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Federal Insurance Co. v. Coast Converters, Inc.

Supreme Court of Nevada

December 24, 2014

FEDERAL INSURANCE COMPANY, Appellant/Cross-Respondent,
v.
COAST CONVERTERS, INC., Respondent/Cross-Appellant

Page 1282

Appeal and cross-appeal from a judgment on a jury verdict finding an insurance company liable for breach of contract and violation of the Nevada Unfair Claims Practices Act. Eighth Judicial District Court, Clark County; Gloria Sturman, Judge.

Lewis Roca Rothgerber LLP and Daniel F. Polsenberg and Joel D. Henriod, Las Vegas; Pyatt Silvestri and James P.C. Silvestri, Las Vegas, for Appellant/Cross-Respondent.

Lee, Hernandez, Landrum, Garofalo & Blake, APC, and David S. Lee and Robert A. Carlson, Las Vegas; Lemons, Grundy & Eisenberg and Robert L. Eisenberg and Tiffinay B. Pagni, Reno, for Respondent/Cross-Appellant.

Gibbons, C.J. We concur: Pickering, J., Hardesty, J., Parraguirre, J., Douglas, J., Cherry, J., Saitta, J.

OPINION

Page 1283

BEFORE THE COURT EN BANC.

GIBBONS, C.J.:

This case involves a dispute between an insured manufacturer and its insurer. In the present case, electrical problems at a plastic bag manufacturing plant led to damaged machinery and an increased number of defective bags being produced. Following the electrical problems, the manufacturer filed a claim with its insurance company. However, a dispute arose between the parties regarding whether losses associated with the defective bags should be covered under the insurance policy's property damage provision or its business interruption/extra expense provision. The parties further disputed whether a policy limit of $2 million or $5 million should apply to the manufacturer's property loss. The district court submitted both of these issues to the jury. Following trial, the jury awarded the manufacturer $4,005,866 for breach of the insurance contract, impliedly finding that the insured's loss was property damage and that the $5 million property damage policy limit applied.

In this opinion, we first address whether categorizing the insured's loss under the policy presents a question of law or a question of fact. We conclude that categorizing the insured's loss under the policy is a question of law. Second, we address whether determining which policy limit applies to the insured's property loss presents a question of law or a question of fact. We conclude that determining which policy limit applies presents a question of law. Accordingly, we conclude that the district court erred in sending these questions to the jury. We therefore reverse the district court's judgment and remand this matter for further proceedings consistent with this opinion.

FACTS AND PROCEDURAL HISTORY

Respondent/cross-appellant Coast Converters, Inc., manufactured plastic bags in California. In 2003, Coast began moving its plastic bag factory, including machines and equipment, from California to Las Vegas. Corresponding with the move, in June 2003, Coast obtained a commercial package all-risk insurance policy from appellant/cross-respondent Federal Insurance Company. The insurance policy covered up to $2 million in property damage (PD) and up to $1.75 million for business interruptions/extra expenses (BI/EE). On August 27, 2003, Coast requested, and later received, an increase in the PD coverage limit from $2 million to $5 million.

In anticipation of Coast's move to Las Vegas, electrical modifications were made to the Las Vegas facility. However, the modifications were apparently inadequate, causing voltage fluctuations. The voltage fluctuations damaged machinery used in the manufacturing process and also caused the production of a larger-than-normal amount of defective bags, or " scrap."

Coast filed a claim with Federal Insurance, seeking to recover costs related to the damaged machinery and the production of increased scrap. Coast pointed out that the defective bags were often hidden in rolls of otherwise quality bags, rendering the defective bags largely undiscoverable prior to sale. While it was able to pull some of the rolls containing defective bags, Coast claimed that it was not made aware of the defects until several orders were returned. Thus, Coast asserted that it was unable to separate the defective bags from the quality ones, rendering the entire package of bags a total loss.

Upon receiving Coast's claim, Federal Insurance investigated the machine malfunctions and eventually made several payments to Coast. Initially, Federal Insurance did

Page 1284

not communicate under which provision, PD or BI/EE, the payments were made. Federal Insurance later allocated a small portion of the payments--relating to the damaged machinery--to the PD coverage. However, the majority of the payments, including payments for the increased scrap, were made under the BI/EE coverage. Ultimately, Federal Insurance disbursed amounts covering the increased scrap and other losses up to the entire $1.75 million BI/EE policy limit. Coast contended that the increased scrap losses should have been covered under the PD provision. However, Federal Insurance disagreed and refused to make any additional payments under the PD provision. Coast alleges that it ultimately went out of business as a result of Federal Insurance's refusal to pay. Coast then filed a complaint against Federal Insurance.

Both before and after trial, Federal Insurance asked the district court to determine (1) whether Coast's loss fell under the policy's PD provision or the BI/EE provision; and (2) if PD coverage was appropriate, whether the coverage limit was $2 million or $5 million. The district court, however, declined to answer these questions, opting instead to leave them to the jury. After a five-week jury trial, the jury found Federal Insurance liable in the amount of $4,005,866 for breaching the insurance contract and in the amount of $5,048,717 for violating the Nevada Unfair Claims Practices Act (UCPA), NRS 686A.310. The district court offset the judgment by amounts Coast obtained in settlement for its claims against other parties. The district court, however, refused to offset the judgment by the amount already paid on the increased scrap insurance claim, and awarded Coast attorney fees and prejudgment interest.

Federal Insurance now appeals, arguing that (1) the district court erred in refusing to rule, as a matter of law, on the policy coverage and policy limit issues, as well as on the UCPA claims; (2) substantial evidence does not support the jury's findings on the breach of contract and UCPA claims; (3) the jury erred in finding it liable under the UCPA; (4) the district court erred in refusing to offset the judgment by the amount already paid on the claim; and (5) the district court erred in granting Supreme Court attorney fees as special damages. Coast cross-appeals, ...


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