Continental Insurance Company v. Arkwright Mutual Insurance Company

102 F.3d 30 (1st Cir. 1996)

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Nature of the Case

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Facts

In 1992, Olympia and York owned a high-rise office building. On December 11th a severe storm struck New York City, causing the Hudson and East Rivers to overflow their banks. Flood waters entered the basement resulting in more than one million dollars in property damage. Slightly more than half the damage involved energized electrical switching panels that had come into contact with the flood waters. The water immediately caused a phenomenon known as 'electrical arcing' which in turn caused an immediate explosion that blew large holes in the switching panels. The damage to the switching panels was $581,225. Much of the remaining damage, appraised at $445,592, occurred when the flood waters came in contact with non-energized electrical equipment; it involved no electrical arcing. Three separate policies provided various coverages for the Building. Ps' policies insured against 'all risks including Flood and Earthquake' up to $75,000,000 per occurrence for the one-year period beginning March 3, 1992. Each policy underwrote fifty percent of the $75,000,000 'all risk' coverage on identical terms and conditions, and contained a $100,000 deductible for any loss and damage arising out of each covered occurrence. In addition, each 'all-risk' policy excluded coverage for mechanical or electrical breakdown caused by artificially generated electrical currents. D issued the third policy which afforded up to $100,000,000 in covered property loss from flooding, subject to a $75,000,000 deductible. D's policy principally served as excess 'all-risk' coverage above the $75,000,000 liability limit on Ps' 'all-risk' policies. D's policy included a 'Special Deductible Endorsement,' which afforded primary insurance coverage for mechanical or electrical breakdown by substituting a $50,000 deductible for the $75,000,000 'all-risk' deductible. The $50,000 Special Deductible Endorsement was subject to the following qualifications: Loss or damage from mechanical or electrical breakdown (except by direct lightning damage) of any equipment unless physical damage not excluded results, in which event this Special Deductible shall not apply to such resulting damage. Olympia maintained that the entire loss had been caused by flooding and therefore came within the coverage afforded under the two primary 'all-risk' policies issued Ps. Ps paid $937,557 and then claimed reimbursement from D for the $581,225 loss to the electrical switching panels allegedly caused by electrical arcing. D refused to contribute, contending that all damage had been caused by, or resulted directly from flooding. Ps sued D seeking a judicial declaration that D was liable for the portion of the electrical switching panel loss due to electrical arcing. The district court concluded that as viewed by a reasonable business person in the relevant circumstances, the damage to the electrical switching panels had been caused by flooding. Ps appealed.