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Vol. 3, Iss. 1
January 8, 2014


The $170 Million Stroke Of The Pen


Coverage Opinions
does not do a lot with first-party property cases. From my surveys and focus groups I know that the bulk of the readership is more closely aligned with liability coverage issues. Further, property coverage disputes are more likely to involve unique policy language. That makes the decisions less likely to have impact in subsequent cases.

But sometimes a property case comes up that is worthwhile to read even if you are not involved in that area of coverage. It may be because the issue is interesting. Or it may be because there is a lot at stake. Or maybe the case does in fact foretell future decisions. Or there could be a lesson to be learned that has applicability in the liability context. Or maybe it’s all of the above, as in the case of Federal Mogul Corp. v. Ins. Co. of the State of PA, No. 12-12005 (E.D. Mich. Dec. 10, 2013). [I’m also happy to include Federal Mogul here as there is a loyal Coverage Opinions reader that gives me grief about not including property cases.]

A lot of dollars were on the table in Federal Mogul -- as in $58 million according to the insured, and even as many as $170 million. A coverage case with $58 million on the line is unusual but not extraordinary. But usually when that much money is at stake the case involves several insurers and a lot of facts and issues and litigation that goes on for years. That wasn’t the case in Federal Mogul. It involved one insured versus one insurer. Further, the case was filed on May 3, 2012 and concluded, in favor of the insured, on December 10, 2013 (the insurer filed a notice of appeal a week later; and there seem to be some lingering procedural issues). And despite the amount at stake, the court was able to resolve a major issue on summary judgment.

At issue in Federal Mogul was the extent of coverage available for an October 2011 flood at FM’s facility in Thailand. FM alleged that the damages exceeded $88 million and filed a claim with the insurer under its policy. The insurer paid $30 million on the basis that the “High Hazard Zone” flood provision in the policy capped its obligation at that amount. FM disputed that the High Hazard provision applied and filed an action seeking coverage under the policy’s $200 million annual aggregate limit for flood liability.

The policy’s limit of liability section stated: $200,000,000 Flood Aggregate Limit of Liability for all locations combined in any one policy year, except: $70,000,000 Flood for Moderate Hazard Zones (Annual Aggregate); $30,000,000 Flood for High Hazard Zones (Annual Aggregate).

The policy defined High Hazard Zone for Flood as follows: a) all property at a “location” that is partially or totally situated in an area which at the time of loss or damage has been designated on a Flood Insurance Rate Map (FIRM) to be a Special Flood Hazard Area (SFHA), and/or b) all property in areas where the National Flood Insurance Program (NFIP) is not in effect, and where all property at a “location” is partially or totally situated in an area which is within a 100 year flood plain or its worldwide equivalent, and/or c) all property at a “location that is partially or totally protected by dams, dikes, levees or walls which were intended to protect such property from the level of a 100 year flood or its worldwide equivalent, regardless of any Zone or Area designation or assignment by the Federal Insurance and Mitigation Administration (FIMA) or other recognized authority having jurisdiction.

So the issue boiled down to this. Was the flood within a High Hazard Zone?

First, the court determined that, since the insurer was relying on an exclusion or sublimit to exclude certain payment, it bore the burden of proof.

Turning to the substantive issue, the court was required to interpret clause (b) of the definition of High Hazard Zone for Flood: “all property in areas where the National Flood Insurance Program (NFIP) is not in effect, and where all property at a ‘location’ is partially or totally situated in an area which is within a 100 year flood plain or its worldwide equivalent.”

Following an interpretation of clause (b) of the definition of High Hazard Zone for Flood, that was tied to clauses (a) and (c), the court held that “the policy unambiguously requires that a predetermined 100–year flood plain must have existed at the time of the flood. The parties agree that neither Thailand, nor any country or governmental/private body, had determined that Plaintiff's facility was in a 100–year floodplain before the flood.” Therefore, the High Hazard Zone limit did not apply and FM was entitled to assert claims over the $30 million limit.

Cases like Federal Mogul are not going to arise every day. But major flooding outside the United States seems to happen a lot. And there have been other coverage disputes over the 2011 Thailand flooding. It is hard to imagine Federal Mogul not having an impact in any other coverage disputes involving this 100–year flood plain issue. It is also hard to imagine any insurer, that writes coverage for floods taking place outside the United States -- especially using policies that apply different limits for different types of floods, and tying coverage to a predetermined 100–year flood plain -- not taking a close look at Federal Mogul in conjunction with its own policy language. Even if the insurer ultimately prevails on appeal, a review of such policy language is no less important.

As for Federal Mogul providing a lesson to be learned in the liability context, it is simply that sub-limits can be tricky. A sub-limit in a policy is often an invitation over a dispute whether it, or the main limit, applies.

 
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