Three Rivers Hydroponics LLC v. Florists Mutual Insurance Co

• Court: Court of Appeals for the Third Circuit
• Decided: August 29, 2023
• Docket: 22-1140
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ________________

No. 22-1140 ________________

THREE RIVERS HYDROPONICS, LLC,

Appellant

v.

FLORISTS’ MUTUAL INSURANCE COMPANY and THE HARTFORD STEAM BOILER INSPECTION AND INSURANCE COMPANY ________________

On Appeal from the United States District Court for the Western District of Pennsylvania (D. C. No. 2-15-cv-00809) District Judge: Honorable Mark R. Hornak ________________

Submitted under Third Circuit LAR 34.1(a) on January 12, 2023

Before: JORDAN, PHIPPS and ROTH, Circuit Judges

(Opinion filed August 29, 2023)

________________

OPINION* ________________

ROTH, Circuit Judge

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent. Three Rivers Hydroponics, LLC (TRH) contends that Florists Mutual Insurance

Company (Florists) and its reinsurer, the Hartford Steam Boiler Inspection and Insurance

Company (HSB), breached their contracts and acted in bad faith by denying coverage for

an equipment breakdown that resulted in crop loss. TRH appeals the District Court’s

dismissal of HSB from the suit, its preclusion of witness testimony, and its grant of

Florists’s summary judgment motion as to all remaining claims. For the reasons discussed

below, we will affirm.

I. TRH owned and operated a hydroponic basil-farming greenhouse. It used an ozone-

based water sterilization system (ozone system), which has, in part, an ozone generator and

an oxidation reduction potential controller (ORP controller). The ORP controller used a

sensor to ensure a set ozone level (ORP sensor).

Florists insured TRH. The insurance policy covered crop loss, unless a “mechanical

breakdown” caused or resulted in the loss.1 The policy also included an equipment

breakdown endorsement, which provided that Florists “will pay for loss caused by or

resulting from an ‘Accident’” to the ozone system components.2 This endorsement defined

“Accident,” in part, as “direct physical loss [caused by] mechanical breakdown.”3 This

loss included “‘perishable goods’ due to spoilage,”4 but excluded loss due to design errors,

poor workmanship, inherent and latent defects, and faulty materials causing loss or

1 Appx. 2783 2 Appx. 2960. 3 Appx. 2960. 4 Appx. 2960–61. 2 damage. HSB reinsured this equipment breakdown coverage under a reinsurance

agreement.5 HSB and Florists entered into this reinsurance agreement before TRH was a

Florists policyholder.

In July 2014, TRH filed an insurance claim with Florists, reporting that there were

“equipment damages to Ozone System” because “something failed and caused a small

explosion/fire in the equipment[, but] [TRH] was able to shut it down before it caused any

major damage beyond the actual piece of equipment.”6 TRH also reported that this incident

“resulted in Crop loss.”7

Florists, with HSB’s help, investigated the claim, which included several onsite

inspections of the ozone system. Florists first retained a fire and explosion expert who

confirmed that a fire had occurred and recommended Florists retain an electrical engineer.

Florists then hired an electrical engineer who determined that the ozone generator was

damaged. The engineer found that operator error, incorrectly sized equipment, or defective

equipment—and not a failed ozone generator—caused the damage to the crops. TRH

disagreed with this assessment, arguing that a failure with the ozone system caused the

crop loss. To investigate this claim further, Florists arranged for the manufacturer of the

ozone system to inspect TRH’s system. TRH, however, did not allow the manufacturer to

perform the inspection.

5 A treaty reinsurance agreement “insure[s] an entire block of insurance business (both existing policies and ‘as yet unwritten’ policies).” Ario v. Underwriting Members of Syndicate 53 at Lloyds for 1998 Year of Account, 618 F.3d 277, 283 n.1 (3d Cir. 2010). 6 Appx. 2976. 7 Appx. 2978. 3 Florists then provided a check to TRH for the cost of the ozone generator and

requested that the manufacturer inspect the system. A couple weeks later, Florists followed

up to see if TRH had had the system inspected. TRH replied that it was “waiting for a third

party evaluation from a leader in water treatment in the United States.”8 A few hours later,

TRH responded again, explaining that it was not accepting the check as it “only represents

a minimal part of the damages caused by the equipment failure which [its] insurance is to

cover as well as the crop loss as a direct result of this malfunction.”9 Florists responded

that it had not yet denied TRH’s claim because it was still investigating what caused the

crop loss. Florists followed up with TRH two more times but did not receive a response.

