Northrop Grumman Corporation v. Factory Mutual Insurance Company et al, No. 2:2005cv08444 - Document 513 (C.D. Cal. 2013)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART NORTHROPS MOTION FOR SUMMARY JUDGMENT AND GRANTING FACTORY MUTUALS MOTION FOR DECLARATION 429 , 439 by Judge Dean D. Pregerson. (lc). Modified on 7/18/2013 (lc).
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Northrop Grumman Corporation v. Factory Mutual Insurance Company et al Doc. 513 1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 NORTHROP GRUMMAN CORPORATION, 12 Plaintiff, 13 v. 14 15 FACTORY MUTUAL INSURANCE COMPANY, 16 17 Defendant. ___________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 05-08444 DDP (PLAx) ORDER GRANTING IN PART AND DENYING IN PART NORTHROP’S MOTION FOR SUMMARY JUDGMENT AND GRANTING FACTORY MUTUAL’S MOTION FOR DECLARATION [Dkt. Nos. 429 & 439] 18 Presently before the court are Plaintiff Northrop Grumman’s 19 Motion for Partial Summary Judgment and Defendant Factory Mutual 20 Insurance Company’s Phase II Motion for Summary Judgment. 21 considered the parties’ submissions and heard oral argument, the 22 court adopts the following order. 23 I. BACKGROUND 24 Having Northrop Grumman Corporation ("Northrop") is a global defense 25 contractor. 26 the Gulf Coast. 27 Systems, is headquartered in Pascagoula, Mississippi. 28 shipbuilding business consists of two primary shipyards in Northrop operates shipyards and facilities throughout Its Mississippi subsidiary, Northrop Grumman Ship Northrop's Dockets.Justia.com 1 Pascagoula and New Orleans, Louisiana ("Avondale"). 2 1999, Northrop acquired a company which had acquired Avondale. 3 part of the acquisition, Northrop acquired contracts with the Navy 4 and Coast Guard for the construction of ships including LHD-8, 5 LPDs, DDGs, and NSCs. 6 delivery of a commercial ship program called Polar. In or about As The Avondale yard was also finalizing 7 For the April 1, 2005, to April 1, 2006, policy year, Northrop 8 purchased approximately $20 billion in all risk property insurance. 9 Northrop's 2005–2006 property insurance program consists of two 10 layers. 11 primary coverage (the "Primary Layer"). The Primary Layer is 12 comprised of approximately 30 policies. Factory Mutual Insurance 13 Company ("Factory Mutual") issued one of the Primary Layer's 14 policies (the "Factory Mutual Primary Policy" or "Primary Policy"). 15 The first layer consists of a $500 million layer of The Factory Mutual Primary Policy is an "all risk" policy. 16 The Primary Policy defines certain perils including "Flood." 17 second layer is the excess layer (the "Excess Policy"). 18 Policy is a single all risk policy sold to Northrop by Factory 19 Mutual. 20 of coverage for losses in excess of $500 million. 21 Policy contains an exclusion for flood. 22 provision in the Primary Layer states that the Excess Policy's $500 23 million attachment point is subject to the Excess of Loss 24 provisions. 25 was caused by both covered and excluded losses, the Primary 26 Policies are deemed to apply first to the excluded losses. The The Excess The Excess Policy provides approximately $20 billion worth The Excess The Limits of Liability The Excess of Loss provisions state that when a loss 27 The Primary Policy provides a number of time element coverages 28 to indemnify Northrop for financial and economic losses that result 2 1 from property damage. 2 property damage and Time Element coverage. 3 Element coverage, the Excess Policy states as follows: 4 A. 5 6 7 8 9 10 11 12 With regard to Time This Policy insures TIME ELEMENT loss, as provided in the TIME ELEMENT COVERAGES, directly resulting from physical loss or damage of the type insured by this Policy: 1) to property described elsewhere in this Policy and not otherwise exclude by this Policy or otherwise limited in the TIME ELEMENT COVERAGES below; 2) used by the Insured, or for which the Insured has contracted use; 3) located at an Insured Location; or 4) while in transit as provided by this Policy, and 5) during the Periods of Liability described in this section. (Chris B. Roza Decl. Exh. 1-A.) 13 14 The Excess Policy also provides coverage for The Time Element Coverages in the Excess Policy are defined and include the loss of gross earnings as follows: 15 1) 16 17 18 19 20 21 Measurement of Loss: a) The recoverable GROSS EARNINGS loss is the Actual Loss Sustained by the Insured of the following during the PERIOD OF LIABILITY: (i) Gross Earnings; (ii) less all charges and expenses that do not necessarily continue during the interruption of production or suspension of business operations or services; (iii)plus all other earnings derived from the operation of the business. 