Northrop Grumman Corp. v. Factory Mutual Insurance

Citations: 805 F. Supp. 2d 945; 2011 U.S. Dist. LEXIS 81926; 2011 WL 3189168Docket: Case CV 05-08444 DDP (PLAx)

Court: District Court, C.D. California; July 27, 2011; Federal District Court

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Northrop Grumman Corporation (“Northrop”) filed a motion for partial summary judgment concerning exhaustion issues and the burden of proof related to establishing exhaustion of primary insurance coverage, following significant damage estimated at nearly $940 million from Hurricane Katrina in 2005. Northrop's insurance program for the policy year April 1, 2005, to April 1, 2006, included a $500 million primary coverage layer comprised of approximately 30 policies, one of which was issued by Factory Mutual Insurance Company (“Factory Mutual”). This primary policy is an "all risks" policy that includes specific perils like "Earthquake" and "Flood," with a $400 million sublimit for flood-related property damage. Additionally, Northrop holds a $20 billion excess policy from Factory Mutual, which excludes flood damage. The court granted and denied portions of both parties’ motions, confirming that Northrop bears the burden of proving exhaustion of the underlying primary insurance while also addressing the limitations outlined in the insurance policies.

Excess of Loss provisions dictate that when a loss involves both covered and excluded losses, the Primary Policies first address the excluded losses. Northrop sued Factory Mutual in California state court on November 4, 2005, seeking coverage for water damage under the Excess Policy. The case was removed to federal court, leading to cross-motions for summary judgment regarding whether the flood exclusion in the Excess Policy applied to storm surge damage from Hurricane Katrina. On August 16, 2007, the court granted partial summary judgment in favor of Northrop, but the Ninth Circuit reversed on April 2, 2009, ruling that the Excess Policy's flood exclusion covered storm surge damage.

Currently, the parties' cross-motions for summary adjudication focus on three issues: whether storm surge damage from a "Named Windstorm" is excluded under the Factory Mutual Primary Policy’s Flood Sublimit; whether time element losses due to flood are excluded under the same policy; and which party bears the burden of proving losses excluded by the Excess Policy.

Summary judgment is deemed appropriate when there are no genuine issues of material fact, allowing the movant to prevail as a matter of law. Evidence must be viewed favorably for the non-moving party, and genuine issues exist when a reasonable jury could find for that party based on the evidence. Non-moving parties cannot simply rely on allegations but must present specific facts indicating a genuine issue for trial. The court can take judicial notice of facts that are not subject to reasonable dispute, provided a party requests it and supplies the necessary information.

In prior litigation phases, it was determined that the Excess Policy's flood exclusion also precludes coverage for property damage caused by Hurricane Katrina's storm surge.

Northrop claims that the Flood Sublimit in the Primary Policy does not apply to storm surge losses from a "Named Windstorm," arguing that such losses are distinct from flood damage. Northrop asserts that it has exhausted the $500 million Primary Layer of insurance with "Named Windstorm" damages, which would trigger coverage under the Excess Policy. Additionally, Northrop contends that the Priority of Payments provision allows it to classify storm surge losses as "Named Windstorm" losses regardless of their flood characterization. However, Factory Mutual disputes these claims.

The court finds that "Named Windstorm" is not a distinct peril from "Flood," as previously determined by the Ninth Circuit. The designation is merely related to a deductible in the Primary Policy, and the definitions provided do not create separate coverage. The court clarifies that the distinction between flood and "Named Windstorm" pertains solely to a $10,000 deductible and does not imply a separate coverage category. Thus, Northrop's interpretation would effectively create new coverage that does not exist in the policy.

Regarding Time Element losses, Factory Mutual argues that the Flood Sublimit encompasses all losses related to flood, including consequential damages. The court disagrees, concluding that Time Element damages associated with flood are covered by the policy but are not subject to the Flood Sublimit, which only applies to direct physical loss or damage. Consequently, the Flood Sublimit remains applicable solely to physical losses, excluding Time Element losses.

