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Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 6-21-2004 GTE Corp v. Allendale Mutl Ins Precedential or Non-Precedential: Precedential Docket No. 03-2139 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "GTE Corp v. Allendale Mutl Ins" (2004). 2004 Decisions. Paper 543. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/543 This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 2004 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. PRECEDENTIAL ROBERT F. RUYAK (Argued) JERROLD J. GANZFRIED UNITED STATES COURT OF Howrey, Simon, Arnold & White APPEALS 1299 Pennsylvania Avenue, N.W. FOR THE THIRD CIRCUIT Washington, DC 20004 Counsel for Appellant No. 03-2139 HENRY J. CATENACCI (Argued) Podvey, Sachs, Meanor, Catenacci, GTE CORPORATION, Hildner & Cocoziello One Riverfront Plaza Appellant The Legal Center, 8th Floor Newark, NJ 07102 v. Counsel for Appellees Allendale ALLENDALE MUTUAL INSURANCE Mutual Insurance and Afilliated FM Ins. COMPANY; Co. AFFILIATED FM INSURANCE COMPANY; MARY K. VYSKOCIL (Argued) ALLIANZ INSURANCE COMPANY; Simpson, Thatcher & Bartlett FEDERAL INSURANCE COMPANY; 425 Lexington Ave. INDUSTRIAL RISK INSURERS New York, NY 10017 Counsel for Appellee Industrial Risk Insurers On Appeal from the United States District Court WILLIAM N. ERICKSON for the District of New Jersey Robins, Kaplan, Miller & Ciresi (Dist. Ct. No. 99-cv-02877) 111 Huntington Avenue District Judge: Honorable Alfred M. Suite 1300 Wolin Boston, MA 02199 Counsel for Appellee Allianz Ins. Argued: December 9, 2003 Co. Before: AMBRO, FUENTES and CHERTOFF, Circuit Judges. RICHARD M. MACKOWSKY Cozen & O’Connor (Filed: June 21, 2004) 1900 Market Street The Atrium Philadelphia, PA 19103 BERNADETTE N. GORDON Provisions”) of the policies did not entitle Cozen & O’Connor GTE to coverage for costs incurred to One Newark Center prevent an excluded loss. For the reasons Suite 1900 stated below, we will affirm the District Newark, NJ 07102 Court’s grant of summary judgment. I. Counsel for Appellee Federal Insurance Company A. The Y2K Problem The approach of the year 2000 evoked fears of various millenarian catastrophes. One such fear was the “Y2K OPINION problem,” and it arose from the entirely predictable fact that the passing of the year 1999 resulted in a change in all four digits CHERTOFF, Circuit Judge. of the written representation of the succeeding years. P l a i n t i f f - A p p e l l an t GTE Corporation (“GTE”) seeks coverage for Historically, software was routinely costs and expenses incurred in remediating programmed omitting the first two digits its computer systems to avoid Year 2000 in year dates. See, e.g., Steve Lohr, (Y2K) related date recognition problems. Technology and 2000—Momentous GTE contends that it is entitled to such Relief; Computers Prevail in First Hours costs and expenses pursuant to insurance of ‘00, N.Y. Times, January 1, 2000, at policies entered into with Defendant- A1. There were a number of reasons for Appellees Allendale Mutual Insurance this traditional use of two-digit years as an Company (“Allendale”), Affiliated FM ingredient of software programing. “The Insurance Company (“Affiliated”), Allianz two-digit shortcut originally was taken to Insurance Company (“Allianz”), Federal conserve space that a four-digit entry Insurance Company (“Federal”), and would have occupied in a computer’s Industrial Risk Insurers (“IRI”) memory.” Bruce W. Foudree, The Year (collectively “Insurers”). The District 2000 Problem and the Courts, 9 Kan. J.L. Court granted summary judgment in favor & Pub. Pol’y 515, 517 (2000). of the Insurers. Specifically, the District Particularly in light of the high cost of Court concluded that: (1) GTE’s Y2K storing information in the early days of remediation falls under the design defect computers, this shortcut provided and inherent vice exclusions of the numerous benefits, including “allow[ing] policies; (2) the exceptions to these substantial cost savings,” enabling exclusions were inapplicable; and (3) the “[m]anufacturers . . . to make chips Sue and Labor and Preservation of available to consumers at more affordable Property Clauses (hereinafter referred to prices,” and “shortening the production collectively as the “Sue and Labor time for chips and software.” Id. 2 With the approach of the year 2000, economic failures and public panic.” however, experts voiced dire predictions Foudree, supra, at 517-18. A likely that the four-digit changeover could scenario of the consequences of the Y2K utterly upset computer programs. This problem was described as follows: problem, commonly referred to as the The most common “Y2K problem,” is essentially summarized scenario for a Y2K problem as follows: involves a computer reading [C]omputers have trouble two-digit dates of “00” or distinguishing between “01” and either being years in the 1900s and years stymied (if an inanimate in the 2000s. Until object can be stymied) or comparatively recently, reading the dates date-sensitive computer erroneously as “1900” or programs identified years by “1901,” a misreading that in their last two digits. For the estimation of many has example, using the standard “potentially devastating format of mm/dd/yy, 1988 results.” was entered as “88” by For example, programers. Thus, on information systems may January 1, 2000, many lock or freeze, causing computers and equipment interruptions and emergency which contain computer repairs or perhaps even chips (“embedded chips”) requiring the discarding of may not be able to old equipment and its recognize the difference replacement with new. between 1900 and 2000 Misread dates could lead to since both are abbreviated lost funds, improperly as “00.” administered medicine, or Foudree, supra, at 516-17; see also Jeffrey f a i l u re t o r e p l e n i s h W. Stempel, A Mixed Bag for Chicken inventory. For example, an Little: Analyzing Year 2000 Claims and insurance policy could be Insurance Coverage,
