treatment Plant on May 16, 2011. (Dkt. No. 1 [Plfs.' Compl.].)

B. Parties' Briefing on Plaintiffs' Motion

1. Plaintiffs' Memorandum of Law

Generally, in their motion for summary judgment, Plaintiffs assert two arguments. (Dkt. No. 47, Attach. 1 [Plfs.' Memo. of Law].)

First, Plaintiffs argue, they are entitled to a declaratory judgment stating that Defendant is obligated under the Policy to pay their losses and damages for the following reasons: (a) under an "all risk" insurance policy (such as the one in this case), losses caused by any fortuitous peril not specifically excluded under the policy will be covered; (b) when relying on an exclusion, the burden is on the insurer to show by a preponderance of the evidence that the exclusion applies; (c) more specifically, to show that an exclusion applies, the insurer must demonstrate that an interpretation favoring the insurer is the only reasonable reading of at least one of the relevant terms of exclusion; (d) here, Plaintiffs have met their initial burden of showing that a valid policy was in place at the time of the wall collapse, that they are insureds under the Policy, that the losses and damages suffered by them were to covered real and personal property, and that they satisfied their post-event-of-loss obligations by promptly notifying Defendant of the wall collapse, cooperating with Defendant's investigation, and providing Defendant with a sworn Proof of Loss statement; (e) as a result, the burden is shifted to Defendant to establish, by a preponderance of the evidence, that its denial of coverage based upon the Faulty Design and Workmanship Exclusion is the "only reasonable reading" of that exclusion; (f) Defendant has not met that burden because the losses and damages sought under the Policy (i.e., the repair and replacement of physical and process components and/or equipment of the C-Cell Complex and the contents therein) did not result from faulty design, workmanship and/or material, but rather from the collapse of the west wall of the covered personal property (the C-Cell Filter and BAF Complex); (g) moreover, the Faulty Design and Workmanship Exclusion goes on to state, "But [Defendant] will cover loss or damage that results from any of these if the loss or damage occurs in connection with any cause of loss not otherwise excluded by this coverage part" (the "Resulting Loss Exception"); and (h) to show that Plaintiffs' loss or damage has not occurred in "connection with [such a] cause of loss, " Defendant would need expert testimony, but it has disclosed no such expert. ( Id. )

Second, Plaintiffs argue, Defendant is estopped from arguing that damages resulting from the wall collapse are not covered under the Policy, because (a) by paying a portion of the cost of replacing the lost media, Defendant acknowledged that the Resulting Loss Exception to the Faulty Design and Workmanship Exclusion applies to the lost media, and (b) there is no meaningful distinction that can be drawn between the wall collapse and the loss of media. ( Id. )

2. Defendant's Opposition Memorandum of Law

Generally, in its response to Plaintiffs' motion, Defendant asserts two arguments. (Dkt. No. 56 [Def.'s Opp'n Memo. of Law].)

First, Defendant argues, Plaintiffs' contention that the Resulting Loss Exception to the Faulty Design and Workmanship Exclusion applies to the wall collapse is without merit for the following reasons: (a) the exclusion specifically excludes losses and damages "directly or indirectly " related to defects in design and workmanship; (b) Plaintiffs do not dispute that the failure of the C-Cells was the result of defects in design and workmanship that preexisted the failure (as is evident from the record); (c) Plaintiffs seek to usurp the Court's role in interpreting insurance policies by improperly relying on the self-proclaimed "expert in insurance policy interpretation" Paul Nielander, whose faulty logic and reliance on insurance practice in other states (as well as what words other insurance policies contain) renders him unqualified and his opinion irrelevant to this action under Daubert v. Merrell Dow Pharm. and Kumho Tire Co. v. Carmichael; (d) Plaintiffs interpret the Resulting Loss Exception in a way that impermissibly renders the exception greater than the exclusion itself; (e) moreover, in arguing that the "collapse" of the wall is a covered cause of loss (or, alternatively, that the Policy does not contain an exclusion for a "collapse"), Plaintiffs ignore that the collapse of the wall was the direct result of design and workmanship defects, and not some independent cause (as is evident from record); (f) in effect, Plaintiffs are attempting to treat the inevitable "collapse" of a wall (due to gravity) as something other than the result of the faulty design and workmanship of the wall; (g) contrary to Plaintiffs' interpretation, under the Resulting Loss Exception, the only instances in which the Faulty Design and Workmanship Exclusion will be negated and the loss or damage covered as occurring in connection with a non-excluded cause of loss is where the non-excluded cause of loss is something like fire, wind, snow, external collision by or contact with trees or other objects (which makes sense); and (h) if the Court adopted Plaintiffs' argument, no insurance policy would be able to exclude coverage for any reason because there would always be a circumstance in the continuum of the happening of the loss occurring (i.e. degradation, collapse, disintegration) that would not be specifically stated in the policy, which is pure sophistry. ( Id. [emphasis added].)

