Recology, Inc. v. Berkley Regional Insurance Company

Background

Recology owns and operates the Hay Road Landfill in Vacaville, California. It sells access to finite landfill space and charges customers based in part on the weight and classification of their waste. Recology held a commercial crime policy from Berkley Regional Insurance Company (BRIC) for the period October 1, 2014, to October 1, 2015. The policy covered losses resulting directly from employee theft and defined theft as the unlawful taking of property to Recology’s deprivation. It covered tangible “other property” with intrinsic value.

Recology submitted two claims. In the Lucero Scheme, former employee Toby Soares allegedly worked with a waste broker to let trucks bypass the weigh station without paying or to classify general debris as cheaper concrete and asphalt waste. In the Weighmaster Scheme, other former employees allegedly allowed customers to dump waste without payment in exchange for kickbacks. Recology sought $1,769,288.22 for the Lucero Scheme and $784,106.73 for the Weighmaster Scheme. BRIC denied coverage for the lost revenue but did not rule out coverage for provable kickbacks received by the former employees.

Motions and legal standard

Both sides moved for summary judgment or partial summary judgment. Summary judgment is appropriate when the evidence shows no genuine dispute over a fact that could affect the outcome and the moving party is entitled to judgment under the law. Recology sought rulings that its losses were covered, that it was entitled to the claimed amounts, and that no exclusion applied. BRIC sought rulings that the policy did not cover lost revenue or landfill airspace, that the claims were one occurrence, and that BRIC did not act in bad faith.

Coverage

The court held that the former employees’ conduct constituted a “taking” under the policy even though they did not physically possess Recology’s money. By controlling access to the landfill, pricing, and records, they transferred control over finite landfill space to customers who paid nothing or less than the full price. The court treated the landfill space as tangible property with intrinsic value and concluded that the employees’ conduct amounted to theft under the policy.

The court also held that Recology’s loss resulted directly from the theft. The employees’ conduct immediately caused the physical landfill space to be occupied without full compensation. The court distinguished a case involving only indirect or vicarious losses because, here, there was no intervening cause between the employees’ conduct and Recology’s loss.

The court rejected BRIC’s argument that a policy condition limiting covered property to property Recology owned, leased, or held for others barred coverage. The court concluded that the property taken was Recology’s finite landfill space, not merely unpaid fees or abstract “airspace.” The court also rejected BRIC’s reliance on an employee-theft exclusion because the conduct qualified for coverage under the employee-theft provision. The court therefore found that no policy exclusion applied.

Damages

The court did not decide the amount of Recology’s damages as a matter of law. Recology relied on sworn loss statements and its expert’s calculations, while BRIC identified disputes concerning the methodology through its expert. Although the court found BRIC’s factual showing limited, it concluded that the record was not complete enough for summary judgment. The amount of damages was left for a jury to decide.

Bad-faith claim

Recology alleged that BRIC breached the implied duty of good faith and fair dealing by unreasonably denying coverage and failing to investigate adequately. BRIC argued that its coverage position was reasonable because there was a genuine dispute over the policy’s meaning and pointed to its willingness to pay provable kickbacks.

The court held that BRIC’s denial was not unreasonable under the circumstances. Its ruling that coverage existed did not establish that BRIC acted in bad faith. The court granted BRIC’s motion for partial summary judgment on Recology’s claim for breach of the implied duty of good faith and fair dealing.

Disposition

The court granted summary adjudication in Recology’s favor on coverage and denied summary adjudication against Recology on that issue. The court denied summary adjudication on damages, which will be tried before a jury. The court granted BRIC’s motion for partial summary judgment on the bad-faith claim.