48 Emory L.J. 169, canceled, a lease terminated, 177 (1999). or astounding late fees assessed when a computer Commentators acknowledged that mistakenly reads the date while “[n]o one can accurately predict the “2000” as “1900.” scope, severity, or duration of Y2K disruptions . . . , Y2K-related failures have Stempel, supra, at 177 (internal citations the potential to touch every sector of omitted). society and cause widespread and systemic These fears prompted the 3 undertaking of extensive Y2K remediation Such harms included the prospect that efforts. Corporations and governments GTE’s computer programs and external invested more than $250 billion programs interacting with GTE’s systems worldwide in addressing the Y2K would crash immediately, make erroneous program, with the United States calculations while continuing to process, government alone spending $8.4 billion. endlessly churn before taking a “time out” Lohr, supra, at A1. or shutting down, or process data correctly to no avail. GTE’s Rule 56.1 Statement of In retrospect, we now know that Material Facts ¶ 38, J.A. at 3118 (citing catastrophe did not materialize, perhaps in GTE 2000 President’s Operations Review, part because of the success of remediation p. CORP PMO 1893938 (Exhibit 35)). efforts. See, e.g., Lohr, supra, at A1. Nevertheless, the benefit of hindsight In an effort to protect its expansive should not cloud our appreciation of the network, GTE undertook an extensive widespread perception, in the years Y2K Program at a cost of about $350 leading up to 2000, that failure to correct million to protect data, records, and to the Y2K problem could result in ensure continued business operations. In disastrous consequences. Moreover, even a December 1998, corporate disclosure those who did not predict “catastrophic” document, GTE explained its activities as consequences cautioned that the Y2K follows: problem was “serious enough to require GTE’s Year 2000 correction if contemporary business is to program is focused on both continue to function in the twenty-first information technology (IT) century.” Stempel, supra, at 172. and non-IT systems . . . . B. GTE’s Y2K Efforts .... Because this is an appeal from a GTE’s Year 2000 grant of summary judgment, we must view program has been organized the evidence in the light most favorable to into five phases as follows: the nonmoving party GTE. See Marino v. Awareness : program Indus. Crating Co.,
358 F.3d 241, 247 (3d definition and general Cir. 2004). education; Assessment: GTE is a worldwide leader in analysis and prioritization of telecommunications services, including systems supporting the core local telephone, wireless, and internet business; Renovati on: services. GTE operated a substantial rectifying Year 2000 issues; number of computer based systems and Validation: testing the Year networks which employed the common 2000 solutions; practice of two-digit date recognition. As Implementation: placing the the new millennium approached, GTE t e s t e d s y s t em s i n to identified several Y2K-related threats. production. 4 GTE Corp. 10-K for 12/31/98, J.A. at C. Insurance Policy Provisions 3979-80. GTE contends that in an effort “[t]o Notably, GTE appears to have been protect its expansive network from aware of the potential threat posed by the damage and destruction, [it] . . . contracted Y2K problem as early as 1994. In for extensive insurance protection.” December of that year, GTE Service Appellant Br. at 11. The insurance Corporation published a report entitled policies to which GTE refers were sold in Algorithmic Anarchy: Chaos in the Year 1996 and 1997. As the District Court 2000, identifying the potential impact of explained, GTE was actually insured by a the Y2K problem on GTE, and outlining “panel of insurers” who provided different preliminary strategies for addressing the percentages of coverage on the primary problem. See J.A. at 1395-1428. In 1995, layer and excess layer of coverage.2 GTE established a Program Management Office (PMO) “to oversee the planning and execution of a corporate-wide Year impacts to our networks, switches, and 2000 initiative,” as well as a “Master network management systems; changes Schedule for GTE’s Year 2000 Program.” necessary to continue electronic operations GTE Millennium 2000 Program–Year with our major business and financial 2000 Year End Report–1996 (December partners; upgrades to customer premise 10, 1996), J.A. at 1598, 1602 (“1996 Year equipment for which