Northrop Grumman Corp. v. Factory Mut. Ins. Co.

• Decision Date: 14 August 2008
• Docket Number: No. 07-56760.,07-56760.
• Citation: 538 F.3d 1090
• Parties: NORTHROP GRUMMAN CORPORATION, Plaintiff-Appellee, v. FACTORY MUTUAL INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

538 F.3d 1090

NORTHROP GRUMMAN CORPORATION, Plaintiff-Appellee, v. FACTORY MUTUAL INSURANCE COMPANY, Defendant-Appellant.

No. 07-56760.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 18, 2008.

Filed August 14, 2008.

Kirk A. Pasich, Esq., Los Angeles, CA, for the plaintiff-appellee.

Peter Abrahams, Esq., Encino, CA, for the defendant-appellant.

Appeal from the United States District Court for the Central District of California; Dean D. Pregerson, District Judge, Presiding. D.C. No. CV-05-08444-DDP.

Before: CYNTHIA HOLCOMB HALL and PAMELA ANN RYMER, Circuit Judges, and STEPHEN M. McNAMEE,^* District Judge.

HALL, Circuit Judge:

Factory Mutual Insurance Company appeals the district court's summary judgment in favor of Northrop Grumman Corporation. Northrop sued the insurance company after Factory Mutual denied coverage for water damage at Northrop's Mississippi subsidiary caused by Hurricane Katrina. Factory Mutual argued that coverage for water damage was barred by an exclusion for flooding in the policy, but the district court held that the exclusion was ambiguous and construed it in favor of Northrop. We reverse the district court's grant of summary judgment in favor of Northrop, and remand for a determination of whether California's efficient proximate cause doctrine mandates coverage of the damage notwithstanding our interpretation of the contractual language.

I. FACTS AND PROCEEDINGS BELOW

A. The parties and the insurance policies at issue

Northrop Grumman is a global defense contractor with approximately 120,000 employees worldwide. Its Mississippi subsidiary, Northrop Grumman Ship Systems, is headquartered in Pascagoula, Mississippi and has operations throughout the Gulf area. Northrop maintains a risk management department, and is represented by Aon Risk Services in the insurance marketplace.

Aon was responsible for brokering Northrop's property insurance for April 2005 to April 2006. In February 2005, Aon prepared and submitted an Underwriting Detail to prospective insurers. The Underwriting Detail explained that Northrop sought blanket insurance for $19.8 billion in properties, and proposed that the insurance be layered. The primary layer, termed "All Risk including Earthquake, Flood, Boiler & Machinery," would provide comprehensive property insurance with a general limit of $500 million, and certain sublimits, such as a $400 million sublimit per flood occurrence. The excess layer, described as "All Risk including Boiler & Machinery (Excluding Earthquake and Flood)," would cover additional losses up to the $19.8 billion total value of Northrop's property, but would not include earthquake or flood coverage. The suggested premiums were $12,730,000 for the primary layer, and $950,000 for the excess layer.

Factory Mutual received the Underwriting Detail and provided Northrop with a quote for 15% participation in the first $100 million of the primary layer, and full participation in the excess layer. Northrop accepted the quote and Factory Mutual transmitted the primary and excess policies to Northrop.

The primary policy, derived from a hybrid Aon/Factory Mutual form,¹ was an "all risk" policy, insuring Northrop against "all risk of physical loss or damage to property" unless otherwise excluded. The policy included a glossary section which defined various terms, including certain types of losses, such as Flood, Wind, and Named Windstorm. The policy defined Flood as:

all physical loss or damage caused by or resulting from flood waters, rising waters, waves, tide or tidal water, surface waters, or the rising, overflowing, or breaking of boundaries of lakes, reservoirs, rivers, streams or other bodies of water, whether driven by wind or not, including spray and sewer back-up resulting from any of the foregoing, all regardless of any other cause or event contributing concurrently or in any other sequence of loss.

Wind was defined as "[d]irect action of wind including substance driven by wind." Named Windstorm was separately defined as:

[t]he direct action of wind including any substance driven by wind, and/or flood when such wind or flood is associated with or occurs in conjunction with a storm or weather disturbance which is identified by name prior to loss by any meteorological authority such as the U.S. National Weather Service or National Hurricane Center.