22 (Id.) 23 "the net sales value of production less the cost of all raw stock, 24 materials and supplies used in such production." 25 Gross Earnings for manufacturing operations are defined as (Id.) In August 2005, Hurricane Katrina struck the Gulf Coast region 26 and caused significant damage. 27 in the process of building ships LHD-8, LPD 17 and 19, DDG 100, 28 103, 105, 107, and 110, and NSC 1 and 2. Northrop's Pascagoula shipyard was 3 (Hendry Report, §§ 2, 3; 1 LeeVan Report at pp. 7, 10; Yount Depo at 40:1-11. ) 2 shipyard was finalizing Polar E and building LPD 18, 20, and 21. 3 (Id.) 4 portions of some of the ships were assigned to other Gulf Coast 5 shipyards as well. 6 35:17-37:5; Yount Depo at 87:8-14.) 7 The Avondale Although each of the ships had a primary building location, (Hendry Report, §§ 2, 3; 2013 Lee Van Depo at It is undisputed that, at the time of Hurricane Katrina, the 8 contract in place for LPDs 18-20 was a cost plus award fee 9 contract, and the contract for LPD 21 was a cost plus incentive fee 10 contract, and that under these types of contracts, Northrop was 11 entitled to reimbursement from the Navy for allowable costs 12 incurred to build the ship, including overhead costs. 13 Hurricane Katrina struck, Northrop was not entitled to any 14 incentive fees on the LPDs 18-20. 15 When It is also undisputed that between 2005 and 2009, Northrop 16 received federal income tax relief pursuant to the Katrina 17 Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act 18 of 2005. 19 offset to Northrop's insurance claim of approximately $9.4 million 20 based on the federal income tax credit. 21 Factory Mutual's sixteenth affirmative defense asserts an Northrop moves for summary judgment on Factory Mutual’s 22 sixteenth Affirmative Defense, arguing that there should be no 23 offset of the Tax Credit or of certain payments from the Navy. 24 Factory Mutual moves for summary judgment on Northrop’s Time 25 Element claim, (1) arguing that it is entitled to summary judgment 26 because Northrop has failed to tie its Time Element claim to 27 property damage or loss or seeking, in the alternative, a 28 declaration that all Time Element loss must result from property 4 1 damage or loss and that it is Northrop’s burden to demonstrate as 2 much, and (2) arguing that it is entitled to summary judgment on 3 Northrop’s Time Element claims for ships LPD 18-21 because Northrop 4 was fully compensated for those ships by the Navy. 5 II. LEGAL STANDARD 6 Summary judgment is appropriate where the pleadings, 7 depositions, answers to interrogatories, and admissions on file, 8 together with the affidavits, if any, show “that there is no 9 genuine dispute as to any material fact and the movant is entitled 10 to judgment as a matter of law.” 11 seeking summary judgment bears the initial burden of informing the 12 court of the basis for its motion and of identifying those portions 13 of the pleadings and discovery responses that demonstrate the 14 absence of a genuine dispute of material fact. 15 Catrett, 477 U.S. 317, 323 (1986). 16 the evidence must be drawn in favor of the nonmoving party. 17 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). 18 If the moving party does not bear the burden of proof at trial, it 19 is entitled to summary judgment if it can demonstrate that “there 20 is an absence of evidence to support the nonmoving party’s case.” 21 Celotex, 477 U.S. at 325. 22 Fed. R. Civ. P. 56(a). A party Celotex Corp. v. All reasonable inferences from See Once the moving party meets its burden, the burden shifts to 23 the nonmoving party opposing the motion, who must “set forth 24 specific facts showing that there is a genuine issue for trial.” 