GTE is responsible; End Report”). Moreover, in 1996 GTE changes required to systems which have completed the Proposed Criteria for been developed by GTE for commercial “Century Compliance”, “provid[ing] resale; and the costs to incorporate information regarding the scope of the . . changes made to other third-party software . (Y2K) challenge and . . . identif[ying] systems providing basic functionality to and discuss[ing] four suggested criteria for GTE’s business operations.” J.A. at 1598. consideration in assessing century Interestingly, the Report also compliance.” J.A. at 1477. From the outlines potential sources of funding for inception of its Y2K program, GTE the program. The Report does not suggest exhibited an awareness of the tremendous that the costs might be reimbursable resources required to address the date- through insurance, but instead suggests the recognition problem. For example, the f o l l o w i n g f u n d i n g 1996 Year End Report reported that the mechanisms—“Business as Usual,” “cost of the Year 2000 Program is “Opportunity Cost,” “Incremental Cost,” currently estimated to be $361 [million].” “Replacement Funds,” and “Customer J.A. at 1598.1 Funds.”
Id.2 The primary layer provides $50 1 The Report explains, “These costs million in coverage, and the excess layer include not only the conversion of our provides $400 million in coverage for legacy systems, but also: the anticipated losses in excess of $50 million. Because 5 Although the policies at issue in this The primary layer policies outline litigation are actually five distinct policies, the scope of the coverage. In pertinent because the terms of the relevant policy part, the provisions read: provisions are identical, the District Court COVERAGE and the parties did not analyze the provisions separately. Therefore, we do Except as hereinafter not differentiate among the policies.3 excluded, this policy covers: a. Real and Personal Property the claim in this case does not exceed (1) The interest of $400 million, we are not concerned with the Insured in all real the blanket layer of coverage that provides and personal insurance for claims in excess of $400 property (including million. improvements and Primary layer coverage was divided betterments) owned, among the Insurers as follows—Affiliated used, or under (40%), see J.A. at 237, IRI (20%), see J.A. contract to be at 416, Allianz (10%), see J.A. at 630, purchased or leased Federal (10%), see J.A. at 703. Excess by the Insured, or layer coverage was divided among the h e r e a f t e r Insurers as follows—Allendale (40%), see constructed, erected, J.A. at 278, IRI (20%), see J.A. at 416, installed, or acquired and Allianz (10%), see J.A. at 630. These including while in percentages do not add up to 100% c o u r s e o f because coverage was also provided by construction, insurance companies who are not a party erection, installation, to this suit (because these other policies and assembly. contained mandatory arbitration clauses). See GTE Corp. v. Allendale Mut. Ins. Co., ....
258 F. Supp. 2d 364, 369 & n.4 (D.N.J. b. B u s i n e s s 2003). Interruption–Gross 3 The only relevant distinction Earning pertains to Federal and IRI’s supplemental Coverage shall apply motions for summary judgment. Federal under this section and IRI argue that GTE’s Y2K costs were unless there is a loss not incurred to prevent loss that would of profits policy in have occurred during their policy periods, which ended on July 1, 1999. Because, as discussed below, we do not reach the need not analyze this distinction in policy supplemental grounds for affirmance, we terms. 6 f o r c e hereunder, except as covering the hereinafter excluded. location Physical loss or damage where loss is shall include any incurred. destruction, distortion or (1) Loss resulting corruption of any computer f r o m n e c e s s a ry data, coding, program or i n t e r r u p ti o n o f software except as business conducted hereinafter excluded. by the Insured and Affiliated Policy, J.A. at 252; IRI Policy, caused by loss, J.A. at 437; Allianz Policy, J.A. at 655; damage, or Federal Policy, J.A. at 724 (emphasis destruction by any of added). the perils covered herein during the Certain perils, however, are term of this policy to explicitly excluded: real and personal PERILS EXCLUDED property . . . not otherwise excluded. This policy does not insure: Affiliated FM Insurance Policy No. .... AE016 [hereinafter “Affiliated Policy”], c. against the cost of J.A. at 241; IRI Policy No. 31-3-64676 making good [hereinafter “IRI Policy”], J.A. at 425; defective design or Allianz Policy No. CLP 1025660 specifications, faulty [hereinafter “Allianz Policy”], J.A. at 643; material, or faulty Federal Policy No. 648-22-99 [hereinafter workmanship. This “Federal Policy”], J.A. at 712. exclusion shall not The policies also specifically apply to loss or outline included perils: damage resulting from such defective PERILS INSURED d e s i g n o r AGAINST specifications, faulty This policy insures against material, or faulty all risks of physical loss of workmanship; or damage to property however any such described herein including resulting damage general average, salvage, will be subject to all and all other charges on other exclusions in shipments covered this Policy. 