In this Ninth Circuit Court of Appeals decision, the issue of ambiguity was considered with reference to a term used in both a primary and excess policy. The policies defined the term differently, and the issue was whether this created an ambiguity.

Northrop Grumman Corporation, and its Mississippi subsidiary, Northrop Grumman Ship Systems, were insured by Factory Mutual Insurance Company. Northrop obtained a primary policy from Factory Mutual, providing comprehensive property insurance. The policy included coverage for all risks, including earthquake, flood, boiler and machinery. An excess policy was obtained from Factory Mutual and included all risks, including boiler and machinery, but excluding earthquake and flood. The primary policy defined flood as including wind-driven water. The excess policy definition of flood did not include within its definition wind-driven water.

Northrop’s Mississippi subsidiary suffered severe damage in Hurricane Katrina. Factory Mutual paid Northrop $15 million under the primary policy, but informed Northrop that the remainder of the $1.257 billion claim would be evaluated under the excess policy as two separate losses, that caused by wind, which was covered, and that caused by flood, which was excluded.

Northrop sued Factory Mutual to obtain coverage under the excess policy. The District Court granted Northrop’s motion for partial summary judgment. It concluded that the flood exclusion was ambiguous because it did not plainly and clearly refer to hurricanes or damage caused by wind. Judgment was entered in favor of Northrop. Factory Mutual appealed.

The Court of Appeal reversed, applying California law. The Court stated the flood exclusion in the excess policy encompassed the water damage to Northrop’s shipyards. The definition of flood, based on lay and legal dictionaries, was an overflowing or inundation of water over usually dry land. The shipyards were covered in ten feet of water and therefore experienced a flood within the meaning of the excess policy. Northrop argued that since wind-driven water was included in the primary policy’s definition of flood, but did not appear in the excess policy’s definition of flood, this created an ambiguity. It argued, therefore, that wind-driven flood was covered.

The Court disagreed. It stated the primary and excess policies should not be construed as one document. The Court stated different definitions in the primary and excess policies of flood did not create ambiguity. Further, the absence of the phrase “whether driven by wind or not” in the flood exclusion in the excess policy did not show an intent on Factory Mutual’s part to expand coverage to include wind-driven flood. The Court stated the absence of that language did not render the otherwise clear language of the flood exclusion ambiguous. The Court stated this was merely indicative of a lack of specificity on Factory Mutual’s part rather than an omission evidencing an intent to narrow the exclusion. The Court further rejected the argument that since the language “whether driven by wind or not” was industry standard, this created an ambiguity. The policies were different and provided different types of coverage.

The Court found the flood exclusion unambiguously barred coverage for water damage under the excess policy. The District Court’s summary judgment was reversed and the matter remanded for further proceedings.

COMMENT

This case can be used by insurers to argue that just because an excess policy defines terms differently than a primary policy issued by the same insurer, this does not create an ambiguity.

SOURCE: (c) 2008 Low, Ball & Lynch