Northrop Grumman v. Factory Mutual Ins. Co., 2008 U.S. App. LEXIS 17270 (9th Cir. Aug. 14, 2008).

Juliane D. Morris, 2008 J.D. Candidate, University of Mississippi School of Law
Timothy M. Mulvaney, J.D.

A federal appellate court found that a flood damage exclusion provision in the excess layer of a dual-layered insurance policy is unambiguous in excluding damage caused to Northrop Grumman’s shipyard in Pascagoula, Mississippi as a result of the storm surge associated with Hurricane Katrina.

Background
Northrop Grumman Corporation (“Corporation”), a global defense contractor employing approximately 120,000 employees worldwide, operates a Mississippi subsidiary, Northrop Grumman Ship Systems (“Northrop Grumman”), located in Pascagoula, Mississippi.1 Northrop Grumman purchased dual-layered property insurance from Factory Mutual Insurance Company (“Factory Mutual”). The primary policy covered fifteen percent of “all risk including [f]lood,” unless otherwise excluded, up to the first $100 million.2 The excess policy covered additional losses above $500 million up to the $19.8 billion total value of Northrop Grumman’s property for “all risks” but for various specified occurrences such as floods (the “Flood Exclusion”).3

As a result of Hurricane Katrina in 2005, the Northrop Grumman plant in Mississippi sustained significant water damage, with six to ten feet of water covering some parts of the property.4 The Corporation estimated its losses as a result of the hurricane at $1,257,100,000, due in part to the damage at the Pascagoula shipyard.5 Northrop Grumman timely notified its insurers of the losses, and Factory Mutual paid $15 million under the primary policy.6 With respect to the excess policy, Factory Mutual informed Northrop Grumman that it would analyze the sustained damages in two separate categories: damage caused by wind, under which there is no limit under the policy, and damage caused by flooding, under which there is no coverage due to the Flood Exclusion.

Litigation Ensues
On November 4, 2005, Northrop Grumman filed suit against Factory Mutual in a California state court, as opposed to a Mississippi court, apparently in light of a venue agreement in the insurance contract. In its complaint, Northrop Grumman demanded coverage under the excess policy for the water damage it sustained.7 Factory Mutual removed the case to federal court in the Central District of California, where both parties filed summary judgment motions asking the court to determine whether or not the Flood Exclusion in the excess policy barred coverage for the water damage from Hurricane Katrina.8 Summary judgment is appropriate in cases where there is no genuine issue of material fact in dispute.

The district court held in favor of Northrop Grumman, ruling that the Flood Exclusion language was ambiguous because it did not “plainly and clearly reference hurricanes or damage caused by wind.”9 Therefore, the court agreed with Northrop Grumman’s interpretation of the Flood Exclusion, stating that the excess policy covered only those floods not caused by wind.10 Factory Mutual appealed.

The Court of Appeals’ Decision
On appeal, Northrop Grumman argued that the contractual language was ambiguous, in reliance upon the fact that the primary policy used the phrase “whether wind driven or not” to define “flood,” but the excess policy did not.11 In alleging that the primary and excess policies should be read together, Northrop Grumman contended that the absence of the phrase “whether wind driven or not” in the excess policy reflected an intent on Factory Mutual’s part to expand coverage.12 It alleged that Mutual could and should have included this phrase in the definition of “Flood” in the excess policy if it wanted to limit coverage.13 Further, Northrop Grumman insisted that inclusion of the phrase “whether wind driven or not” in flood exclusion provisions is industry custom, and Factory Mutual contravened this custom by creating a narrower exclusion for flood-related damages.14

Under California law, applicable because Factory Mutual did not contend that Mississippi law, or that of any other state, applied, ambiguous terms are generally construed in favor of the insured.15 However, a policy provision is only considered ambiguous if “it is susceptible to two or more constructions despite the plain meaning of its terms within the context of the policy as a whole.”16

The Ninth Circuit found that the absence of the language “whether wind driven or not” in the excess policy did not render ambiguous the definition of “Flood” in that policy.17 The court noted that the excess policy’s definition of the term “Flood” included “flood, surface waters, rising waters,” etc. The court relied upon lay and legal dictionaries for determining the plain meaning of “flood,” and the related terms utilized in the definition, as encompassing the inundation of water over normally dry property, which occurred here.

The Ninth Circuit stated that the lack of the phrase “whether wind driven or not” was not an admission of the insurer’s intent to “conspicuous(ly) omi(t)” the phrase, but rather “indicative of a lack of specificity.”18 Therefore, the court refused to read the two policies to­ gether.19 Further, the court rejected Northrop Grumman’s claim of custom for lack of proof that Factory Mutual was on notice to include the qualifying language in light of prior narrow interpretations of flood exclusion provisions.20

Accordingly, the Ninth Circuit reversed the lower court’s grant of partial summary judgment for Northrop Grumman, holding that the Flood Exclu­ sion in the excess policy is unambiguous in excluding the damage caused to Northrop Grumman’s shipyard as a result of the storm surge associated with Hurricane Katrina. The court remanded the matter to the lower court for consideration of Northrop Grum­ man’s allegation that California’s efficient proximate cause doctrine demands coverage of the water damage notwithstanding the language of the contract.21

Endnotes:
1.   Northrop Grumman Corp. v. Factory Mut. Ins. Co., 2008 U.S. App. LEXIS 17270, *2 (9th Cir. Aug. 14, 2008).
2.   Id. at *2-3.
3.   Id. at *4-5.
4.   Id. at *6.
5.   Id.
6.   Id. at *6-7.
7.   Id. at *7.
8.   Id.
9.   Id.
10. Id. at *7-8.
11. Id. *15.
12. Id.
13. Id. at *15-16.
14. Id. at *16.
15. Id. at *8-9.
16. Id. at *9 (quoting Palmer v. Truck Ins. Exch., 988 P.2d 568, 573 (1999)).
17. Northrop Grumman Corp., 2008 U.S. App. Lexis 17270 at *16.
18. Id. at *16-17.
19. Id. at *13-17.
20. Id. at *18.
21. Id.