7 .... or latent defect; all unless physical damage not k. against unexplained excluded by this Policy loss, mysterious results, in which event, this disappearance, loss Policy shall cover only such or shortage disclosed resulting damage . . . . on taking inventory, inherent vice or Allendale Policy, J.A. at 297-99; IRI latent defect unless Policy, J.A. at 454-56; Allianz Policy, J.A. loss or damage from at 676-78. a peril insured herein Moreover, the excess layer policies ensues and then this contain a “Business Interruption policy shall cover for Endorsement” which provides, in such ensuing loss or pertinent part: damage. In consideration of Affiliated Policy, J.A. at 252-55; IRI additional premium, this Policy, J.A. 438-40; Allianz Policy, J.A. at Policy is extended to cover 656-58; Federal Policy, J.A. at 725-27. the Actual Loss Sustained The excess layer policies similarly by the Insured during a provide, in pertinent part: Period of Interruption directly resulting from EXCLUSIONS physical loss or damage of .... the type insured against by this Policy, to property not This Policy does not insure otherwise excluded by this against: Policy, utilized by the .... insured and located as described elsewhere in this 3. faulty workmanship, Policy. material, construction or design from any cause; all Allendale Policy, J.A. at 306; IRI Policy, unless physical damage not J.A. at 463; Allianz Policy, J.A. at 685. excluded by this Policy In addition to the above coverage results, in which event, this and exclusion provisions, both the primary Policy will cover only such and excess policies contain clauses that resulting damage; permit GTE to recover for certain .... preventative measures. 5. deterioration, depletion, The primary policies contain Sue rust, corrosion, erosion, and Labor Clauses providing, in pertinent wear and tear, inherent vice part: 8 Sue and Labor against by this Policy, the expenses incurred by the In the case of actual or Insured in taking reasonable imminent loss or damage by and necessary actions for a peril insured against, it the temporary protection shall, without prejudice to and preservation of property this insurance, be lawful insured hereunder shall be and necessary for the added to the total physical Insured, their factors, loss or damage otherwise servants, or assigns to sue, recoverable under this labor, and travel for, in, and Policy . . . . about the defense, the safeguard, and the recovery Allendale Policy, J.A. at 301; IRI Policy, of the property or any part J.A. at 458; Allianz Policy, J.A. at 680. of the property insured D. Procedural History and Standard hereunder; nor, in the event of Review of loss or damage, shall the acts of the Insured or of this On June 18, 1999, GTE filed a Company in recovering, declaratory judgment action seeking saving, and preserving the coverage for costs and expenses incurred i n s u r e d p r operty b e remediating its computer systems to avoid considered a waiver or an Y2K problems: Count One sought a acceptance of abandonment. declaratory judgment that the costs were This C o m p any shall covered by the policies’ Sue and Labor contribute to the expenses Provisions; Count Two alleged breach of so incurred according to the contract; and Count Three sought damages rate and quantity of the sum from Allendale for bad faith. The herein insured. This Appellees each answered the complaint, provision does not increase and Appellee Federal counterclaimed any amounts or limits of seeking a declaration denying coverage. insurance . . . . To facilitate the ease of the litigation, on August 31, 2000, the U.S. Magistrate Affilliated Policy, J.A. at 265; IRI Policy, Judge entered an order dividing the J.A. at 450; Federal Policy, J.A. at 737. litigation into phases. In Phase I, the Similarly, the excess layer policies parties were instructed to address whether contain Preservation and Protection of insurance coverage existed under the Property Clauses providing, in pertinent insurance policies. Following discovery part: on Phase I issues, the parties filed motions for summary judgment on October 16, In case of actual or 2002. imminent physical loss or damage of the type insured The District Court properly 9 exercised jurisdiction under 28 U.S.C. § District Court also granted IRI and 1332.4 On March 26, 2003, the District Federal’s supplementary summary Court granted the Insurers’ joint motion judgment motions, alleging that GTE’s for summary judgment in its entirety. As Y2K costs were not incurred to avoid loss an initial matter, the District Court noted or damage that occurred during those that the Sue and Labor Provisions only Insurers’ policy periods.5 permit GTE to recover for costs incurred Notice of appeal was timely filed to prevent a loss that is covered under the on April 17, 2003. This Court has policies. The District Court went on to jurisdiction pursuant to
28 U.S.C. § 1291. conclude that the Y2K problem was not We conduct plenary review over a district covered because it fell within the design court’s order granting summary judgment. defect and inherent vice exclusions. Morton Int’l, Inc. v. A.E. Staley Mfg. Co., Moreover, the exceptions to these
