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

• Decision Date: 14 August 2008
• Docket Number: No. 07-56760.,07-56760.
• Citation: 563 F.3d 777
• Parties: NORTHROP GRUMMAN CORPORATION, Plaintiff-Appellee, v. FACTORY MUTUAL INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

563 F.3d 777

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.

Amended April 2, 2009.

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.

ORDER AMENDING OPINION AND DENYING PETITION FOR REHEARING AND PETITION FOR REHEARING EN BANC AND AMENDED OPINION

ORDER

The Opinion filed on August 14, 2008, 538 F.3d 1090, is amended as follows:

Slip Opinion page 10671, line 19, 538 F.3d at 1094, insert the following text: "We will `not artificially create ambiguity where none exists. If a reasonable interpretation favors the insurer and any other interpretation would be strained, no compulsion exists to torture or twist the language of the policy.'" Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1441 (9th Cir.1990) (quoting Allstate Ins. Co. v. Ellison, 757 F.2d 1042, 1044 (9th Cir.1985)).

Page 10672, line 6, 538 F.3d at 1095, replace "Sher v. Lafayette Ins. Co., 988 So.2d. 186" with "Sher v. Lafayette Ins. Co., 988 So.2d 186".

Page 10673, line 1, 538 F.3d at 1095, insert the following text (beginning a new paragraph): "Furthermore, the dictionary definition of flood comports with the lay understanding of the term. Most individuals would describe the inundation caused by a hurricane as a `flood.' See E.M.M.I. Inc. v. Zurich American Ins. Co., 32 Cal.4th 465, 471, 9 Cal.Rptr.3d 701, 84 P.3d 385 (2004) (describing `elementary rules of contract interpretation that policy language is interpreted in its ordinary and popular sense and as a layman would read it and not as it might be analyzed by an attorney or an insurance expert' (internal citations omitted)); compare MacKinnon, 31 Cal.4th 635, 3 Cal.Rptr.3d 228, 73 P.3d 1205(finding `pollution' ambiguous when dictionary definition did not agree with the lay person's understanding and applying the dictionary definition would lead to absurd results)."

Page 10673, line 20, 538 F.3d at 1095, delete: "To begin with, we are not convinced by Northrop's argument that the primary and excess policies must be construed as one document."

Page 10673, line 26, 538 F.3d at 1095, replace "the primary policy may be consulted in interpreting the excess policy, we decline to treat the two documents as one contract." with "the primary policy must be consulted in interpreting the excess policy, see Cal. Civ.Code § 1642, we decline to treat the two documents as only one contract."

Page 10674, line 7, 538 F.3d at 1096, replace "that an ambiguity exists" with "that an ambiguity must exist".

Page 10674, line 14, 538 F.3d at 1096, replace "policy." with "policy, because the insured's interpretation was not reasonable under either definition."

Page 10674, line 16, 538 F.3d at 1096, insert the following text: "Similarly, under either definition of flood, Northrop's limited interpretation of the broad term `flood,' as excluding wind-driven flooding, is not reasonable."

Page 10674, line 17, 538 F.3d at 1096, move "Northrop relies on Powerine Oil" to begin a new paragraph.

Page 10676, line 13, insert the following text: "Here, because the other terms used to describe flood were merely descriptive of floods, or synonymous for flood, rather than separate exclusions, the absence of `whether driven by wind or not' is not rendered surplusage in the primary policy, nor is it necessary to the excess policy's definition, where the term flood is sufficiently broad to encompass the damage Northrop suffered. See Brodkin v. State Farm Fire & Casualty Co., 217 Cal.App.3d 210, 217, 265 Cal.Rptr. 710 (Ct.App.1990) (holding exclusion applied to damage suffered by insureds, though the synonym `corrosion' or other descriptors was not included, because the plain meaning of the exclusion of `leakage or seepage,' `wear, tear' and `deterioration' covered the damage suffered); see also Smyth, 7 Cal. Rptr.2d at 697 (holding that definition of `business' in primary policy as `trade, profession, or occupation' did not create an ambiguity, though `business' was defined in the umbrella policy as `trade, occupation, profession or business')."

Page 10676, line 13, 538 F.3d at 1097, move "In addition" to begin a new paragraph.

Page 10676, line 17, 538 F.3d at 1097, insert the following text: "Neither has Northrop cited any cases holding that hurricane storm surge is not within the meaning of a flood exclusion, or holding that the phrase `whether driven by wind or not' is necessary to signify that storm surge is included within a flood exclusion."

Page 10677, line 18, 538 F.3d at 1098, insert the following text: "Moreover, even the definition of Named Windstorm noted that such storms can cause flood damage, only strengthening the argument that the lay interpretation of flood includes flooding caused by storm surge."

Page 10678, line 1, 538 F.3d at 1098, delete the following text: "Neither the absence of the phrase `whether driven by wind or not' nor the terms Wind and Named Windstorm in the excess policy render the excess policy ambiguous, and therefore we need not consider the extrinsic evidence presented by the parties. See Fraley v. Allstate Ins. Co., 81 Cal.App.4th 1282, 97 Cal.Rptr.2d 386, 390 (2000) (`Extrinsic evidence may be admitted to aid in the interpretation of an insurance policy only where the terms are ambiguous.')."

Page 10678, line 1, 538 F.3d at 1098, insert the following text: "Despite the unambiguous policy language, however, we must preliminarily consider Northrop's extrinsic evidence to determine whether it creates an ambiguity. Barris Industries, Inc. v. Worldvision Ent., Inc., 875 F.2d 1446, 1450 (9th Cir.1989). For example, Northrop points to a sentence in the Underwriting Detail provided to Factory Mutual by Aon, which states `[s]torm surge loss estimates are included in our windstorm analysis unless mentioned otherwise.' This sentence, however, was included on a document specifically addressing only the risks of earthquakes and coastal windstorms striking covered Northrop facilities, and, like the Named Windstorm definition in the primary policy, also described storm surge as flooding. The parties also cite inconclusive and conflicting evidence regarding the treatment of previous storm surge damage caused by Hurricanes Georges and Isabel. Neither claim implicated excess policy coverage and the evidence is of little relevance in construing this excess policy. We find the extrinsic evidence `insufficient to render the contract susceptible to [Northrop's] proffered interpretation' of flood as excluding flooding caused by storm surge. See id."

With these amendments, the panel has voted to deny appellee's petition for panel rehearing and has recommended denial of the petition for rehearing en banc. The full court has been advised of the petition for rehearing en banc and no judge has requested a vote on whether to rehear the matter en banc. Fed. R.App. P. 35.

The petition for panel rehearing and the petition for rehearing en banc are DENIED. No further petitions for rehearing will be entertained.

OPINION

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 sub-limits, 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,...