25 Anderson, 477 U.S. at 256. 26 party “fails to make a showing sufficient to establish the 27 existence of an element essential to that party’s case, and on 28 which that party will bear the burden of proof at trial.” Summary judgment is warranted if a 5 Celotex, 1 477 U.S. at 322. 2 that a reasonable jury could return a verdict for the nonmoving 3 party,” and material facts are those “that might affect the outcome 4 of the suit under the governing law.” 5 There is no genuine issue of fact “[w]here the record taken as a 6 whole could not lead a rational trier of fact to find for the non- 7 moving party.” 8 475 U.S. 574, 587 (1986). 9 A genuine issue exists if “the evidence is such Anderson, 477 U.S. at 248. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., It is not the court’s task “to scour the record in search of a 10 genuine issue of triable fact.” 11 1279 (9th Cir. 1996). 12 support clearly. 13 F.3d 1026, 1031 (9th Cir. 2001). 14 entire file for evidence establishing a genuine issue of fact, 15 where the evidence is not set forth in the opposing papers with 16 adequate references so that it could conveniently be found." 17 III. DISCUSSION OF NORTHROP’S MOTION 18 Keenan v. Allan, 91 F.3d 1275, Counsel has an obligation to lay out their Carmen v. San Francisco Unified Sch. Dist., 237 The court “need not examine the Id. Northrop argues that it is entitled to summary judgment on 19 Factory Mutual’s sixteenth affirmative defense, according to which 20 Northrop’s claim should be reduced by (1) approximately 9.4 million 21 of the federal income tax credits that Northrop received, and (2) 22 payments from the Navy. 23 A. 24 The Factory Mutual Primary Policy includes “Business Offset of Tax Credit 25 Interruption - Gross Earnings” coverage. 26 dispute that as part of the adjustment of Northrop’s loss, Factory 27 Mutual agreed to treat as covered under the Primary Layer the total 28 amount of retention pay that Northrop paid to its employees ($38 6 The parties do not 1 million) during the period Northrop’s business was inoperable due 2 to Hurricane Katrina. 3 Northrop received a tax credit totaling nearly $9.4 million (the 4 “Tax Credit”). 5 and 202 of the Katrina Emergency Tax Relief Act of 2005 and the 6 Gulf Opportunity Zone, which allowed eligible employers to receive 7 a tax credit of 40% of the first $6,000 in wages paid to each 8 eligible current employee (i.e. $2,400) immediately after the 9 storm. The parties also do not dispute that Northrop obtained the Tax Credit from Sections 201 Pub. L. No. 109-73 § 202, 119 Stat. 2021, 2021-22 (2005), 10 as amended by Pub L. No. 109-135, § 201, 119 Stat. 2596, 2602 11 (2005)(codified at 26 U.S.C. § 1400R(2006)). 12 Both the Primary Policy and the Excess Policy have provisions 13 allowing offsets. 14 “Salvage and Recoveries” provision: 15 16 17 18 The Primary Policy contains the following Except as described in Clause 27, after expenses incurred in salvage or recovery are deducted, any salvage or other recovery, except recovery through subrogation proceedings and/or from underlying and/or excess insurance as described herein, shall accrue entirely to the benefit of the Insurer until the sum paid by the Insurer has been recovered. 19 (Northrop Exh. B, pp.42-43, ¶ 28.) 20 following “Collection from Others” provision: 21 The Excess Policy contains the The Company will not be liable for any loss to the extent that the Insured has collected for such loss from others. 22 (Northrop Exh. C, p. 105, § D, ¶ 6.) 23 Factory Mutual argues that the Tax Credit falls within both 24 the “Salvages and Recoveries” provision and the “Collection from 25 Others” provision. According to Factory Mutual, the Tax Credit 26 constitutes a recovery for the retention pay, and Factory Mutual is 27 entitled to offset $9.4 million of the $38 million that Northrop 28 7 1 spent on retention pay. 2 not constitute a recovery and should not be offset from Factory 3 Mutual’s retention pay payment. 