The excess policy, which was derived from Factual Mutual's own Advantage form, was also an "all risk" policy. The excess policy provided Northrop with $19.8 billion of insurance in excess of the $500 million covered by the primary policy, and insured Northrop for all risks unless specifically excluded. The excess policy excluded loss or damage caused by various occurrences, including Flood (the Flood Exclusion). Flood was defined as:

Flood; surface waters; rising waters; waves; tide or tidal water; the release of water, the rising, overflowing or breaking of boundaries of natural or manmade bodies of water; or the spray therefrom; or sewer back-up resulting from any of the foregoing; regardless of any other cause or event contributing concurrently or in any other sequence of loss. However, physical damage by fire, explosion or sprinkler leakage resulting from Flood is not considered to be loss by Flood within the terms and conditions of this Policy.

Neither Named Windstorm damage nor Wind damage was defined or otherwise referenced in the excess policy.

B. Hurricane Katrina and the damage to Northrop's shipyards

On August 29, 2005, Hurricane Katrina struck the Gulf Coast, making landfall near the Louisiana/Mississippi border. Katrina was one of the strongest storms to impact the coast of the United States in the past 100 years, with wind speeds of up to nearly 175 miles per hour and an accompanying storm surge that inundated parts of Louisiana, Alabama, and Mississippi.² Northrop's ship building subsidiaries located in the Gulf region were severely damaged by the storm. The majority of the loss occurred at the Pascagoula, Mississippi shipyards, where the storm surge was as high as twenty-two feet. According to the shipyard manager, Steve Pierce, the Pascagoula yard sustained water damage to transporters, translation cars, electrical systems, and other property, as well as wind damage to the roofs of the buildings. Photographs on the day of the hurricane showed trucks in the shipyard halfway submerged in water, and Pierce estimated that buildings were covered in six to ten feet of water in some parts of the shipyard. Northrop's preliminary estimates put the damage to its property as a result of the hurricane at $1,257,100,000, primarily attributable to the damage at the Pascagoula shipyards.

Northrop timely notified its insurers of the loss it suffered from Hurricane Katrina. Factory Mutual paid Northrop $15 million under the primary policy, but informed Northrop that it was planning to examine the damages under the excess policy as two separate perils: a loss caused by wind, which has no limitation on the amount of coverage, and a loss caused by flood, which was not covered at all due to the Flood Exclusion.

C. This Litigation

On November 4, 2005, Northrop filed suit against Factory Mutual in California state court, demanding coverage for the water damage under the excess policy. Factory Mutual removed the case to the Central District of California, and the parties filed cross-motions for partial summary judgment on Northrop's cause of action for declaratory relief — specifically, whether the Flood Exclusion in the excess policy barred coverage for the water damage from Hurricane Katrina.

On August 16, 2007, the district court granted Northrop's motion for partial summary judgment. The court agreed with Northrop that the Flood Exclusion was ambiguous because it did not "plainly and clearly reference hurricanes or damage caused by wind." The court then deferred to what it found to be Northrop's reasonable interpretation of the Flood Exclusion — that it was limited to floods not caused by wind.

Factory Mutual filed an unopposed motion for entry of final judgment under Fed.R.Civ.P. 54(b). The district court found no cause for delay and granted the motion on November 20, 2007. Factory Mutual timely appealed.

II. STANDARD OF REVIEW

A district court's grant of summary judgment is reviewed de novo, under the same standards applied by the district court. "We must determine whether, viewing the evidence in the light most favorable to the nonmoving party, any genuine issues of material fact exist, and whether the district court correctly applied the relevant substantive law." Fazio v. City and County of San Francisco, 125 F.3d 1328, 1331 (9th Cir.1997).

III. DISCUSSION

Though insurance contracts have special features, the general rules of contract interpretation still apply in California.³ Bank of the W. v. Superior Court, 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545, 551 (Cal.1992); MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635, 647, 3 Cal. Rptr.3d 228, 238, 73 P.3d 1205, 1212 (2003). The interpretation of a contract must "give effect to the `mutual intent' of the parties ... at the time the contract was formed." Id. at 1212-13 (citing Cal. Civ.Code § 1636). Such intent is to be inferred, if possible, from the written provisions of the contract based on their "ordinary and popular sense," unless a "technical sense or special meaning is given to them by their usage." Id. at 1213. (citing Cal. Civ.Code §§ 1639, 1644, 1638). If the contractual language is clear and explicit, it governs. Id.; AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253, 1264 (1990). Ambiguous terms are generally construed against insurers, but "[a] policy provision is ambiguous only if it is susceptible to two or more reasonable constructions despite the plain meaning of its terms within the context of the policy as a whole." Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 90 Cal.Rptr.2d 647, 988 P.2d 568,...