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Northrop Grumman Corporation v. Factory Mutual Insurance Company

July 27, 2011

NORTHROP GRUMMAN CORPORATION, PLAINTIFF,
v.
FACTORY MUTUAL INSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Dean D. Pregerson United States District Judge

ORDER GRANTING PARTIAL SUMMARY JUDGMENT

[Motions filed on 2/11/2011]

Presently before the court is Plaintiff Northrop Grumman Corporation's ("Northrop"'s) Motion for Partial Summary Judgment Regarding Exhaustion Issues (Dkt. No. 268) and Motion Regarding the Burdens of Proof and of Going Forward With Respect to Establishing Exhaustion of Primary Coverage (Dkt. No. 269). Factory Mutual Insurance Company ("Factory Mutual") opposes Northrop's motions and has submitted a Motion for Partial Summary Judgment on Northrop's Burden to Prove Exhaustion of the Underlying Primary Insurance (Dkt. No. 270) and a Motion for Pretrial Ruling Regarding Proof of Northrop's Non-Flood Damage. (Dkt. No. 266.)

After reviewing the papers submitted by the parties, considering the arguments therein, and hearing oral arguments, the court GRANTS Northrop's Motion for Partial Summary Judgment Regarding Exhaustion Issues in part and DENIES it in part; GRANTS Factory Mutual's Motion for Partial Summary Judgment on Northrop's Burden to Prove Exhaustion of the Underlying Primary Insurance in part and DENIES it in part; GRANTS Northrop's Motion Regarding the Burdens of Proof and of Going Forward With Respect to Establishing Exhaustion of Primary Coverage; and DENIES Factory Mutual's Motion for Pretrial Ruling Regarding Proof of Northrop's Non-Flood Damage.

I. Background

Northrop is a global defense contractor. Its Mississippi subsidiary, Northrop Grumman Ship Systems, is headquartered in Pascagoula, Mississippi. Pascagoula is located on the Gulf of Mexico. Northrop has operations throughout the Gulf area. In August 2005, Hurricane Katrina hit the region and caused significant damage. Northrop estimates that it has sustained almost $940 million in property damage and other loss as a result of the Hurricane.

For the April 1, 2005, to April 1, 2006, policy year, Northrop purchased approximately $20 billion in all risk property insurance. Northrop's 2005-2006 property insurance program consists of two layers. The first layer consists of a $500 million layer of primary coverage (the "Primary Layer"). The Primary Layer is comprised of approximately 30 policies (the "Primary Policies"). Factory Mutual issued one of the Primary Layer's policies (the "Factory Mutual Primary Policy" or "Primary Policy").

The Factory Mutual Primary Policy is an "all risks" policy. The Primary Policy defines certain perils including "Earthquake" and "Flood." The Primary Policy include a Limits of Liability provision that limits certain coverages and perils to a lesser amount under the $500 million. For example, under the Primary Policies, there is a $400 million per occurrence sublimit applicable to property damage losses caused by the peril flood (the "Flood Sublimit").

The second layer is the excess layer (the "Excess Policy"). The Excess Policy is one all risks policy sold to Northrop by Factory Mutual. The Excess Policy provides approximately $20 billion worth of coverage for losses in excess of $500 million. The Excess Policy contains an exclusion for flood. The Limits of Liability provision in the Primary Layer states that the Excess Policy's $500 million attachment point is subject to the Excess of Loss provisions. The Excess of Loss provisions state that when a loss was caused by both covered and excluded losses, the Primary Policies are deemed to apply first to the excluded losses.

On November 4, 2005, Northrop filed suit against Factory Mutual in California state court, claiming coverage for water damage under the Excess Policy. Factory Mutual removed the case to this court, and the parties filed cross-motions for summary judgment on whether the flood exclusion in the Excess Policy barred coverage for storm surge damage from Hurricane Katrina. On August 16, 2007, this court entered partial summary judgment for Northrop, and on April 2, 2009, the Ninth Circuit reversed, holding that the Excess Policy's flood exclusion encompassed storm surge damage.

See Northrop Grumman Corp. v. Factory Mut. Ins. Co., 563 F.3d 777, 788 (9th Cir. 2009).

Presently before the court are the parties cross-motions for summary adjudication. First, the parties dispute whether storm surge damage caused by a "Named Windstorm" is excluded by the Factory Mutual Primary Policy's Flood Sublimit. Second, the parties dispute whether time element loss caused by flood is excluded by the Factory Mutual Primary Policy's Flood Sublimit. Finally, the parties disagree as to which party has the burden of identifying the claimed losses that are excluded under the Excess Policy.

