Quote of the Day - The only dangerous hurricanes so far are the ones we've been drinking. We can't get out, so we might as well have fun.
What do you think constitutes the main reason the levees broke in New Orleans during Hurricane Katrina? Wind? Flood? Rain? A combination of all of the above? Maybe we could mix a poorly planned levee system not built by the Dutch, but that's blaming the U.S. Army Corps of Engineers too much.
Northrop Grumman had a shipyard in NO that suffered a substantial amount of damage as a result of the Hurricane when the storm surge hit 22 feet. To cover that risk, Northrop covered itself with two insurance policies: the primary for $500 million and a second, excess policy for $19.8 billion.
That's a big shipyard.
After the Hurricane, Northrop submitted a claim to Factory Insurance and got $15 million in coverage under the primary policy. When it came to the excess policy, Factory chose to separate the loss caused by wind from loss caused by flood and didn't pay anything because flood coverage was excluded from the excess policy. Flood and wind were covered together under the primary policy. Not happy with that result, Northrop sued in the case of Northrop Grumman v. Factory Mutual Insurance Company.
In the trial court Northrop won. On appeal, it lost, with the Ninth Circuit reasoning essentially that the two policies were separate contracts and since the coverage was different, the contract language was not ambiguous and controlled the relationship of the parties. The Court wasn't with some sympathy, however. It "remand[ed the case to the trial court] for a determination of whether California's efficient proximate cause doctrine mandates coverage of the damage notwithstanding our interpretation of the contractual language."
MIPTC has written about efficient proximate cause language before, and explained it this way: it's whatever event is the most important cause of the chain of events that led to the damage. You may not have read California Insurance Code section 530. It's one of the most confusing statutes I've read, and a California Supreme Court opinion, Julian v. Hartford, covers it fairly well. Here's how they say it:
So, if the wind was the most important cause of the damage, Northrop wins under its excess policy, even if flood is excluded. If the flood was the most important cause of the damage, then Northrop loses.
What's the difference? Just a few million dollars, give or take. Why does this analysis matter to you? Just move the decimal point over to the left one, two or three places as appropriate, and you'll find the insurance concepts are the same in your insurance policy.
What, you've never read it? Time to pull it out, dust it off and see what you have. Better to do it now than be in Northrop's position after the horses escaped.