The appeals court ruled that the flood exclusion was not ambiguous and did apply to water damage at Northrop Grumman’s Ship Systems ship-building facility in Pascagoula, Mississippi caused by storm surge during the 2005 hurricane.
Northrop Grumman, whose headquarters is in Los Angeles, had sought coverage under an all-risk excess policy it purchased from Factory Mutual Insurance Co., which does business as FM Global, that provided $19.8 billion in blanket limits above $500 million in primary coverage. FM Global’s policy form included boiler and machinery coverage but excluded losses from earthquake and flood damage.
FM Global did pay Northrop $15 million for its share of the first $100 million of primary coverage but denied coverage under the excess policy, citing its flood exclusion.
The lower court ruled last year that the excess policy’s flood exclusion was ambiguous because it was not worded similarly to that in the primary policy and granted coverage to Northrop. FM Global appealed, and the 9th U.S. Circuit Court of Appeals in San Francisco reversed.
However, in its ruling, the appellate court did not totally reject the possibility that the policy might provide coverage, instead remanding the case to U.S. District Court in Los Angeles to determine whether another coverage theory advanced by Northrop Grumman might apply. Northrop had also argued that California’s efficient proximate cause doctrine should guarantee coverage of the water damage despite the contract language.