Continental Ins. Co. v. Arkwright Mut. Ins. Co.

• Decision Date: 10 October 1996
• Docket Number: No. 96-1596,96-1596
• Parties: CONTINENTAL INSURANCE COMPANY and Hartford Fire Insurance Company, Plaintiffs, Appellants, v. ARKWRIGHT MUTUAL INSURANCE COMPANY, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 30

102 F.3d 30

CONTINENTAL INSURANCE COMPANY and Hartford Fire Insurance

Company, Plaintiffs, Appellants, v. ARKWRIGHT MUTUAL INSURANCE COMPANY, Defendant, Appellee.

No. 96-1596.

United States Court of Appeals, First Circuit.

Heard Oct. 10, 1996.

Decided Dec. 19, 1996.

James T. Hargrove, with whom Thomas M. Elcock, Boston, Richard W. Jensen, Somerville, and Morrison, Mahoney & Miller, Boston, were on brief, for appellants.

William Gerald McElroy, with whom Catherine M. Colinvaux, Waltham, and Zelle & Larson LLP were on brief, for appellee.

Before CYR, BOUDIN and STAHL, Circuit Judges.

CYR, Circuit Judge.

Appellants Continental Insurance Company ("Continental") and Hartford Insurance Company ("Hartford") (collectively: "C & H" or "appellants") challenge the district court's summary judgment ruling under New York law that damage from flooding was not covered under the insurance policy issued by Arkwright Mutual Insurance Company ("Arkwright" or "appellee"). As the district court correctly applied New York law, we affirm.

I BACKGROUND

In 1992, Olympia and York Development Company, L.P. ("Olympia") owned a high-rise office building at 55 Water Street, New York, New York ("Water Street Building"). On December 11th of that year, a severe storm struck New York City, causing the Hudson and East Rivers to overflow their banks. Flood waters entered the basement of the Water Street Building through cracks in its foundation, resulting in more than one million dollars in property damage. Slightly more than half the damage involved energized electrical switching panels which had come into contact with the flood waters. The water immediately caused a phenomenon known as "electrical arcing" ¹--an electrical short circuit, in lay terms--which in turn caused an immediate explosion that blew large holes in the switching panels. C & H appraised the damage to the switching panels at $581,225. Much of the remaining damage, appraised at $445,592, occurred when the flood waters came in contact with non-energized electrical equipment; it involved no electrical arcing.

At the time of the storm, three separate policies provided various coverages for the Water Street Building. Two of the policies--identical "all risk" policies separately issued by appellants Continental and Hartford--insured against "all risks including Flood and Earthquake" up to $75,000,000 per occurrence for the one-year period beginning March 3, 1992. Each policy underwrote fifty percent of the $75,000,000 "all risk" coverage on identical terms and conditions, and contained a $100,000 deductible for any loss and damage arising out of each covered occurrence. In addition, each "all risk" policy excluded coverage for mechanical or electrical The third policy, issued by appellee Arkwright, a Massachusetts corporation, afforded $3,000,000,000 in total liability coverage for the three-year period between January 1, 1992 and January 1, 1995, on approximately forty buildings owned by Olympia around the world. As concerns the Water Street Building in particular, the Arkwright policy afforded up to $100,000,000 in covered property loss from flooding, subject to a $75,000,000 deductible. Thus, the Arkwright policy principally served as excess "all risk" coverage above the $75,000,000 liability limit on the two separate "all risk" policies issued by appellants Continental and Hartford.

breakdown caused by artificially generated electrical currents. ²

The Arkwright policy on the Water Street Building included a "Special Deductible Endorsement," which afforded primary insurance coverage for mechanical or electrical breakdown by substituting a $50,000 deductible for the $75,000,000 "all risk" deductible in the Arkwright policy. The $50,000 Special Deductible Endorsement was subject to the following qualifications:

In the event of insured loss or damage under the policy to which this endorsement is attached, the Loss or Damage described below shall be subject to the following deductible amount(s) in lieu of any other Policy deductible amount(s) except those for Flood, Earthquake or Service Interruption if applicable:

[$50,000.00 ]

* * * * * *

3. Loss or damage from mechanical or electrical breakdown (except by direct lightning damage) of any equipment, unless physical damage not excluded results, in which event this Special Deductible shall not apply to such resulting damage. (Emphasis added.)