4 Northrop contends that the Tax Credit does Factory Mutual points to a case from the Virginia Supreme 5 Court where the court found that an insurance company could offset 6 federal funds because those funds constituted a recovery. 7 Capital Insurance Company v. US Airways, Inc., 271 Va. 352, 360-61 8 (2006). 9 Transportation Safety and System Stabilization Act (“Stabilization PMA The case concerned funding provided under the Air 10 Act”), which was enacted after 9/11 to “compensate air carriers . . 11 . for both ‘direct losses’ as a result of ‘any Federal ground stop 12 order’ and ‘incremental losses’ as a ‘direct result of’ the 13 September 11, 2011, terrorist attacks.” 14 Stabilization Act). 15 of “recoveries” under the policy because they met the definition of 16 “recovery” as “the regaining or restoration of something lost or 17 taken away.” 18 ed. 2004)). 19 Id. at 359 (quoting the The court found that those funds were a form Id. at 360 (citing Black’s Law Dictionary 1302 (8th Factory Mutual argues that here, as in PMA, the $9.4 million 20 tax credit is a “recovery” by Northrop of a portion of the $38 21 million retention pay that Factory Mutual has treated as covered 22 under the primary layer. 23 directly on the amount Northrop spent in retention pay. 24 Tax Relief Act of 2005, PL 109-73, §§ 201-202, September 23, 2005, 25 119 Stat 2016 (allowing eligible employers to receive a tax credit 26 of 40% of the first $6,000 in wages paid to each eligible current 27 employee). 28 recovery of a portion of the amount it paid in retention pay. The amount of the Tax Credit depended Emergency The Tax Credit thus, according to Factory Mutual, is a 8 If 1 Northrop were to retain the Tax Credit as well as the full $38 2 million in retention pay from Factory Mutual, Northrop would end up 3 with over $47 million recovery for retention, when it only paid out 4 $38 million, which Factory Mutual calls a windfall. 5 The court finds this situation to be factually distinguishable 6 from PMA. 7 was intended as an incentive for employers to retain employees, not 8 as a compensation for loss. 9 of these provisions . . . help businesses, help employers; and, of Unlike the Stabilization Act in PMA, the Tax Credit here As one congressman put it, “[s]everal 10 course, we are trying to encourage employers in these affected 11 areas to bring workers back and to create jobs so that people can 12 come back and have an income.” 151 Cong. Rec. H8189-01 (2005) 13 (statement of Cong. McCrery)). See also 151 Cong. Rec. S13702-01 14 (2005)(statement of Sen. Baucus)(“We must encourage individuals to 15 return. 16 to. 17 jobs.”), and 151 Cong. Rec. H8014, H8018 (daily ed. Sept. 15, 18 2005)(statement of Cong. Jefferson)(“[T]he Katrina Emergency Tax 19 Relief Act also provides targeted incentives for returning 20 businesses and new businesses to employ the thousands of 21 hardworking Americans who have been displaced or lost jobs to 22 Hurricane Katrina.”). 23 Retention Credit for Employers Affected by Hurricane Katrina,” 24 which emphasizes a credit rather than compensation for a loss. 25 these reasons, the court finds that the Tax Credit is not a 26 “recovery” or a “collection from others” in the sense of the Policy 27 because it is not a compensation for a loss but instead an 28 incentive to encourage employee retention. And this means that there must be jobs for them to return This legislation gives businesses help to create those The relevant section is entitled “Employee 9 For 1 This holding is consistent with the FEMA cases discussed by 2 both parties, Hawaii v. FEMA, 294 F.3d 1152 (9th Cir. 2002), and 3 Kiln Underwriting Ltd. v. Jesuit High School of New Orleans, No. 4 06-4350, 2008 WL 4724390 (E.D. La. Oct. 24, 2008). 5 concern the government’s power to obtain reimbursement when FEMA 6 funds recipients later receive compensation from private insurance 7 policies. 8 statute to create incentives for companies to obtain private 9 insurance instead of depending on federal FEMA funds in the case of The FEMA cases The cases emphasize Congress’s intent in the FEMA 10 disaster. 11 concern, then, was that when there was the safety net of federal 12 disaster relief, covered parties and insurers were not seeking or 13 providing insurance coverage as they otherwise would.”). 