Second, Defendant argues, Plaintiffs' contention that Defendant is estopped from asserting a valid exclusion to coverage is without merit for the following reasons: (a) for coverage by estoppel to occur, an insured must establish that the insurance carrier's conduct resulted in the imposition of coverage where it otherwise did not exist, and that the insured was prejudiced by the carrier's subsequent denial of coverage; (b) here, Plaintiffs have not established, and cannot establish, that Defendant's conduct (in paying for the filter media and debris removal) resulted in coverage (for the wall) because the payment for the filter media and debris removal arose from separate portions of the Policy that specifically provided for payment for business property and for debris removal which are independent of any obligations or exclusions with regard to the structure (and Defendant specifically and repeatedly reserved its rights with regard to the denial of coverage for the wall when it made payment for the media and debris removal in 2011); (c) in any event, Plaintiffs have not established, and cannot establish, prejudice because recovery for the faulty design and workmanship defects complained of is available to them from the litany of engineers and contractors that Plaintiffs have sued in their state action; and (d) as a result, there is a meaningful distinction that can be drawn between the wall collapse and the loss of media. ( Id. )

3. Plaintiffs' Reply Memorandum of Law

Generally, in their reply to Defendant's response, Plaintiffs assert five arguments. (Dkt. No. 59 [Plf.'s Reply Memo. of Law].)

First, Plaintiffs argue, expert report and potential testimony of Mr. Nielander (against whom Defendant launches an ad hominem attack) are both reliable and relevant to the Court's and trier-of-fact's evaluation and interpretation of the Policy (and thus admissible) under Fed.R.Evid. 702, as is evident from the fact that Defendant has not formally moved to preclude that report and potential testimony. ( Id. )

Second, Plaintiffs argue, Defendant's opinions and conclusions lack factual and legal support, and in fact the only expert opinion that provides any analysis or conclusion regarding the proximate, or "but for, " cause of the wall collapse is that of Plaintiffs' expert, Dr. Paul G. Carr, who opines that, while elements of the design and construction of the C-Cell Filter Complex were deficient, it was actually the operation of the subject tanks, and their subjection to operating forces and varying loads and forces, which proximately led to overstress and the eventual failure and collapse of the west wall of the C-Cell Filter Complex. ( Id. )

Third, Plaintiffs argue, in Paragraph 37 of its Rule 7.1 Response, Defendant admits that "collapse" is not an excluded cause of loss under the Policy, rendering its argument that the collapse was the result of defective design or workmanship both meritless and irrelevant. ( Id. )

Fourth, Plaintiffs argue, Defendant cannot establish that the Faulty Design and Workmanship Exclusion applies because Defendant is precluded from offering expert testimony to support its defective design or workmanship and proximate cause burdens ( Id. )

Fifth, Plaintiffs argue, Defendant fails to cite a single legal or factual authority in support of its (vague) contention that the Resulting Loss Exception is inapplicable. ( Id. )

C. Parties' Briefing on Defendant's Motion

1. Defendant's Memorandum of Law

Generally, in its motion for summary judgment, Defendant argues that the Faulty Design and Workmanship Exclusion to property coverage applies and vitiates coverage for six reasons. (Dkt. No. 49, Attach. 1 [Def.'s Memo. of Law].)

First, Defendant argues, the affidavit of Binghamton-Johnson City Joint Sewage Board Superintendent Catherine Aingworth (submitted by Plaintiffs in opposition to a motion dismiss in their state court action) demonstrates that the subject wall failure occurred as the result of faulty design and workmanship in that it acknowledges, inter alia, that (1) "defects and deficiencies" appeared in the plant's systems and structures "[f]rom the beginning, " and (2) before the failure of the wall, there were "numerous leaks at the intersecting wall joints at the C-cell and N-cell walls, multiple leaks at pipe penetrations through structural walls, inadequate HVAC output, frequent mechanical failures, numerous SCADA problems, missing and malfunctioning personal computer software and licensing data, and missing as-built drawings and product submittals for the plant and its systems." ( Id. )

