Earlier this month, a federal district court in California granted an insured’s motion for partial summary judgment in a Katrina-related coverage case, holding that flood damage arising out of storm surge is not excluded under the policy’s flood exclusion.  A copy of the court decision is available here

The litigation was between Northrop Grumman Corporation against its insurer, Factory Mutual Insurance Company, captioned Northrop Grumman Corp. v. Factory Mutual Ins. Co., Case No. CV058444 DDP (PLAx), venued in the United States District Court Central District of California. 

According to the decision, Northrop is a defense and technology company based in California.  Its subsidiary, Northrop Grumman Ship Systems, is a shipbuilder headquartered in Mississippi.  At issue are Northrop’s property insurance policies for the 2005-2006 policy year.  Its primary policy contained limits of liability of $100 million, and covered all risks including flood and earthquakes. Factory Mutual had a 15% share in the primary policy level.  At issue in the litigation was Northrop’s excess insurance policy, also an all risk policy, in which Factory Mutual reportedly had 100% of the risk.  Under the excess policy, Factory Mutual provided $19.8 billion in blanket coverage in excess of $500 million in losses.

Northrop submitted claims for damages sustained to its military shipyards located in Mississippi during Hurricane Katrina.  Factory Mutual, acting as excess carrier, denied coverage for the damage under the policy’s flood exclusion.  The parties filed motions for partial summary judgment that were heard by the court on May 25, 2007. 

The issue before the court was whether the excess policy excluded coverage for flood damage caused by a storm surge.  The excess policy contained a flood exclusion that stated as follows:

Flood; surface waters, rising waters; waves; tide or tidal water; the release of water, the rising, overflowing or breaking of boundaries of natural or man-made 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.

This exclusion was different than that in the primary policy, which contained a flood exclusion that excluded damage from flood “whether driven by wind or not.” 

The court held that under the excess policy’s flood exclusion, flood damage arising out of storm surge was not excluded, noting that:

. . . although Factory Mutual may have intended for the flood definition in the [primary policy] to convey the same intent as [the excess policy’s] definition, the language used did not clearly and explicitly accomplish that objective.  Moreover, as a matter of California law, the words “whether driven by wind or not” in the Primary Policy are not surplusage, and their absence from the Excess Policy cannot be deemed meaningless.

The court also examined the meaning of the term “storm surge,” concluding that that the accepted definitions characterize “storm surge” as “water pushed by the wind that combines with the hurricane storm tide to cause significant flooding,” and stressed that under an all-risk policy, all risks are covered except for those that are specifically excluded. 

This decision may be appealed and we will provide updates on InsureReinsure.com