14 FEMA statute, Congress explicitly required FEMA funds to be 15 reimbursed if recipients of those funds were “available to the 16 person for the same purpose from another source.” 42 U.S.C. § 17 5155. Here, in 18 contrast, although Congress was doubtless aware that at least some 19 employers would have business interruption insurance, Congress did 20 not require reimbursement of the Tax Credit in the statute. 21 it appears that through the Tax Credit Congress intended to give 22 companies an incentive to retain the employees during the recovery 23 period. See, e.g. Hawaii v. FEMA, 294 F.3d at 1163 (“Congress’ See also Hawaii v. FEMA, 294 F.3d at 1158. In the Thus, 24 Because the Tax Credit was conceived as an incentive to retain 25 employees rather than compensation for a loss, the court finds that 26 the Tax Credit was not a “recovery” or “collection for such loss 27 from others” under the Policies and GRANTS summary judgment in 28 favor of Northrop on this issue. Having granted summary judgment 10 1 on this issue, the court need not consider Northrop’s other two 2 arguments against offset. 3 B. Payments from the Navy 4 Northrop argues that Factory Mutual may not offset certain 5 payments that the Navy has made to Northrop. The parties agree 6 that Factory Mutual is entitled to a credit for amounts that the 7 Navy was contractually obligated to pay to Northrop. 8 appears to maintain that it has already accounted for all Navy 9 payments and deducted them from its claim, and that in any event, Northrop 10 the Navy did not pay it more than it was contractually obligated to 11 pay when escalation payments are taken into account. 12 Mutual disputes that the Navy paid only its contractually obligated 13 fee, and also points out that Northrop has not indicated the 14 precise claim from which the Navy payments have been deducted. Factory 15 The court finds that because this issue is bound up in 16 disputed questions of methodology of calculating Northrop’s loss, 17 this issue is better suited for trial than for summary judgment. 18 The court therefore DENIES summary judgment. 19 IV. DISCUSSION OF FACTORY MUTUAL’S MOTION 20 Factory Mutual moves to dismiss Northrop’s Time Element claim 21 because the claim is not limited to loss resulting from insured 22 physical loss or damage, or, in the alternative, seeks a 23 declaration that Northrop’s recovery under the Excess Policy is 24 limited to the Time Element loss that Northrop can establish was a 25 direct result of physical loss or damage and that Northrop bears 26 the burden to tie its claimed Time Element losses directly to the 27 insured physical loss or damage. Factory Mutual also moves to 28 11 1 dismiss the Time Element claim for ships 18-21 because Northrop did 2 not actually sustain a loss for those ships. 3 A. Time Element Claim 1. Policy Language 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 The Excess Policy provides coverage for both property damage and Time Element loss. A. The Time Element coverage is as follows: This Policy insures TIME ELEMENT loss, as provided in the TIME ELEMENT COVERAGES, directly resulting from physical loss or damage of the type insured by this Policy: 1) to property described elsewhere in this Policy and not otherwise excluded by this Policy or otherwise limited in the TIME ELEMENT COVERAGES below; 2) used by the Insured, or for which the Insured has contracted use; 3) located at an Insured Location; or 4) while in transit as provided by this Policy, and 5) during the Periods of Liability described in this section. (Factory Mutual Mot., Exh. 1A, Appx. p. 0023.) The Primary Policy also provides coverage for Business Interruption as follows: Loss due to the necessary interruption of business conducted by the Insured including all interdependencies between or among companies owned or operated by the Insured caused by physical loss or damage insured herein during the term of this policy to real and/or personal property described in Clause 7.A. (Northrop Mot., Exh. B at 16.) Northrop argues that although the Excess Policy requires the Time