The court's conclusion is primarily based on a straightforward interpretation of the Primary Policy in accordance with California law, which dictates that clear and explicit written provisions of an insurance policy prevail. The policy provides broad coverage, insuring against "all risks" of physical loss or damage unless specifically excluded. Exclusions noted include losses from hostile actions, terrorism, and dishonest acts, but do not mention flood or time element losses related to flood. Consequently, neither flood nor related time element losses are excluded by the policy's plain terms. 

The policy outlines specific categories of coverage, including Real and Personal Property and various types of Business Interruption (Gross Earnings, Loss of Profits, Extra Expense, etc.). The definition of Real and Personal Property encompasses all property located within specified territorial limits, while Business Interruption is defined as losses due to necessary interruptions caused by insured physical loss or damage. The distinction between types of loss is emphasized, as the Flood Sublimit refers only to "physical loss or damage" without mentioning losses resulting from such damage.

Additionally, the Primary Policy explicitly sets limits on liability, including a $400 million limit specifically for flood-related claims. This clarity in the policy's terms and definitions is critical for determining coverage and exclusions relevant to the case.

The limitation in the insurance policy specifies that coverage for flood-related losses is "per occurrence and in the annual aggregate." The dispute centers on the interpretation of "flood," with Factory Mutual asserting that it encompasses all damage from floods, including consequential losses like time element losses. In contrast, Northrop argues that "flood" pertains only to direct physical property loss and excludes consequential damages.

The policy defines "flood" as covering physical loss or damage due to floodwaters and associated phenomena, but it explicitly excludes losses from fire, sprinkler leakage, or explosion resulting from floods. The policy does not address non-physical losses, such as time element or accounts receivable losses, leading the court to interpret it by its plain terms. While the policy includes various limits for different perils and coverages, it does not imply that the flood limit would automatically cover non-physical losses.

The presence of a specific limit for accounts receivable indicates that the parties understood how to delineate limits for coverages, suggesting that the absence of a time element limit in the flood coverage was intentional. Additionally, the policy contains a separate limit for terrorism-related time element losses, demonstrating that Factory Mutual recognized the potential liability for such losses but chose not to include them in the flood coverage. The court infers that the lack of explicit language to cover time element losses in the flood provision indicates that the parties did not intend to provide coverage for those losses.

Factory Mutual did not include limiting language for the Flood Sublimit in its policy, despite doing so for other perils within the same section. In the case of Hewlett-Packard Co. v. Factory Mutual Insurance Co., the court emphasized that specific references to sublimits for time element losses indicated that any absence of such references implied no sublimit applied. This reasoning applies to the current case, where the court will not read additional limitations into the Flood Sublimit that the parties, having sophisticated understanding, chose not to include.

Factory Mutual contends that the comparison with time element loss related to terrorism is not relevant, arguing that terrorism is treated differently. The court disagrees, noting that the policy, drafted by knowledgeable parties, does not indicate that terrorism is a distinct peril. Coverage for time element loss is anticipated within the policy. Factory Mutual's sole justification for excluding Northrop's flood-related time element losses is that these losses fall under the Flood Sublimit, yet the policy lacks explicit language supporting this grouping.

The policy's structure does not inherently suggest that a sublimit for physical damage from flood also applies to business interruption losses caused by the same flood. Different types of losses can warrant separate coverage limits. The contract delineates between perils and coverages, allowing for varied liability limits. The definition of "flood" in the contract does not reference related economic loss, unlike other liability sublimits that specifically include time element loss. Consequently, any intention by Factory Mutual to encompass time element loss within the Flood Sublimit is not clearly established. The contract is ambiguous regarding whether "physical loss or damage" includes both physical and non-physical losses resulting from flooding, and in light of this ambiguity, the court must interpret it in favor of coverage. Factory Mutual's argument is further undermined by a straightforward reading of the definition of "flood" and the comparison between Flood and Terrorism Sublimits.

Insurance policy interpretation requires that all parts of the policy be considered together, with a focus on providing broad protection and narrowly interpreting exclusions against the insurer. This principle is especially relevant for “all risks” policies, which cover all physical losses except those explicitly excluded. In reviewing Factory Mutual's Primary Policy, it was found that the Flood Sublimit did not explicitly include time element losses, and any intent to cover such losses was not clearly stated. The policy made a clear distinction between different types of losses, indicating that Factory Mutual intended to limit coverage under the Flood Sublimit.

