Insurance Policies are Creatures of Contract
Insurance contracts must be interpreted like any other contract. When there is a dispute between an insurer and insured on the meaning of a term or condition in the insurance policy the court must determine the intent of the parties from the clear and unambiguous language of the insurance contract. In Lantheus Medical Imaging, Inc. v. Zurich American Insurance Company, United States Court of Appeals Second Circuit .No. 15-1717 (May 25, 2016) Lantheus Medical Imaging, Inc. (“Lantheus”) appealed a decision of the United States District Court for the Southern District of New York granting summary judgment to Zurich American Insurance Co. (“Zurich”).
An insurance coverage dispute that arose between the parties after Lantheus experienced a supply chain disruption in late spring 2009. The supply chain disruption occurred due to a fifteen month shutdown of a National Research University nuclear reactor (“NRU Reactor”) that forced Lantheus to suspend dozens of production runs for one of its products. Lantheus sought coverage from Zurich for the resulting losses, but Zurich denied the claim.
Since insurance policies are, in essence, creatures of contract, and, accordingly, subject to principles of contract interpretation The Second Circuit Court of Appeal, applying New York law noted that the interpretation of a contract is a matter of law for the court to decide.
Where contractual language is ambiguous and subject to varying reasonable interpretations, intent becomes an issue of fact and summary judgment is inappropriate. Only where the language is unambiguous may the district court construe it as a matter of law and grant summary judgment accordingly.
When an insurance contract contains an exclusion provision, the insurer generally bears the burden of proving that the claim falls within the scope of an exclusion by establishing that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case.
The Second Circuit concluded that the District Court’s analysis was thorough and sound. From the outset, the District Court drew all inferences in favor of Lantheus, accepting that “the breach occurred because of a ‘pressure surge … act[ing] upon an already weakened point.’ ” It specifically declined to resolve certain outstanding factual ambiguities that were not necessary to decide Zurich’s summary judgment motion, including whether “General Corrosion precipitated the NRU Reactor shutdown.”
Honoring the anti-concurrent causation language of Exclusion 5b, the District Court found as a factual matter (and based on agreement of both of Lantheus’s experts) “that a thinning over time of the aluminum wall of the reactor vessel, referred to as [redacted] Penetration, was a necessary component to the through wall breach that occurred after a rapid shift in pressure.” The District Court then concluded as a legal matter that the definition of “corrosion” as used in Exclusion 5b “fully embraces” this condition, including Lantheus’s assertion that an electrochemical cell caused the [redacted] Penetration.
Lantheus argues that Exclusion 5b must be read as a whole and “generally connotes a process by which material is gradually consumed or worn away, either by external forces or the material’s own inherent qualities.” Lantheus also argues that the ordinary meaning of corrosion is a “gradual process” that does not occur rapidly.
Relying on expert testimony provided by Lantheus’s metallurgist and nuclear engineer, it was not error for the District Court to draw the factual conclusion that “the [redacted] Penetration contribute[d] concurrently or in any sequence to the … damage.” Nor was it error for the District Court to grant summary judgment to Zurich on the basis of its finding “that the formation of the [redacted] Penetration and its concurrent involvement in the through wall breach that shut down the NRU Reactor is sufficient to bring the loss within the corrosion exclusion.”
Taking the facts in the light most favorable to Lantheus, the [redacted] Penetration of the reactor vessel wall took approximately twenty nine days to occur and was caused at least in part by the differential aeration cell. Thus, there is no question of material fact that the NRU Reactor shutdown falls into Exclusion 5b, even accepting Lantheus’s proposed version of events.
Most insurance policies insuring against damage to real or personal property exclude losses due to corrosion, whether specifically defined in the policy, or using the common meaning of corrosion. Since the reactor was shut down because of a slow – 29 day – wearing down of the material the court easily concluded that the loss was due to corrosion acting allow or concurring with other causes.
Barry Zalma, Esq., CFE, practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide
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