Element loss to result directly from property damage, that property damage need only be “damage of the type insured” by Factory Mutual, and not necessarily damage to insured property. On this argument, if there were damage to property that was not owned by Northrop and not insured by Factory Mutual but that met one of 28 12 1 criteria (1) through (4) and criterion (5), and if this damage 2 resulted in Time Element loss for Northrop, the Excess Policy would 3 cover it. 4 Factory Mutual does not contest this interpretation of the 5 Policy. Factory Mutual insists only that Northrop can recover for 6 Time Element loss only if that loss arises from some insured 7 physical damage. 8 the Excess Policy and the Primary Policy require Time Element or 9 Business Interruption losses to be the direct result of insured The court agrees with Factory Mutual that both 10 physical loss or damage.1 11 losses not connected to physical loss or damage are not subject to 12 coverage under these Policies. 13 Time Element or Business Interruption The court also agrees with Factory Mutual that the language of 14 “directly resulting” requires that there be a causal link between 15 the insured property damage and the claimed Time Element loss. 16 See, e.g., Syufy Enterprises v. Home Ins. Co. of Indiana, No.94- 17 0756, 1995 WL 129229 at *2 (N.D. Cal. March 21, 1995)(excluding 18 19 20 21 22 23 24 25 26 27 28 1 By “insured physical damage” or “insured property damage,” the court means property damage as specified in the Time Element insurance provision, which, as Northrop discusses, apparently includes damage to property that in a strict sense may not be considered “insured property.” For instance, hypothetically, if a shipyard is insured and there is damage to a vehicle not covered by the policy but parked at the shipyard, resulting in time element loss, the physical damage resulting in the time element loss would not strictly speaking be damage to “insured property.” Nonetheless, it could be a source of Time Element loss covered by the Excess Policy here under category (2) or (3) (covering Time Element loss resulting from property “used by the insured” or property “located at an Insured Location.”). The court thus uses the term “insured property damage” as a shorthand for physical damage that will result in Time Element coverage if it causes a relevant loss, as defined in the Policies. “Insured property damage” need not be damage to property covered by the Policy; it must simply be property which, when damaged, could give rise to a covered Time Element loss claim. 13 1 coverage for business interruption loss due to curfews following 2 the Rodney King trial because the “requisite causal link between 3 damage to adjacent property and denial of access to a Syufy theater 4 is absent. 5 the city-wide curfews, not as a result of adjacent property 6 damage.”). 7 Syufy opted to close its theaters as a direct result of The court does not credit Northrop’s argument that the Primary 8 Policy has a looser causation requirement than the Excess Policy 9 because the Primary Policy does not use the word “directly.” Both 10 Policies are clear in linking the non-physical loss to physical 11 loss or damage. 12 same coverage in this respect, the court also rejects Northrop’s 13 argument that Time Element loss that is not caused by physical 14 damage will be covered by the Primary Policy. 15 16 Because the court finds that the policies have the 2. Burden to demonstrate causal link Factory Mutual argues that Northrop bears the burden to 17 demonstrate the causal link between insured property damage and its 18 claimed Time Element losses. 19 previous order the court determined that Factory Mutual bears the 20 burden to segregate covered damage from excluded damage because the 21 Excess Policy insures all risks except those excluded. 22 Mutual nonetheless asserts that Northrop has the burden to 23 establish its claim for Time Element loss because it is a condition 24 of coverage, not an exclusion. 