Interpretation of excess policy is not dependent on primary policy
August, 2008
By
Jess B. Millikan
In one of the first cases to specifically address the issue, Northrop Grumman Corporation v. Factory Mutual Insurance Company, (No. 07-56760, August 14, 2008), the Ninth Circuit has recognized that an excess policy is a separate contract, and that its meaning does not depend on the language of the primary policy.
The issue arose in connection with Northrop's suit against Factory Mutual seeking insurance coverage for water damage caused by Hurricane Katrina. Factory Mutual was a 15% participant in a primary "all risk" property insurance policy issued to Northrop. In addition, Factory Mutual issued an excess "all risk" policy which, unlike the underlying primary policy, excluded coverage for loss or damage caused by flood. While Factory Mutual paid its share of Northrop's water damage claim under the primary policy, it denied coverage under the excess policy based on the flood exclusion.
Hurricane Katrina, Northrop contended, was a covered peril, entitling it to payment even though the resulting damage came in the form of flooding. Northrop argued that the flood exclusion in the excess policy was ambiguous because unlike the primary policy, its definition of "flood" did not reference wind-driven water. The U.S. District Court for the Central District of California agreed with Northrop and granted its motion for summary judgment.
On appeal, the Ninth Circuit reversed, rejecting the view that an ambiguity existed simply because an excess policy defined a term differently than the primary policy. The Court was not convinced by Northrop's argument that primary and excess policies should be construed as one contract, and held that California law did not support the application of such a rule.
While the Ninth Circuit ruled in favor of the insurer, the victory may prove pyrrhic. The Ninth Circuit declined to enter judgment in Factory Mutual's favor, and remanded for a determination of whether California's efficient proximate cause doctrine mandates coverage notwithstanding the flood exclusion. The Court of Appeal did not say that payment would be owed if Hurricane Katrina were identified as the efficient proximate cause of the loss, but that is certainly an inference one could expect Northrop to draw from the decision. Factory Mutual will argue, no doubt, that because the damage is divisible as between wind and water, the efficient proximate cause rule should not invalidate the flood exclusion. Time will tell how the courts will resolve this issue.