General Acc. Fire and Life Assur. Corp., Ltd. v. Akzona, Inc.

• Decision Date: 07 July 1980
• Docket Number: No. 79-1095,79-1095
• Parties: GENERAL ACCIDENT FIRE and LIFE ASSURANCE CORPORATION, LIMITED, Plaintiff-Appellee, v. AKZONA INCORPORATED, and all subsidiaries affiliated, associated and allied companies, American Enka Company, Armak Company, Armira Company, Brand-Rex Company, and Organon, Incorporated, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 90

622 F.2d 90

GENERAL ACCIDENT FIRE and LIFE ASSURANCE CORPORATION, LIMITED, Plaintiff-Appellee, v. AKZONA INCORPORATED, and all subsidiaries affiliated,

associated and allied companies, American Enka Company,

Armak Company, Armira Company, Brand-Rex Company, and

Organon, Incorporated, Defendants-Appellants.

No. 79-1095.

United States Court of Appeals, Fourth Circuit.

Argued Dec. 3, 1979.

Decided May 27, 1980.

As Modified on Denial of Rehearing July 7, 1980.

Earl H. Nemser, New York City (Landon Roberts, Asheville, N.C., Howard R. Hawkins, Jr., New York City, Roberts, Cogburn & Williams, Asheville, N.C., Cadwalader, Wickersham & Taft, New York City, on brief), for defendants-appellants.

Albert L. Sneed, Jr., Asheville, N.C., (O. E. Starnes, Jr., Van Winkle, Buck, Wall, Starnes, & Davis, P.A., Asheville, N.C., on brief), for plaintiff-appellee.

Before PHILLIPS and SPROUSE, Circuit Judges, and WALTER E. HOFFMAN, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

WALTER E. HOFFMAN, Senior District Judge:

In this diversity case, plaintiff-appellee, General Accident Fire and Life Assurance Corporation, Limited (the insurance company), sought a declaratory judgment that it was not liable under an all-risks insurance policy issued to defendants-appellants (Akzona) for losses resulting from a flood which occurred on November 6, 1977, causing damage in excess of $15,000,000 at the American Enka manufacturing plant in Enka, North Carolina. Akzona moved to dismiss the insurance company's action and counterclaimed for $3,000,000, the limit for flood damage under the policy. The district court granted the insurance company's motion for summary judgment declaring that the policy's flood coverage was voided by virtue of the following warranty which was included in the policy:

"With respect to Flood and Earthquake at Enka, N.C., the deductible will be $500,000.00. It is agreed that all barricades in openings in dikes will be in position prior to flooding at Enka, N.C. or no flood coverage will be provided." (Emphasis added).

The district court found that this provision was unambiguous, that Akzona failed to comply with it, and that, accordingly, the risk was excluded as a matter of law. We vacate and remand on the basis that the provision was ambiguous, thus creating an issue of factual interpretation and precluding summary judgment.

The facts are as follows: The Enka plant is located near Hominy Creek in Enka, North Carolina. Hominy Creek is subject to frequent flooding. In order to prevent flood damage to the plant, Akzona erected a dike, an elongated earthen mound more than eight feet high, between the creek and the plant. There are four passageways through the dike, gates A, B, C, and D, through which pass a public road (State Highway Route 112), a foot path, and two railroad tracks. Built into the dike near the passageways are structures referred to as gate houses A, B, C, and D. The gate houses store specially fitted wooden boards, timbers, tools and other materials and equipment used to erect barricades across the passageways to prevent flood waters from flowing through the openings into the plant.

Akzona has an established procedure for closing the passageways. The creek's water level is constantly monitored and normally reads 2052.5 feet above sea level. When the water level exceeds 2057 feet, the point at which the creek breaks its boundaries, a flood alarm sounds. If the level of the water reaches 2059 feet, a barricade is erected in gate B. The other openings are less vulnerable to the initial flooding and are not closed until the water reaches a higher level. Since the construction of the dike in 1940, no flood waters have come into the plant. The insurance company knew of and its underwriter approved Akzona's flood control procedure.

Heavy rains fell on the night of November 5, 1977 and Enka flood control personnel were sent to their assigned posts. When the water in Hominy Creek overflowed its boundaries and rose to 2059 feet above sea level, the flood crew erected the flood gate in gate B. Apparently, there was no urgent need to erect the other three flood gates as the sea level gauge indicated that the water was rising at a slow pace. However, unbeknownst to the flood crew, an artificial dam of debris had formed upstream causing the water level readings at the plant to rise at a deceptively slow rate. This dam eventually broke and swept away a lumber yard. Debris from the lumber yard formed another obstruction just upstream from the plant where the Route 112 bridge crosses Hominy Creek. This obstruction diverted the path of the water out of the creek bed and onto Route 112 running directly towards gate A, where the flood crew was in the process of closing that flood gate. As a result, it was impossible for the crew to close the diking system at gate A. The waters inundated the plant and caused extensive damage.

The insurance company moved for summary judgment declaring that it had no liability under the policy. ¹ Akzona filed a cross-motion for summary judgment. The only issue before the district court was whether Akzona failed to comply with the flood warranty so as to abrogate the insurance company's liability for the flood damage. ²

The insurance company contends that there was no flood coverage provided by the policy unless, prior to flooding, each of the four gates in the dike was closed by the erection of barricades, resulting in a continuous barrier protecting the plant from flood waters. The insurance company argues that the words "openings in dike" were intended to mean the gates A, B, C, and D, and the words "in position" mean that the "barricades" had to be placed in the gates so as to prevent the entry of flood waters. It is contended that since the gates were not closed prior to the flooding, as required by the policy, there was no flood coverage.

Akzona contends that the word "barricades" refers to the specially prepared wooden boards which were kept in the gate house and were to be fitted into place in the gates in case of flooding. The "opening in dikes" were the gates houses themselves. Therefore, argues Akzona, since the boards were stored in the gate houses on November 6, 1977, they were "in position" and the requirements of the policy were met.

In adopting the insurance company's interpretation, the district court found that the insurance company had not been willing to assume the risk of loss if the gates were not closed before the flood waters reached the dike. The court concluded that the language of the warranty clearly and unambiguously provided that the barricades must be in position in the gates before the flood waters flowed through to the plant.

We find that the district court erred when it failed to give adequate consideration to the definition of "flooding" as provided in the policy. Had it done so,...