25 previous order that Factory Mutual has the burden to prove 26 exclusion under the Excess Policy should also apply here. 27 Additionally, Northrop accuses Factory Mutual of attempting to hold Factory Mutual acknowledges that in a Factory Northrop argues that the court’s 28 14 1 it to an impossible burden of demonstrating its precise loss with 2 “complete precision.” 3 The court finds that Northrop has the burden of proving that 4 its claims are covered by the Policy. “The insured has the burden 5 of establishing that a claim, unless specifically excluded, is 6 within basic coverage, while the insurer has the burden of 7 establishing that a specific exclusion applies.” 8 Ins. Co. of Am., 49 Cal. 4th 315, 322 (2010), opinion after 9 certified question answered sub nom. Minkler v. Safeco Ins. Co., Minkler v. Safeco 10 399 F. App'x 230 (9th Cir. 2010). 11 Element loss “directly resulting from” certain types of property 12 damage. 13 only certain types of Time Element loss are covered. 14 Policy identifies the covered Time Element loss by requiring that 15 such loss directly result from certain types of property loss. 16 required connection to physical damage functions as a condition of 17 coverage, rather than an exclusion. 18 Factor Mut. Ins. Co., 453 F.3d 1281, 1287 (10th Cir. 2006)(internal 19 citation and quotation marks omitted, emphasis added) (Under 20 Colorado law, “[u]nder an all-risk policy, once the insured 21 demonstrates a loss to the property covered by the policy, the 22 insurance carrier has the burden of proving that the proximate 23 cause of the loss was excluded by the policy language.”). 24 The Excess Policy covers Time Although the Excess Policy is itself an all-risk policy, The Excess The See Leprino Foods Co. v. In its previous order the court found that it was Factory 25 Mutual’s burden to justify exclusions because the policy was an 26 all-risk policy that insured Northrop against all risks of physical 27 loss, subject only to certain specific exclusions. 28 Grumman Corp. v. Factory Mut. Ins. Co., 805 F. Supp. 2d 945 (C.D. 15 Northrop 1 Cal. 2011). The court found that according to the provisions of 2 the policy, “where more than one coverage applies, the Primary 3 Policies apply first to those coverages or perils not insured by 4 the Excess Policy.” 5 requirement that Time Element loss directly result from insured 6 property damage functions as a condition of coverage, and the 7 burden remains on the insured to establish that its loss falls 8 within the coverage. 9 implicated here. 10 Id. at 954. Here, in contrast, the The court’s previous holding is therefore not The court rejects Northrop’s argument that any Time Element 11 loss not covered by the Excess Policy will be covered by the 12 Primary Policy. 13 Policies require that time element or business interruption loss be 14 tied to property damage or loss. 15 covered in the Excess Policy is highly unlikely to be covered by 16 the Primary Policy. 17 demonstrating coverage, not exclusion, and the burden falls, as is 18 typical, upon the insured. Thus any time element damage not For this reason, the burden is a burden of 3. Northrop’s Claim 19 20 As discussed above, both the Excess and Primary Factory Mutual offers evidence of a number of ways in which 21 Northrop’s claimed Time Element loss is not tied to physical loss 22 or damage. 23 some “non-Katrina impacts” before making its Time Element claim. 24 (Exh. 2-S, Spiker Depo, Appx. p. 0813.) 25 CFO and designated corporate representative Bob Spiker testified 26 that the methodology included “impacts that are not just a result 27 of physical damage to the yard from Hurricane Katrina” including 28 “[l]abor impacts. Factory Mutual acknowledges that Northrop did remove However, Northrop’s former Impacts to our work force and ability to hire 16 1 after Katrina. 2 paid the property damage but yet cost disruption in a production.” 3 (Id. at 818-819.) 