By the third follow-up, Florists requested that TRH submit any evidence it had linking the

ozone system to its crop loss. A few weeks later, TRH finally agreed to have the

manufacturer inspect the system.

Based on its inspection, the manufacturer provided TRH with a verbal report that it

determined that an incorrectly installed pipe caused water to go into the ozone generator,

which in turn caused the fire. It also determined that the ozone generator was not the cause

of the crop loss because that piece of equipment would stop ozone production as soon as

fire damaged it. It could not, however, determine whether any problem with the ORP

controller may have caused the crop loss.

Florists then opened an equipment-breakdown claim to investigate whether a

breakdown of the ORP controller caused the crop loss. Florists and HSB retained a

8 Appx. 3507. 9 Appx. 3509. 4 greenhouse engineer to inspect the ozone system and evaluate the ORP controller. After

this inspection, Florists determined that there was no evidence that a covered accident

caused the crop loss. Florists then denied coverage (beyond replacing the ozone generator).

TRH maintains that a breakdown of either the system’s ORP sensor, ORP controller, or

both caused the crop loss.

TRH sued Florists, alleging breach of contract and bad faith; TRH sought

consequential damages based on the alleged breach. TRH later filed an amended complaint

adding HSB as a defendant and a civil conspiracy claim against both Florists and HSB.

The operative complaint alleges that TRH’s crop failed because of the ORP controller’s

mechanical failure before the fire. HSB moved to dismiss on all counts, which the District

Court granted. TRH moved to dismiss the civil conspiracy claim, which the District Court

also granted.

Florists then filed a motion in limine to preclude TRH from presenting the testimony

of its expert witness, David Greenway. The District Court granted this motion, finding that

Greenway lacked qualifications and reliability to offer his opinions as an expert. The

District Court also precluded the testimony of witness Donald Lanini, concluding that his

testimony included opinions that he was unqualified to make.

Florists filed a motion for summary judgment, which the District Court granted. It

found that TRH failed to meet its burden to prove that Florists breached the insurance

contract and denied coverage in bad faith. TRH appealed.

5 II.10 TRH appeals the District Court’s (1) grant of HSB’s motion to dismiss, (2)

preclusion of witness testimony, and (3) grant of Florists’s motion for summary judgment.

For the reasons discussed below, we will affirm the orders of the District Court.

A. The District Court did not err in granting HSB’s motion to dismiss.

TRH appeals the District Court’s dismissal of HSB from the suit. We exercise

“plenary review over a district court’s grant of a motion to dismiss pursuant to Rule

12(b)(6).”11 Construing all allegations as true and in the light most favorable to the

plaintiff,12 we find that the District Court did not err in dismissing HSB as TRH failed to

state plausible claims for both breach of contract and bad faith.

1. Breach of Contract

Under Pennsylvania law, to state a claim for breach of contract a plaintiff “must

establish ‘(1) the existence of a contract, . . . (2) a breach of a duty imposed by the

contract[,] and (3) resultant damages.’”13 Privity of contract must exist for a defendant to

be liable for a breach.14 In other words, both parties must be parties to the contract.15 In

10 The District Court had jurisdiction under 28 U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291. 11 Fleisher v. Standard Ins. Co., 679 F.3d 116, 120 (3d Cir. 2012). 12 Id. 13 Ware v. Rodale Press, Inc., 322 F.3d 218, 225 (3d Cir. 2003) (second alteration in original) (quoting CoreStates Bank, N.A. v. Cutillo, 723 A.2d 1053, 1058 (Pa. Super. Ct. 1999)). 14 Electron Energy Corp. v. Short, 597 A.2d 175, 177 (Pa. Super. Ct. 1991), aff’d, 618 A.2d 395 (Pa. 1993). 15 Id. 6 the exceptional circumstance, however, privity need not exist if a party is a third-party

beneficiary to the contract.16 A party is a third-party beneficiary if

both parties to the contract express an intention to benefit the third party in the contract itself, unless, the circumstances are so compelling that recognition of the beneficiary’s right is appropriate to effectuate the intention of the parties, and the performance satisfies an obligation of the promisee to pay money to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.17

TRH does not dispute that it is not a party to the reinsurance agreement between

Florists and HSB. It does, however, argue that it is a third-party beneficiary. We disagree.