343 F.3d 669, 679 (3d Cir. 2003). exclusions—the ensuing and resulting loss Summary judgment will be granted if the provisions—did not permit GTE to record establishes “there is no genuine recover. In light of this finding of non- issue as to any material fact and that the coverage, the District Court also granted moving party is entitled to a judgment as a Allendale’s motion for summary judgment matter of law.” Fed. R. Civ. P. 56(c); see on the third count claim of bad faith (that also Celotex Corp. v. Catrett,
477 U.S. 317is, there being no coverage, GTE cannot (1986); Anderson v. Liberty Lobby, Inc., claim bad faith denial of coverage). The
477 U.S. 242(1986); Matsushita Elec. Indus. v. Zenith Radio Corp.,
475 U.S. 574(1986). 6 For the reasons elaborated below, 4 At the time of suit, GTE was a corporation organized under the laws of New York with its principal place of 5 In granting IRI and Federal’s business in Texas. Allendale and supplementary motions, however, the Affiliated were corporations organized District Court did not specifically reach under the laws of Rhode Island with their the merits of the claim. Instead, the principal places of business in Rhode District Court concluded that it could Island; Allianz was a corporation grant the motions without reaching these organized under the laws of California issues because the relief requested had with its principal place of business in already been provided by virtue of its California; Federal was a corporation grant of Insurers’ joint motion for organized under the laws of Indiana with summary judgment. See 258 F. Supp. 2d its principal place of business in New at 381-82. Jersey; and IRI was a corporation 6 organized under the laws of Connecticut In concluding that the District with its principal place of business in New Court properly granted summary Jersey. The amount in controversy judgment, there are several issues that we exceeded $75,000. do not reach. First, we need not decide 10 we agree with the District Court. The motions for summary judgment were brought following discovery in II. Phase I of the litigation, pertaining to As a preliminary matter, GTE whether insurance coverage existed for argues that consideration of the GTE’s claims. As the District Court exclusionary provisions was premature noted, any factual issues pertaining to because “factual issues regarding design whether the Y2K problem constitutes a defect are reserved for later stages of the design defect are “inextricably tied to the litigation.” See GTE Corp. v. Allendale Phase I issue of coverage.”
Id.In fact, Mut. Ins. Co.,
258 F. Supp. 2d 364, 377 perhaps the most quintessential coverage (D.N.J. 2003). GTE argues that there is a issue is the applicability of policy disputed factual issue, which cannot be exclusions. Moreover, there is no resolved on summary judgment, about indication that GTE was prohibited by whether two-digit software programming order or otherwise from taking any is a design defect or inherent vice. discovery relevant to the coverage issue.7 Furthermore, GTE argues that these issues If GTE felt that additional evidence, of fact fall within the province of a jury. including expert testimony, was required, We are unpersuaded. GTE was free to conduct such discovery and present such evidence to the District Court. To the extent GTE’s argument the merits of Federal and IRI’s constitutes a challenge to the District supplemental motions for summary Court’s discovery orders, this Court will judgment because we conclude that, not disturb those discovery decisions irrespective of the time frame issue, the because there has been no showing of an policies did not provide coverage. abuse of discretion. See Arnold Pontiac- Second, we do not examine whether GMC, Inc. v. General Motors Corp., 786 affirmation of the District Court’s opinion F.2d 564, 568 (3d Cir. 1986). Thus, the is warranted on the basis of independent exclusionary provisions were properly legal arguments raised by the Insurers, including the arguments that (a) GTE’s 7 Y2K costs were not fortuitous at inception In support of the contention that it of the policies; and (b) GTE failed to was denied discovery, GTE references comply with the Policies’ notice and suit J.A. at 4734-35 and J.A. at 4794. See limitations provisions. While this Court Appellant Br. at 45-46. These references “may affirm a district court’s grant of are to GTE’s Memorandum in Response summary judgment on any ground that to Defendants’ Joint Motion for Summary appears in the record,” Hedges v. Musco, Judgment and GTE’s Supplemental Rule
204 F.3d 109, 116 (3d Cir. 2000), we see 56.1 Statement of Material Facts, no reason to do so in light of our respectively. Neither provides any conclusion that the policies did not cover specific indication of what discovery GTE Y2K compliance costs. was prohibited from taking. 11 within the consideration of the District questions of contract interpretation Court in considering the motions for properly within the province of the summary judgment in Phase I of the District Court at the summary judgment litigation. stage of the litigation. In addition, the design defect issue III. did not need to be resolved by a jury. We Generally, under New Jersey law,8 agree with the District Court that in “the interpretation of insurance contracts arguing that the issue falls within the requires generous readings of coverage province of the jury, GTE erroneously provisions, narrow read ings o f looks to products liability cases for the exclusionary provisions, resolution of standards applicable to this insurance ambiguities in favor of the insured, and contract dispute. See Motter v. Everest & construction consistent with the insured’s Jennings, Inc.,