4 report: 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 And impacts of - from Navy property that the Navy Northrop’s expert Cheryl LeeVan stated in her Northrop did not identify and I did not attempt to adjust Northrop’s Hurricane Katrina lost profits claim for profit impacts, if any, that were caused by the impact of Hurricane Katrina upon Northrop’s operations, yet not caused by Northrop’s Hurricane Katrina property damage. I was requested to assume the lost profits I measure are covered by Northrop’s insurance policies, as is Northrop’s contention. (Exh. 2B at Appx. p. 0211.) The types of impacts claimed as loss by Northrop that according to Factory Mutual are unrelated to insured physical loss or damage include (1) post-Katrina labor shortages that affected Northrop’s ability to build ships following the storm, including inconsistent return of labor to yards, supplementing Polar E workforce with workers unfamiliar with Polar E (Factory Mutual Exh. 2-C, Appx. pp. 0455, 0459, 0461)(Hendry Report), thus increasing Northrop’s costs and delaying its schedule; (2) preKatrina issues with various ship programs that continued to affect ship costs and schedules; (3) inconsistent Navy funding; and (4) Northrop’s work on other ships in the yards but not included in the claim. Northrop challenges these claims. Northrop asserts that (1) it has demonstrated loss due to labor shortages that was related to property damage (see e.g., Teel Depo 146:18-147:14; Hendry Decl. ¶ 31); (2) it removed all pre-Katrina issues from its claim (LeeVan Decl. ¶¶ 9, 19, 21); (3) it removed all effects of inconsistent Navy funding from the claim, (LeeVan Decl., ¶ 9, Exh. D., LeeVan 28 17 1 Report at 56-67) and (4) the impacts on ships in other yards are 2 related to insured property damage (Hendry Decl. ¶¶ 23, 27, 34.). The court finds that there are triable issues of fact as to 3 4 whether Northrop has met its burden in demonstrating that its Time 5 Element claim results from insured physical loss or damage. 6 question implicates other factual questions concerning the 7 credibility of the potentially conflicting accounting methodologies 8 employed by the parties, and whether Northrop’s top-down accounting 9 approach appropriately identified the Time Element loss caused by This 10 insured physical damage. See, e.g. Exh. B., Hendry Report ¶¶ 5.3- 11 5.6. 12 court to grant summary judgment on this issue. 13 credibility of the expert reports will be a question for the fact- 14 finder. 15 Element loss to physical damage as required by the Policy will 16 depend on the weight the jury gives to the parties’ respective 17 methodologies for calculating that loss. Given the disputed methodologies, it is inappropriate for the Evaluating the Whether Northrop has met its burden of tying its Time 4. Conclusion on Time Element 18 Factory Mutual asks, in the alternative, for the court to find 19 20 that Northrop’s recovery is limited to the Time Element loss that 21 Northrop can establish was a direct result of physical loss or 22 damage and that Northrop bears the burden to establish the causal 23 link. 24 policy and burden and finds it appropriate to issue a declaration 25 that (1) Time Element loss not directly resulting from physical 26 loss or damage is not covered under the Excess Policy, and (2) it 27 is Northrop’s burden to establish this causal link with respect to 28 all of its claimed Time Element losses. The court agrees with Factory Mutual’s interpretation of the 18 1 B. Time Element Claim for Ships LPD 18-21 2 The court has requested supplemental briefing on this issue 3 and will rule on it in a separate order. 4 V. CONCLUSION 5 For the reasons stated above, the court GRANTS summary 6 judgment in favor of Northrop with respect to the offset of the tax 7 credit and DENIES Northrop summary judgment with respect to the 8 Navy payments. 9 declaration that under the Policies (1) Time Element loss not The court GRANTS Factory Mutual’s Motion for a 10 directly resulting from physical loss or damage is not covered 11 under the Excess Policy, and (2) it is Northrop’s burden to 12 establish this causal link with respect to all of its claimed Time 13 Element losses. 14 Factory Mutual’s Motion regarding LPD 18-21 and will rule on that 15 issue in a separate order. The court has requested supplemental briefing on 16 17 IT IS SO ORDERED. 18 19 20 Dated: July 18, 2013 21 DEAN D. PREGERSON 22 United States District Judge 23 24 25 26 27 28 19
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