TRH suggests that, “[u]nlike traditional reinsurance agreements,” HSB’s direct

dealings with the “customer,” i.e., TRH, and its oversight of the claim dispute showed that

“HSB functioned as the direct insurer.”18 This argument holds no weight as it would be no

different than if Florists had contracted with an independent claims adjuster. In other

words, outsourcing the claim adjustment function does not manifest an intent to benefit as

an individual policyholder.

Because TRH is not a third-party beneficiary to the reinsurance agreement, the

District Court correctly found that TRH failed to allege a plausible breach of contract claim

against HSB.

2. Bad Faith

To state a claim of bad faith pursuant to 42 Pa. C.S. § 8371, an insured must show

that the insurer (1) had no reasonable basis for denying benefits under the policy, and (2)

16 Scarpitti v. Weborg, 609 A.2d 147, 150–51 (Pa. 1992). 17 Id. (citations omitted). 18 Appellant Br. at 52. 7 knew or recklessly disregarded this lack of reasonable basis.19 To determine whether a

party is an insurer, courts must consider “(1) the extent to which the company was

identified as the insurer on the policy documents; and (2) the extent to which the company

acted as the insurer.”20

HSB is not TRH’s insurer. HSB is not mentioned in the policy between Florists and

TRH. Indeed, the facts alleged do not suggest that HSB acted as TRH’s insurer but show

that it merely assisted with the claims adjustment. A claims adjuster is not an insurer under

the statute. HSB cannot be considered an insurer under § 8371.

B. The District Court did not abuse its discretion by precluding the testimonies of TRH’s witnesses. TRH contends that the District Court abused its discretion by precluding its

witnesses from offering certain testimony. We review a district court’s evidentiary rulings

for abuse of discretion.21 A district court abuses its discretion when its finding “rests upon

a clearly erroneous finding of fact, an errant conclusion of law or an improper application

of law to fact.”22

1. Expert Witness David Greenway

19 Nw. Mut. Life Ins. Co. v. Babayan, 430 F.3d 121, 137 (3d Cir. 2005). 20 Brown v. Progressive Ins. Co., 860 A.2d 493, 498 (Pa. Super. Ct. 2004). 21 Pineda v. Ford Motor Co., 520 F.3d 237, 243 (3d Cir. 2008); Donlin v. Philips Lighting N. Am, 581 F.3d 73, 80 (3d Cir. 2009). 22 Pineda, 520 F.3d at 243 (quoting In re TMI Lit., 193 F.3d 613, 666 (3d Cir. 1999)). 8 TRH argues that the District Court abused its discretion by precluding Greenway

“from testifying to or offering an opinion on . . . the probable cause of the crop failure as it

relates to the ORP controller [and the] damage to the oxygen concentrator.”23 We disagree.

Under Federal Rule of Evidence 702, a witness cannot provide expert testimony

unless:

(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; (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.

We have summarized this rule to mean that expert testimony must (1) be qualified, (2) be

reliable, and (3) assist the trier of fact.24

Here, the District Court did not abuse its discretion in finding Greenway

unqualified. True, Greenway is a chemical engineer who has designed ozone systems for

use in commercial hydroponic greenhouses, but he admitted himself that he was

unqualified to testify about how the ORP controller functioned. Based on Greenway’s

admission, the District Court did not improperly conclude that “[i]t would be illogical to

let Greenway testify as an expert regarding a topic on which he has no expertise.”25

2. Lay Witness Donald Lanini

23 Appx. 28. 24 Pineda, 520 F.3d at 244. 25 Appx. 27. The District Court also precluded Greenway’s testimony because it was unreliable. Because we find his testimony precluded based on its lack of qualification, we need not determine whether it is also unreliable. 9 TRH argues that the District Court abused its discretion in finding that Lanini was

unqualified to provide his opinion on the cause of the crop loss. We disagree.

A party may not offer “an expert witness in the guise of a layperson.” 26 Under Rule

701, lay opinion testimony is admissible if it is “rationally based on the witness’s

perception, . . . helpful to clearly understand[] the witness’s testimony or to determin[e] a

fact in issue[,] and . . . not based on scientific, technical, or other specialized knowledge

within the scope of Rule 702.”

Here, Lanini declined to testify as an expert witness and thus qualifies only as a lay

witness. Thus, TRH’s contention that he satisfies the qualification of an expert is irrelevant

as Rule 702 pertains to expert—not lay—witnesses.27 Since TRH could offer Lanini only

as a lay witness, any testimony that would require expert qualifications under Rule 702 is

inadmissible. The only testimony TRH sought from Lanini was his opinion about whether

a mechanical breakdown caused the crop loss. This opinion is barred by Rule 702 as it

required specialized knowledge about the system’s function, operation, and how to

determine that a mechanical breakdown had occurred.