Regarding the burden of proof, there is a dispute between Northrop and Factory Mutual over which party must identify excluded losses under the Excess Policy. Factory Mutual contends that Northrop must prove the exhaustion of Primary Policies before claiming under the Excess Policy, while Northrop asserts it has demonstrated damages exceeding the $500 million threshold, shifting the burden to Factory Mutual to identify exclusions. The court ruled that Factory Mutual has the burden of proof to specify claimed damages excluded from the Excess Policy. Generally, the insured must show exhaustion of primary coverage to trigger the excess insurer's obligation to pay. The parties agree that the Excess Policy provides additional coverage beyond the $500 million threshold, with a maximum liability limit of approximately $19.83 billion.

The Excess of Loss Provision governs the application of coverage in the context of multiple policies, stipulating that the Primary Policies must be exhausted before the Excess Policy is applicable. Specifically, the Excess Policy applies only to losses that exceed the limits of liability of the underlying primary policies, after deductibles are applied, and excludes coverage for certain damages. It mandates that losses from a single occurrence are treated collectively and that the underlying policies cover any perils not insured by the Excess Policy. For Northrop to exhaust the Primary Policy, Factory Mutual must first identify any exclusions under the Excess Policy, as doing so is a prerequisite for such exhaustion. The interpretation of these provisions is guided by the mutual intention of the parties as reflected in the contract terms.

Northrop claims losses exceeding $939 million, which are subject to the Excess Policy's $500 million attachment point. The burden of proof regarding which losses are excluded by the Excess Policy lies with Factory Mutual, contingent upon Northrop having satisfied the "Requirements in Case of Loss." Factory Mutual requests an order for Northrop to submit a revised proof of loss delineating non-flood damage from Hurricane Katrina. However, Northrop contends that it has fulfilled its obligations under the Excess Policy without needing to itemize losses by specific perils. The court agrees with Northrop, indicating that the Excess Policy does not require a revision of proof of loss based on specific perils, as the policy's language does not impose such a requirement.

The Excess Policy stipulates specific requirements for the insured in the event of a loss, notably the obligation to submit a signed and sworn proof of loss within 90 days, unless extended in writing by the insurer. This proof must detail various elements including the time and origin of the loss, the insured's interest in the property, the actual cash and replacement values of the items, encumbrances, other insurance contracts, and any changes related to the property since the policy's effective date. 

Northrop submitted a proof of loss claiming approximately $940 million due to Hurricane Katrina, identifying it as the loss's "origin." Factory Mutual contends that this requirement necessitates specifying the peril causing the claimed loss. However, the court finds no support for this interpretation in the policy language. The Excess Policy includes detailed exclusions and coverages and does not explicitly require the insured to detail "time and peril" or "time and coverage." The term "origin" is deemed general and is defined to indicate the beginning or source of the loss, which Northrop fulfilled by citing Hurricane Katrina.

The court also references a similar case, Strubble v. United Services Auto. Assn., where it was held that the insurer must prove that a loss was caused by an excluded peril to deny coverage under an “all risks” policy. Thus, under the current circumstances, Factory Mutual carries the burden to demonstrate that the loss was not covered under the policy terms.

Under an all-risks insurance policy, Northrop is not required to prove that the specific peril causing its loss was covered, as the burden of proof lies with the insurer, Factory Mutual, to demonstrate that the loss was excluded. The court referenced case law indicating that once the insured establishes a loss of covered property, the insurer must prove that the proximate cause was excluded from coverage. Factory Mutual's assertion that Northrop must revise its proof of loss to exclude storm surge damage was deemed incorrect, as the prior Ninth Circuit ruling did not alter the insurer's burden of proof. Additionally, Factory Mutual claimed Northrop's failure to remove flood losses violated its duty to cooperate; however, Northrop had submitted a proof of loss, fulfilling its obligation. The court ruled that the ongoing litigation regarding flood damage does not retroactively affect Northrop's proof requirements. The court granted in part and denied in part motions from both parties concerning summary judgment and the burden of proof, ultimately ruling in favor of Northrop regarding exhaustion issues and the establishment of coverage.