Olympia submitted claims to appellants Continental and Hartford for the total loss sustained at the Water Street Building. It maintained that the entire loss had been caused by flooding and therefore came within the coverage afforded under the two primary "all risk" policies issued by appellants. Continental and Hartford promptly paid $937,557 to Olympia, representing coverage for the entire loss less a $100,000 deductible, then claimed reimbursement from Arkwright for the $581,225 loss to the electrical switching panels allegedly caused by electrical arcing. Arkwright refused to contribute, contending that all damage to the Water Street Building had been caused by, or resulted directly from, flooding. Relying on the Special Deductible Endorsement language--"in lieu of any other Policy deductible amount(s) except those for Flood"--Arkwright insisted that since the damage had been due to flood, the $50,000 deductible in its endorsement did not displace the $75,000,000 deductible in its policy.

Continental and Hartford instituted this diversity proceeding in United States District Court for the District of Massachusetts, seeking a judicial declaration that Arkwright was liable for the portion of the electrical switching panel loss due to electrical arcing. After all parties moved for summary judgment based on their respective interpretations of the applicable New York caselaw, the district court concluded that under the Arkwright insurance contract, including its Special Deductible Endorsement, as viewed by a reasonable business person in the relevant circumstances, see Bird v. St. Paul Fire & Marine Ins. Co., 224 N.Y. 47, 120 N.E. 86 The district court determined that in identifying the cause of the storm-related damage to the electrical switching panels, a reasonable business person would not have segregated the flooding from the arcing. The court based its conclusion on the fact that the $50,000 deductible is made inapplicable to flood loss by the express language in the Special Deductible Endorsement excluding electrical breakdown due to flood, as well as the fact that all the damage occurred virtually simultaneously at the same site.

(1918), the damage to the electrical switching panels had been caused by flooding. ³

II DISCUSSION ⁴

Appellants Continental and Hartford challenge the district court ruling that the flooding, rather than the electrical arcing, constituted the legal cause of the damage to the electrical switching panels. Their proximate causation analysis focuses upon what point in the "proverbial chain of causation" a particular cause ceases to be remote and becomes the "legal cause" of the damage. See Richard A. Fierce, Insurance Law-Concurrent Causation: Examination of Alternative Approaches, 1985 S. Ill. U. L.J. 527, 534 (1986).

1. Causation under New York Law

Appellants first contend that the district court misapplied New York law in ruling that a reasonable business person would consider the switching panels to have been damaged by flood rather than electrical arcing. Under established New York law governing insurance contract interpretation, appellants maintain, the district court was required to identify the most direct, physical cause of the damage, or what is termed "the dominant and proximate cause." Novick v. United Servs. Auto. Ass'n, 639 N.Y.S.2d 469, 471 (App.Div.1996). According to appellants, the most direct, physical cause of a loss under New York law "is that which is nearest to the loss because [it] is invariably the most direct and obvious cause."

Appellants predicate their contention principally upon Home Ins. Co. v. American Ins. Co., 147 A.D.2d 353, 537 N.Y.S.2d 516 (1989), where water and steam precipitated electrical arcing which in turn damaged electrical equipment in a high-rise building. There the New York Supreme Court, Appellate Division, held that electrical arcing, not steam, caused the damage, since the steam "merely set the stage" for the subsequent arcing and therefore constituted the remote, rather than the proximate, cause of the loss. Id., 537 N.Y.S.2d at 517 (" '[T]he causation inquiry stops at the efficient physical cause of the loss; it does not trace events back to their metaphysical beginnings ....' ") (quoting Pan Am. World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 1006 (2d Cir.1974)). Similarly, appellants maintain that the efficient, legal cause of the damage to the switching panels in the present case was the electrical arcing, whereas the flooding merely set the stage for the arcing. ⁵ Consequently We turn to the language in the Arkwright insurance contract to determine whether the damage to the switching panels was legally caused by flooding or electrical arcing. Under New York law, insurance policies are to be interpreted in accordance with their terms. See, e.g., Frey v. Aetna Life & Cas., 221 A.D.2d 841, 633 N.Y.S.2d 880, 882 (1995).

appellants conclude, the district court need have looked no further than the phenomenon of electrical arcing for the legal cause of the damage to the switching panels.

In cases involving an electrical breakdown not caused by lightning, the Special Deductible Endorsement substitutes a $50,000 deductible for the $75,000,000 deductible in the Arkwright liability policy proper, except in cases where the higher deductible for "Flood" is "applicable." Appellants would have the court interpret the operative provision ("in lieu of any other Policy amount(s) except those for Flood ... if applicable") to mean that the $75,000,000 deductible in the Arkwright...