C. The District Court properly granted Florists’s motion for summary judgment.

TRH asserts that the District Court erred in granting summary judgment for the

remaining breach of contract and bad faith claims and for consequential damages based on

breach of contract.28 Our review of a district court’s order granting summary judgment is

26 Hirst v. Inverness Hotel Corp., 544 F.3d 221, 227 (3d Cir. 2008). 27 See Fed. R. Evid. 702. 28 Appellant Br. at 23. 10 plenary.29 We view the facts and make all reasonable inferences in the non-movant’s

favor.30 A motion for summary judgment should be granted if “the non-moving party has

failed to make a sufficient showing on an essential element of [its] case with respect to

which [it] has the burden of proof.”31

TRH contends that the District Court erred by finding TRH failed to meet its burden

in establishing a prima facie case that Florists breached the insurance contract. We

disagree. In insurance contract disputes, the insured has “[t]he burden of proving that a

particular claim falls within the coverage of a policy.”32

TRH’s claim—that a crop loss resulted from a covered mechanical breakdown—

would appear to fall within the policy as the policy covers loss resulting from mechanical

breakdown in the ozone system. However, the admissible evidence that TRH presented to

show that this type of mechanical breakdown occurred and caused the crop loss was

speculative at best and included no admissible expert testimony. Determining whether a

breakdown of the ozone system occurred and then caused crop loss is highly technical and

requires expert guidance. We thus affirm the District Court’s finding that TRH failed to

meet its burden to establish a prima facie case that Florists breached the insurance contract.

29 Mylan Inc. v. SmithKline Beecham Corp., 723 F.3d 413, 418 (3d Cir. 2013). 30 Hugh v. Butler Cnty. Fam. YMCA, 418 F.3d 265, 266–67 (3d Cir. 2005). 31 Celotex Corp v. Catrett, 477 U.S. 317, 323 (1986). 32 Jacobs Constructors, Inc. v. NPS Energy Servs., 264 F.3d 365, 376 (3d Cir. 2001); see also Miller v. Boston Ins. Co., 218 A.2d 275, 277 (Pa. 1966). 11 TRH argues that the District Court erred in finding TRH failed to show that there is

a genuine issue of material fact as to its bad faith claim. Again, we disagree.

Under Pennsylvania law, to recover on a bad faith claim, the plaintiff must show by

clear and convincing evidence that the insurer (1) “did not have a reasonable basis for

denying benefits under the policy,” and (2) “knew of or recklessly disregarded its lack of

a reasonable basis in denying the claim.”33

TRH asserts facts that, even if supported by the record, fall woefully short of the

clear and convincing evidence needed to meet its burden to show Florists did not have a

reasonable basis for denying benefits at trial.34 Florists quickly investigated TRH’s claim,

hired several experts with specialized experience, continued its investigation when TRH

pushed back on its initial findings, and paid on the claim for the replacement generator that

the policy did cover; this record supports a finding that Florists conducted a thorough

investigation. Because this thorough investigation resulted in a finding that there was no

33 Nw. Mut. Life Ins. Co., 430 F.3d at 137. 34 These facts include (1) that Florists had a “motive of self-interest to limit their risk of increased costs” and thus used its own consultants rather than TRH’s preferred consultants; (2) that Florists withheld a conclusion from an expert that the ORP Sensor was the cause of the crop losses, which is directly contradicted by the record; (3) that Florists “promised” that it would have the system repaired without pointing to evidence of this alleged promise; (4) inadmissible settlement negotiations; (5) that the representative from the manufacturer provided only a verbal, not a written, report; and (6) unsubstantiated allegations that Florists’s expert manufactured his conclusion. Appellant Br. at 33–41. 12 evidence that a covered accident caused the crop loss, we find Florists had a reasonable

basis to deny benefits.35

III. For the reasons stated above, we will affirm the Orders of the District Court.

35 TRH also claims that the District Court erred in finding that TRH failed to meet its burden of proving consequential damages. Consequential damages are available if they resulted from a breach of contract, were foreseeable, and were contemplated when forming a contract. Because we find that TRH has failed to establish a prima facie case for its breach of contract claim, we do not reach this issue.