883 F.2d 1223(3d Cir. reasonable expectations.” Cobra Prods., 1989) (cited before the District Court) (holding issues of whether product was defectively designed and whether 8 defective design was proximate cause of While there is some dispute over injury were jury questions); Rooney v. whether New Jersey law governs, both Federal Press Co.,
751 F.2d 140, 144 (3d parties concede that the choice of law is Cir. 1985) (Hunter, III, J., dissenting in not dispositive in this case, as the standard part and concurring in part) (internal governing contract interpretation is the quotations and citations omitted) (cited in same under each of the potentially Appellant Br.) (“The question whether a applicable bodies of law. Insurers explain design defect exists, that is, whether the in their brief: product left the supplier’s control lacking Throughout its brief, GTE an element necessary to make it safe for its relies on New Jersey law. intended use, remains within the province The facts in this case also of the jury.”). This case does not involve support an argument that the a question of whether a product was law of New York or defectively designed for purposes of a tort C o n n e c t i cu t a p p l i e s . action. GTE cites no case concluding that Because the laws of any (and offers no explanation as to why) relevant jurisdiction are the product liability cases and concepts, which same with respect to the concern the balance between “the risk of a issues raised on this appeal product versus its social utility,” Motter, and lead to the same result,
883 F.2d at 1227, are relevant to insurance choice of law should not be contract disputes that involve agreements an issue. The Insurers do between specific parties. The issue of not concede, however, that whether the defective design and inherent this dispute is governed by vice exclusions bar recovery were New Jersey law. Appellee Br. at 26 n.6. 12 Inc. v. Fed. Ins. Co.,
722 A.2d 545, 549 We agree. (N.J. Super. Ct. App. Div. 1998); see also The Y2K problem squarely falls Elizabethtown Water Co. v. Hartford Cas. within the defective design or Ins. Co.,
998 F. Supp. 447, 452 (D.N.J. specification exclusion. The essence of 1998). Insurers contend this rule is the Y2K problem is that the two-digit date inapplicable where the insured is a large design precludes the system from sophisticated corporation, such as GTE. functioning properly on or after January 1, See Pittson Co. v. Allianz Ins. Co.,
905 F. 2000. The problem in this case was not Supp. 1279, 1320 (D.N.J. 1995), rev’d in that a program or system malfunctioned, part
124 F.3d 508, 521 (3d Cir. 1997). or some external threat caused damage to However, we need not address this issue GTE’s systems. Rather, the system because we conclude that the contract is performed in exactly the manner it was not ambiguous; rather, the exclusions designed to operate—the problem is that clearly bar coverage. Because the the system as designed and specified did contract in this case is “clear and not permit recognition of dates in the 21st unambiguous . . . [,][it] must be enforced century.9 as written.” Cobra, 722 A.2d at 549. GTE argues that the two-date A. Policy Exclusions designation system cannot be a We agree with the District Court “defective” design because, at the time of that coverage for GTE’s remediation its implementation, such a design measures is barred by the plain language conformed with industry standard (either of both the defective design and inherent as a widespread practice or “best vice exclusions, and disagree with GTE’s practice”), complied with government contention that its claim is not subject to regulation, and was required for GTE’s these exclusions because the threats were systems to be able to interface with other external. systems. Even assuming all these factors 1. Defective Design Exclusion The policy provisions outlining 9 Even GTE’s characterization of excluded perils specifically preclude the Y2K problem supports the conclusion coverage for “the cost of making good that it falls within the defective design defective design or specifications.” The exclusion. At argument, GTE’s counsel District Court concluded that “any efforts explained the problem as follows: “It is taken to correct a date recognition the data coming in is in a different format problem within the computer systems, in than was anticipated when the system was order to ensure that the computer systems designed.” Tr. of Argument at 7:13-15 continue to process dates as expected and (emphasis added). In other words, it is the required, are efforts undertaken to correct system’s inability, as designed, to a problem with the design or specification recognize and process the data, and not a of the system.”