II. Legal Standard

Summary judgment is appropriate where "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Celotex Corp. v. Catrett , 477 U.S. 317, 324 (1986). In deciding a motion for summary judgment, the evidence is viewed in the light most favorable to the non-moving party, and all justifiable inferences are to be drawn in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

A genuine issue exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party," and material facts are those "that might affect the outcome of the suit under the governing law." Id. at 248. No genuine issue of fact exists "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party."

Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587 (1986).

It is not enough for a party opposing summary judgment to "rest on mere allegations or denials of his pleadings." Anderson, 477 U.S. at 259. Instead, the nonmoving party must go beyond the pleadings to designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 325. The "mere existence of a scintilla of evidence" in support of the nonmoving party's claim is insufficient to defeat summary judgment. Anderson, 477 U.S. at 252. "Credibility determination, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge [when he or she] is ruling on a motion for summary judgment," Id. at 255.

Federal Rule of Evidence 201 permits a court to take judicial notice of adjudicative facts. "A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b). "A court shall take judicial notice if requested by a party and supplied with the necessary information." Fed. R. Evid. 201(d).

III. Discussion

A. Exhaustion of the Primary Policy

In the first phase of this case's litigation, it was established that the Excess Policy's flood exclusion also excludes coverage for damage to Northrop's properties caused by Hurricane Katrina's storm surge. Northrop Grumman, 563 F.3d at 788.

Northrop now argues that the Primary Policy's Flood Sublimit does not apply to storm surge losses caused by a "Named Windstorm." (Pl.'s Motion for Partial Summary Judgment 1:10-11.) Northrop further contends that the Flood Sublimit does not include related "Time Element," e.g. business interruption, loss. Factory Mutual opposes both arguments.

i. "Named Windstorm"

The Primary Policies provide Northrop with a $500 million primary layer of insurance coverage and have a $400 million sublimit for damage caused by flood. Northrop maintains that the Flood Sublimit does not apply to loss or damage caused by a "Named Windstorm," e.g. storm surge damage, because a "Named Windstorm" is a peril distinct from flood. (Pl.'s Motion for Partial Summary Judgment 11:13-15.) It follows, Northrop argues, that the Flood Sublimit does not apply, Northrop has exhausted the $500 million Primary Layer with "Named Windstorm" damages, and coverage under the Excess Policy is triggered. (Id. at 11:6-10.) Alternatively, Northrop argues that the Primary Policies' Priority of Payments provision entitles Northrop to treat its storm surge loss as "Named Windstorm" loss, even if such loss may also be characterized as flood loss. (Id. at 15:17-19.)

Although it is true that the Primary Policy defines an event called a "Named Windstorm," the court is not persuaded that "Named Windstorm" is a peril that is distinct from "Flood". Indeed, the Ninth Circuit previously consider and rejected Northrop's argument that the Primary Policy's mention and definition of "Named Windstorm" created coverage distinct from flood. (Factory Mutual's Mot. For Partial Summary Judgment 4:1-21, 5:5-7.) As the Ninth Circuit explained, "Named Windstorm" is a deductible found in the Primary Policy and not a peril or type of coverage:

[I]t is of no import that the primary policy defined the term Named Windstorm and Wind and that those terms were not referenced in the excess policy . . . . [D]efining Named Windstorm and Wind in the primary policy did not create coverage . . . . Rather, a sensible reading of the primary policy suggests that the terms were defined to explain when the special Named Windstorm deductible would apply.

Northrop Grumman, 563 F.3d at 787. A plain reading of the Primary Policy makes clear that any distinction made between a flood and a "Named Windstorm" applies only to a special, single $10,000 deductible to damage arising out of a "Named Windstorm;" and, there is no distinct category of coverage for damages caused by a named windstorm.

Furthermore, because the Factory Mutual Primary Policy contains a specified deductible for "Named Windstorm" it does not necessarily follow that the Primary Policy created coverage for "Named Windstorm" separate from flood coverage. Accordingly, Northrop's argument that the Priority of Payments provision of the Primary Policy entitles Northrop to treat damage excluded as flood losses as covered "Named Windstorm" losses, also fails. As discussed above, there is no separate peril or "bucket" of coverage for a named windstorm. Rather, "Named Windstorm," is a term used to explain the application of a single deductible to all losses (including, for example, wind and flood) occurring during a named storm or hurricane and has no application under the Priority of Payments provision.

In conclusion, accepting Northrop's interpretation of the policy would entail creating an entirely new category of coverage not present in Factory Mutual's Primary Policy. Therefore, Northrop's argument that the $400 million Flood Sublimit does not apply in this instance ...


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