Second, Defendant argues, the complaint in Plaintiffs' New York State court action against its design engineers and contractors demonstrates that the subject wall failure occurred as the result of faulty design and workmanship, in that it alleges, inter alia, that (1) the plant was "plagued by numerous design defects, errors, and omissions that have compromised the structural, mechanical and operational integrity of the systems constructed and installed as part of the Phase III Improvements, " (2) its "Engineer of Record, " C&S Engineers, "failed to fulfill its duties, responsibilities and obligations" of providing and preparing "appropriate, accurate, complete, code compliant and fully coordinated documents and information to describe the overall design, components, construction and operational functions and details of the project, " (3) one of its contractors, Infilco Degremont Inc., "directed supervised and otherwise participated in the installation" of materials at the plant "in a reckless, careless, and negligent manner causing sufficient structural and related damage to the BJC Plant, " and (4) another of its contractors, C.O. Falter, "used or allowed to be used inferior, unsuitable and defective materials, unskilled and inadequate labor and inadequate equipment in the performance of its work and services." ( Id. )

Third, Defendant argues, the LMK Engineers engineering report commissioned by Plaintiffs demonstrates that the subject wall failure occurred as the result of faulty design and workmanship in that it, inter alia, (1) notes the existence of "several areas where the contractor did not comply with the drawings and specifications, " (2) warns that "failure to design the liquid retaining structures to ACI 350 criteria could lead to severe serviceability problems, " and (3) states that C&S Engineers' decision to increase the joint spacing criteria "increased the potential for cracking and leaking from shrinkage stresses, " and cautioned plaintiffs that such leakage "could affect the long term performance of the wall." ( Id. )

Fourth, Defendant argues, the EFI Global engineering report commissioned by Defendant demonstrates that the subject wall failure occurred as the result of faulty design and workmanship in that it, inter alia, (1) determines the cause of the wall failure to be "a combination of a design that did not comply to code and modifications made during the construction of the facility that further reduced the strength of the wall, " (2) identifies the "point of origin of the wall failure" as "the lack of adequate development length and/or bond at the lap splice of the main reinforcing on the inside face of the wall, " (3) notes evidence that repairs to cracks in concrete in the cell wall had been attempted before the failure of the wall, (4) determines that the west concrete wall that failed was "substantially undersized" and lacked support from the interior perpendicular walls dividing the adjacent tanks of the plant, and (5) observes that the horizontal reinforcing used at the interior dividing walls failed to comply with the design specifications called for in the

construction documents, and that the 144-foot long wall that failed was designed and constructed without any expansion or contraction jointing. ( Id. )

Fifth, Defendant argues, the 2008 and 2009 Annual Reports of Plaintiff Binghamton-Johnson City Joint Sewage Board demonstrate that the subject wall failure occurred as the result of faulty design and workmanship in that it sets forth a list of "known issues" regarding the structural integrity of the plant, including "[r]ust streaks down the walls from leaking penetrations and cracks in concrete tank walls" and "numerous cracks and leaks in concrete cell walls." ( Id. )

Sixth, Defendant argue, there is no valid exception to the Faulty Design and Workmanship Exclusion to coverage in the Policy, just as there was no such valid exception in the factually similar case of Alton Ochsner Med. Found. v. Allendale Mut. Ins. Co., 219 F.3d 501, 503 (5th Cir. 2000). ( Id. )

2. Plaintiffs' Opposition Memorandum of Law

Generally, in their response to Defendant's motion, Plaintiffs asserts two arguments. (Dkt. No. 54 [Plf.'s Opp'n Memo. of Law].)

First, Plaintiffs argue, Defendant's motion should be denied because (a) in order for Defendant to satisfy its burden and demonstrate that the design and/or construction was defective (and the proximate cause of the wall collapse), it must submit expert testimony, (b) Defendant has not submitted such expert testimony, and (c) to the contrary, Plaintiffs' expert, Dr. Paul Carr, undertakes a "causation inquiry" and concludes that it was the operation of the subject tanks and specifically their subjection to "operating forces" (consisting of "a series of varying [dynamic] loads and forces") that proximately caused overstress to, and the eventual failure and collapse of, the west wall. ( Id. )

Second, Plaintiffs argue, in any event, the collapse and loss are nonetheless covered under the Resulting Loss Exception to the Faulty Design and Workmanship Exclusion, because the covered loss or damage occurred in connection with a cause of loss not otherwise excluded by the Policy, i.e., the collapse of the wall. ( Id. )

3. Defendant's Reply Memorandum of Law

Generally, in its reply to Plaintiffs' response, Defendant asserts two arguments. (Dkt. No. 61 [Def.'s Reply Memo. of Law].)