258 F. Supp. 2d at 375. problem with the data itself. 13 are true, we still conclude that GTE’s measures fall within the policies’ claim is barred by the defective design exclusions. See
258 F. Supp. 2d at374- exclusion. Industry standards and the 76. Admittedly, some of this testimony is existence of alternative feasible designs confusing.11 Nevertheless, this testimony may be relevant standards in determining supports the view that GTE’s remediation whether there is a “design defect” for the efforts were taken to correct an purpose of tort liability. See, e.g., “imperfection or shortcoming” in the two- Restatement (Third) of Torts: Prod. Liab. digit system, and thus fall within the § 16, cmt. b (1998). The fact that policies’ defective design exclusions. For something was designed in accordance example, in the context of explaining the with “best practice” or industry standard relationship between Y2K and “legacy does not, however, mean that GTE’s migration,”12 Michael Lawrence Brodie, insurance policy provides coverage for who worked as a senior staff scientist and necessary changes and upgrades to that a senior technologist at GTE, testified: system. The premise is you have a The policies in this case explicitly system that has something exclude the “cost of making good in it that you don’t like, and defective design or specification.” you want to get into a state “Defective” is defined as “[a]n where that thing is no imperfection or shortcoming, esp. in a part longer present. You that is essential to the operation or safety migrate from one state to of a product.” Black’s Law Dictionary another state, whether it is 429 (7th ed. 1999).10 Here there was an Y2K . . . or whether its an “imperfection or shortcoming”—the old database system, or a inability of the system to properly read dates on or after the year 2000––in the 11 system’s design or specification. The At argument, the Court attempted District Court pointed to extensive to clarify portions of the testimony of Joel testimony from GTE employees to buttress Cohen, Program Manager for GTE’s Y2K the conclusion that the remediation Program. In the course of this clarification, even GTE’s counsel acknowledged that the testimony is 10 Black’s Law Dictionary “confusing.” Tr. of Argument at 10:13- separately defines “defect” and the 20. corresponding adjective “defective” from 12 the term “design defect.” See Black’s Brodie explained that the term Law Dictionary 429 (7th ed. 1999). “legacy migration” “describe[s] the Notably, here the language of the policies transformation of a system . . . from one says “defective design,” rather than using state to an improved state.” Deposition of the tort liability concept of “design Michael Lawrence Brodie at 195:11-15, defect.” J.A. at 2364. 14 code that no longer important, GTE’s very argument is is appropriate . . . . undermined by the plain language of the You’re trying to policy provisions. The defective design change an existing provision expressly provides that the system into a new policy does not ensure “against the cost of form that no longer making good defective design or manifests the specifications.” (emphasis added). p r o b l e m y o u ’ re 2. Inherent Vice Exclusion trying to get away from. There is an additional ground to reject GTE’s coverage claim: the Deposition of Michael Lawrence Brodie at insurance policies explicitly do not insure 194:20-195:6, J.A. at 2363-64. In other against “inherent vice.” The District words, Y2K remediation, like other Court concluded that, in addition to the database and code upgrades, is targeted at defective design exclusion, the inherent changing an existing system because of a vice provision barred GTE from problem or limitation within that system. recovering for Y2K remediation measures. The fact that GTE may have In reaching this conclusion, the District utilized the best available system, and Court relied heavily, as persuasive subsequently faced the need to remedy a authority, on the Washington Court of problem with that system, does not save Appeal’s conclusion in Port of Seattle v. GTE from the defective design exclusion. Lexington Ins. Co. that the Y2K problem Taken to its logical conclusion, GTE’s was an inherent vice.
48 P.3d 334(Wash. argument would render virtually every Ct. App. 2002). business upgrade an insurable risk. For As noted by the District Court, the example, GTE could argue that upgrades Port of Seattle Court began by surveying to its software or computers undertaken in definitions of “inherent vice”: the name of mitigating an insurable risk would be insurable as long as it used the An inherent vice is defined best system at the time of initial by various courts as “‘any installation. existing defects, diseases, decay or the inherent nature GTE also suggests that a design of the commodity which cannot be faulty if it meets the will cause it to deteriorate specifications at the time of its design. with a lapse of time.’” It is That is unpersuasive. If, for example, an also defined “as a cause of airplane is built pursuant to specifications loss not covered by the and is unable to take-off, it is “defective” policy, does not relate to an or contains an “imperfection or extraneous cause but to a shortcoming” despite the fact that it loss entirely from internal conformed with the specifications. More decomposition or some 15 quality which brings Furthermore, “GTE is not threatened by about its own injury any external force; the threat is entirely or destruction. The internal.”
