Manufacturer’s Flood Claim Hinges on Definition of High-Hazard Area

For the second time, a federal appellate court reversed a trial judge’s finding that a policy issued by a unit of American International Group did not limit coverage for a 2011 flood that forced the company to shut down an auto parts plant in Thailand.

The Sixth Court of Appeals, in a decision handed down on Monday, rejected the trial court’s summary judgment finding that a $30 million “sublimit” in the manufacturer’s policy applied only to property losses and not “time-element” losses related to the shutdown of the plant.The Sixth Circuit had also reversed an earlier ruling by the trial court that the policy’s limit on damages caused by flooding did not apply at all.

The decision in Federal-Mogul v. Insurance Co. of Pennsylvania might save the carrier $25 million, but the case isn’t over.

Federal-Mogul, a manufacturer headquartered in Southfield, Michigan, owned a factory in the Rojana Industrial Park facility in Ayutthaya, Thailand. The area flooded in October 2011, forcing Federal-Mogul to shut the plant down. The manufacturer filed a claim with Insurance Co. of Pennsylvania seeking $64.5 million in damages.

The carrier paid $30 million and refused any more payments, saying that was the limit under a provision of the policy that capped damages to property in “high-hazard flood areas.” Federal Mogul filed suit alleging that the AIG unit had breached the terms of its $200 million insurance policy.

The dispute centered on the meaning of a policy definition.

Federal-Mogul’s policy included a three-paragraph definition of high-hazard areas. Two of the listed terms make sense only in the United States because they mention flood-plain maps that are used by the National Flood Insurance Program. The third paragraph, however, cited “locations that are partially or totally protected by dams, dikes, levees or walls” that are intended to protect property “from the level of a 100-year flood or its worldwide equivalent.”

The carrier’s claims administrator, Vericlaim, informed Federal-Mogul on Feb. 27, 2012 that the policy covered only the first $30 million in losses caused by flood. Federal-Mogul objected and challenged the carrier to identify the precise contours of the 100-year flood plain. The manufacturer said the carrier has been searching in vain for government flood maps and hasn’t found any because none exist.

U.S. District Judge Nancy G. Edmunds ruled in favor of Federal-Mogul and ordered the insurer to pay an additional $34.5 million in damages, plus pre-judgment interest. But the 6th Circuit reversed and remanded the case, finding that the district court applied an incorrect standard when determining whether the Rojana facility was within a 100-year flood plain.

Edmunds ruled in Federal-Mogul’s favor again on the second go-round, this time finding that the policy sublimit on flood-damage claims applies only to property claims.

The carrier appealed again, and once more the Sixth Circuit found in its favor. The appellate panel said Federal-Mogul’s policy wouldn’t make sense if the carrier had intended to limit the flood sublimit to property damage. It noted that the policy has a separate $5 million sublimit for “contingent time-element losses” caused by flooding.

“This sublimit therefore confirms that the various caps on “flood” are not limited only to claims for property damage,” the opinion states.

The Sixth Circuit sent the case back the the district court for “further proceedings consistent with this ruling.”

The Hunton Andrews Kurth law firm, in a blog post posted Wednesday, predicted that the case is far from over. The law firm said under Michigan law, and generally nationwide, an insurer that uses an exclusion or limitation on recovery must demonstrate that the policy clearly and unambiguously limits liability.

“The correct question on appeal, therefore, was not whether the policyholder had shown that the sublimit was ambiguous, but rather whether the insurer had demonstrated that the $30 million sublimit for high-hazard zones clearly and unambiguously applied to all loss or damage arising out of a flood,” the blog post says. “This is a difficult burden to meet, especially where, as the Sixth Circuit noted, the policy fails to define the scope of the sublimit and the sublimit itself is silent on what losses it limits. The opinion raises many other issues, but we expect the policyholder to focus on this critical burden issue in fighting for coverage on remand.”

Federal-Mogul, which employs 55,000 people and have revenues of $7.8 billion, was purchased by Tenneco in October 2018.