First, Defendant argues, the expert evidence relied on by Defendant coupled with Plaintiffs' admissions (e.g., in their state action complaint and the affidavit of Aingworth in the state action) leads to in inexorable conclusion that the policy's Faulty Design and Workmanship Exclusion vitiates coverage for the losses sought by Plaintiff. ( Id. )

Second, Defendant argues, the case law cited by Plaintiffs (none of which is binding on this Court) generally supports Defendants' motion and in any event is not sufficiently analogous to this case to lend credible support to Plaintiffs' opposition. ( Id. )

D. Statements of Undisputed Material Facts

1. Undisputed Facts Material to Plaintiffs' Motion

Unless otherwise followed by citations to the record, the following material facts have been asserted and supported by Plaintiffs' in their Statement of Material Facts, and not expressly denied with a supporting record citation by Defendant in its Response thereto, and thus admitted pursuant to Local Rule 7.1 of the Local Rules of Practice for this Court, as explained below in Part II of this Decision and Order. ( Compare Dkt. No. 47, Attach. 2 [Plfs.' Rule 7.1 Statement] with Dkt. No. 56, Attach. 1 [Def.'s Rule 7.1 Response].)

1. The Binghamton-Johnson City Joint Sewage Board ("Plaintiff Board") is a public board that is comprised of members appointed by the City of Binghamton, a New York municipal corporation located in Broome County, New York ("Plaintiff Binghamton"), and the Village of Johnson City, a New York municipal corporation located in Broome County, New York ("Plaintiff Johnson City").

2. Plaintiff Board operates and maintains the Binghamton-Johnson City Joint Sewage Treatment Plant ("Plant") located at 4480 Vestal Road, Vestal, New York.

The Project

3. In 2001, pursuant to a Consent Order issued by the New York State Department of Environmental Conservation ("NYS DEC"), Plaintiffs began reconstruction of the Plant to expand its wastewater treatment facilities to meet effluent quality requirements for the discharge of treated waste water into the Susquehanna River and Chesapeake Bay Watershed and to increase the Plant's secondary treatment capacity to a peak discharge rate for finished effluent of sixty million gallons per day ("mgd") during peak demand and storm water flows in the region (the "Project").

4. As part of the Project, Plaintiffs procured a biological aerated filter ("BAF") system to replace an existing activated sludge secondary treatment process. The work included the demolition of existing Plant facilities, the construction of a seventy mgd BAF influent pump station and mechanical systems, the construction of reinforced concrete facilities and masonry buildings to house the BAF system, the conversion of four secondary clarifiers to primary clarifiers, new controls and monitoring systems, new electrical service to the filter complex, new primary sludge pumps, and additional chlorination tanks.

Catastrophic Structural Wall Collapse

5. On May 16, 2011, a fifteen-foot-high, one-hundred-foot-long portion of the exterior wall on the western side of the Plant's C-Cell Complex collapsed outward.

6. The C-Cell Complex is a series of eight biological aerated filters. Eight cells are arranged in two banks of four cells each and are separated by a pipe gallery at grade level with the backwash and effluent channels directly above the gallery. The cells are identified as C-1 through C-4 on the west side adjacent to Fuller Hollow Creek and C-5 through C-8 on the east side. Each cell contains filter media supported by a concrete slab (referred to as the monoflor slab), which is in turn directly supported off the filter base mat by a closely spaced grid of sixinch PVC pipe columns filled with concrete.

7. The collapsed wall had been constructed during part of the "Phase III" of the Project from 2004 to 2006 to provide the exterior containment of BAF cells C-1 through C-4 of the Plant. The west wall of cells C-3 and C-4 collapsed in total. On cell C-2, the wall broke away between about midway along its west side.

8. As a result of the collapse, approximately 580, 000 gallons of partially treated wastewater and Biolite L.2.7mm filter media poured out of the cells, into a nearby creek and onto an adjacent New York State Electric and Gas Utility ("NYSEG") parking lot, causing property damage and an environmental hazard.

9. The BAF process systems in the area of cells C-1 through C-4 were destroyed and/or damaged. (Dkt. No. 47, Attach. 3, at ΒΆ 13 [Aingworth Affid.]; Dkt. No. 47, Attach. 5 [attaching photographs of the site].)

10. The entire concrete structure of the west wall of cells C-1 through C-4 and the interior dividing walls between C-1 through C-4 were destroyed and/or damaged. ( Id. )

11. A majority of the contents of cells C-2 through C-4 were emptied and lost, with the remaining portion ultimately deemed unusable.

The Policy

12. Plaintiffs purchased Insurance Policy Number SDISSP XXXXXXX-X/0 (the "Policy") for the period from January 1, 2011, to January 1, 2012, from Defendant American Alternative Insurance Corporation ("Defendant").

13. The Policy provides $90, 867, 404 blanket liability property damage, pollution remediation expenses of $25, 000 for a covered cause of loss and of $100, 000 for a specified cause of loss, as well as a general aggregate liability coverage of $3, 000, 000.

14. Plaintiff Board's deductible under the Policy was $5, 000 per occurrence.

15. Damage to real property at the premises is addressed in the ...


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