Court overturns policyholder win in Katrina claim

A federal appeals court has overturned a lower court ruling that granted coverage to Northrop Grumman Corp. for Hurricane Katrina-related water damage despite a flood exclusion in its excess policy.

The appeals court ruled that the flood exclusion was not ambiguous and did apply to water damage caused by storm surge during the 2005 hurricane. The appeals court did, however, leave open the possibility that Northrop Grumman could be granted coverage on other grounds.

The case involves more than $1 billion in hurricane-related property damage and business interruption losses at Northrop Grumman Ship Systems’ ship building facility in Pascagoula, Miss.

Los Angeles-based Northrop Grumman 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, court records show, but the insurer denied coverage under the excess policy, citing its flood exclusion.

The lower court ruled in August 2007 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, it remanded the case to U.S. District Court in Los Angeles to determine whether another coverage theory that had been asserted 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.

Though both parties had filed briefs regarding the proximate cause argument on appeal, the appeals court said it would not consider it because it involves factual considerations that the lower court must make.

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