Federal-Mogul filed a claim for those losses with the insurer, but the insurer refused to pay more than $30 million because, in its view, the flood had occurred in a High Hazard Zone.

Federal-Mogul sued the insurer, arguing, among other things, that the $30-million limitation for “Flood for High Hazard Zones” applied only to property damage and, therefore, that the insurer remained liable for the full amount of its time element loss.

The U.S. District Court for the Eastern District of Michigan granted summary judgment to Federal-Mogul, and the insurer appealed to the Sixth Circuit.

The Sixth Circuit's Decision

The circuit court reversed, holding that the $30 million sublimit for “Flood for High Hazard Zones” applied not only to the policy's “Flood” coverage for property damage but to all loss or damage arising out of a flood.

In its decision, the Sixth Circuit explained that the policy's general limit of liability limited the insurer's liability “for all loss or damage arising out of one 'occurrence'” to $200 million “except as more specifically limited below.” The circuit court added that the policy expressly defined an “occurrence” to include “losses from the peril[] of . . . Flood.”

The circuit court found that, by its plain terms, the general limit applied to “all loss or damage arising out of” a flood.

The Sixth Circuit then pointed out that below the general limit, the policy “more specifically” limited the insurer's liability for “Flood for High Hazard Zones” to $30 million. The circuit court acknowledged that the policy did not define the scope of this sublimit, but it noted that the policy did define the term “Flood.”

Specifically, the circuit court continued, the policy defined that term “wherever used” as, “Flood; rising waters; surface waters; waves; tide or tidal water; rain accumulation; runoff from natural or man made objects; the release of water, the rising, overflowing or breaking of boundaries of natural or man-made bodies of water; or the spray there from, surface waters or sewer back-up resulting from any of the foregoing; regardless of any other cause or event contributing concurrently or in any other sequence of loss. However, direct physical damage by fire, explosion or sprinkler leakage resulting from Flood is not considered to be loss by Flood within the terms and conditions of this 'policy.'”

The Sixth Circuit said that, “[n]otably absent from this definition” was any reference to the policy's “Flood” coverage. Instead, the circuit court said, the policy used the term “Flood” to refer more generally to a type of peril insured by the policy.

Thus, the circuit court said, when the policy limited the insurer's liability for “Flood,” it limited the insurer's liability for losses “from a particular type of peril rather than a particular type of coverage.”

The Sixth Circuit concluded that, in the absence of language restricting the sublimit only to property damage, the sublimit – like the general limit – applied to “all loss or damage” arising out of a “Flood[,]” “regardless of the number of 'locations' or coverages involved[.]”

The case is Federal-Mogul LLC v. Ins. Co. of Pennsylvania, Nos. 17-1649/1716 (6th Cir. July 8, 2019).