Northrop Grumman Corporation v. Factory Mutual Insurance Company
Filed August 14, 2008, Ninth Circuit Appeals Court
Cite as 07-56760

Judgment on Insured’s Claim for Flood Damages Caused by Katrina Reversed

The case originates from a claim filed by Northrop Grumman Corporation (insured) against its insurer, the Factory Mutual Insurance Company, for non-application of one of its policy coverage for damages in its facilities in the aftermath of Hurricane Katrina.

Northrop Grumman Corporation operated shipyards in Mississippi. The company bought a primary all-risk policy, and an excess policy excluding earthquake and flood coverage from Factory Mutual Insurance Company.

The primary policy defined “flood,” among other things, as loss resulting from overflowing bodies of water “whether driven by wind or not.” It defined “wind” as “direct action of wind including substance driven by wind.”

The primary policy coverage, defined the “named windstorm” as “the direct action of wind including any substance driven by wind” which was “identified by name prior to loss by any meteorological authority.”

On the other hand, the excess policy, which was also an all-risk policy, specifically excluded loss caused by various occurrences, including flood, and defined “flood” as water overflowing boundaries of bodies of water.

Neither “named windstorm” damage nor “wind” damage was defined or otherwise referenced in the excess policy.

Incidentally, during Hurricane Katrina’s storm surge, the company’s Mississippi properties were damaged by floods. Factory Mutual paid Northrop under the primary policy, and handled excess-policy losses caused by wind, covered without limitation, and losses caused by flood, excluded from coverage.

As a result, Northrop sued Factory Mutual in a California court for water damage under the excess policy.

In response, Factory Mutual removed the case to the district court, where both moved for partial summary judgment on whether the excess-policy flood exclusion barred water-damage coverage.

After hearing, the district court ruled for Northrop, finding the exclusion ambiguous for not clearly referencing hurricanes or damage caused by wind, and deferring to Northrop’s interpretation that it was limited to floods not caused by wind.

The insurance company filed an appeal.

During review, the Ninth Circuit Court of Appeals reversed, holding that Northrop’s water damage was excluded from coverage under its excess policy.

The court noted found that the water damage to Northrop’s shipyards fell squarely within the ordinary and plain meaning of “flood,” as well as within the meaning of the excess policy’s exclusion.

Further, the court held Northrop’s argument that “an ambiguity” existed due to different definitions of “flood” in the primary coverage and the excess policies were not supported in law.

The court based these conclusions on the following grounds:

• In fact, California case holds that a term in an excess policy may be unambiguous notwithstanding its being differently defined in the primary policy


• that absence of the phrase “whether driven by wind or not” from the flood exclusion rendered its otherwise clear language ambiguous, rather finding it indicated more a lack of specificity than an intent to narrow the exclusion.

Further, the court considered it of no import that neither “named windstorm” nor “wind” was defined and referenced in the excess policy.

Defining those terms in the primary policy did not create coverage that the excess policy failed to exclude. Rather, a sensible reading of the primary policy suggested that the terms were defined to explain when the special named-windstorm deductible would apply.

In contrast, there was no defined coverage for wind or for named windstorm in the excess policy, and thus no reason specifically exclude or even reference those terms.

The Ninth Circuit court of appeals therefore reversed a judgment of the district court, holding that an insured’s claim for water damage to its facilities from Hurricane Katrina was within the plain meaning of an excess policy’s flood exclusion.