Id.vice must be inherent On appeal, GTE’s principal in the property for objection to this conclusion, as elaborated which recovery is below, is that the threats posed by Y2K sought.” were not exclusively internal.
48 P.3d at 338-39(quoting Mo. Pac. R.R. 3. External Threats Co. v. Elmore & Stahl,
377 U.S. 134, 136 (1964); Employers Cas. Co. v. Holm, 393 In concluding that GTE’s claims S.W.2d 363, 367 (Tex. App. 1965)) were barred by the defective design and (additional citations omitted). In other inherent vice exclusions, the District Court words, the question is whether the rejected GTE’s argument that its claim “insured property . . . contain[s] its own cannot be barred by these provisions seeds of destruction . . . [or whether it] because it faced risk from Y2K-related was threatened by an outside natural events caused by external systems. The force.” American Home Assurance Co. v. District Court explained that while “[t]his J. F. Shea Co., Inc.,
445 F. Supp. 365, 368 argument gives the Court pause[,] . . . (D.D.C. 1978). [t]he record does not reflect that the program was intended to eliminate any Port of Seattle went on to conclude external threats, as described by GTE.” that the Y2K problem fell within the
258 F. Supp. 2d at 378-79. inherent vice exclusion: “[B]ut for the two-digit date field code programmed into In support of its contention that it the Port’s software, the arrival of January faced external threats, GTE provided 1, 2000, would not result in loss. Thus, numerous citations to the record in both its the Port’s Y2K problem is an excluded brief, see Appellant Br. at 49 & n.12 inherent vice because the date field is an (citing J.A. at 3881, 3884-96, 3871, 3877, internal quality that brought about its own 3840, 4789-90, 5053), and at argument, problem.”
48 P.3d at 339, quoted in 258 see Tr. of Argument at 15:21-22 (citing F. Supp. 2d at 376. J.A. at 1598-1601, 1764, 1008-09, 1004, 4122-23, 1014). GTE provides minimal The District Court found the Port of explanation for how these citations Seattle analysis persuasive, and concluded support its argument. Moreover, upon that the inherent vice exclusion is examination, we are not satisfied that the applicable. We agree. As the District record supports the conclusion that GTE Court explained, “[h]ere . . . the insured faced an “external threat” such that the property, GTE’s computer systems, do defective design and inherent vice c o n t a in t h e i r o wn ‘ s e e d s o f destruction’—that is, the two-digit date limitation.”
258 F. Supp. 2d at 377. 16 exclusions do not apply.13 At best, these We disagree with the suggestion citations appear to support the claim that that the Y2K threat is “external” merely the Y2K problem is particularly complex because GTE’s systems interacted with because of the manner in which GTE’s other systems or read data from outside systems interface with third party sources. Such a conception of external systems.14 would essentially allow all defective designs and inherent vices to be characterized as external problems. For 13 example, if a car is defectively designed so In fact, some of GTE’s citations that the tires come off when the car is actually seem to support a contrary driven at 10 miles per hour, the threat is conclusion. For example, GTE cites to a not external merely because the “external” letter responding to a “request for event of the road contacting the tire information concerning the steps that GTE caused the tires to fly off. The road has taken to avoid or minimize imminent contacting the tire is an entirely loss or damage to its insured property.” predictable event that is inherent to the Letter from Raymond J. Alletto, GTE very function and purpose of the Director of Risk Management, to Ronald automobile—there is no problem H. Davis et. al., Executive General independent of the automotive design. Adjuster McLarens Toplis N.A., Inc. (Oct. To take another example, if a dam whose 12, 1999), J.A. at 971. In response to one very purpose is to hold water falls apart question, GTE explains, “Some of the when the water rises to an entirely costs and expenses associated with the predictable level, the rising of the water is conversion of third party hardware and not an “external” problem—the problem is software have been borne by GTE’s that the dam was not properly designed to suppliers. We do not believe that the allow it to perform precisely the function insurers need this information to carry out it was intended to perform, the holding of their analysis because the figures that GTE water. submitted in its proof of loss do not include any of the costs and expenses that By contrast, if as a consequence of were borne by GTE’s suppliers.” J.A. at a defective Y2K design the fire retardation 1014. system in a building does not function and the building goes up in flames, the fire 14 For example, the 1996 Year End would be an external event. The fire Report explains that “the interdependence represents an independent problem of systems required to support today’s external to the design of the computer telecommunications business compounds system. the complexity of the Year 2000 problem [because] [p]lann ing of system conversions requires coordination of all an understanding of all software and data underlying hardware, operating systems, interfaces between systems.” J.A. at 1599. third party software layered products and 17 In this case, there was no Supp. at 368.16 unpredictable external threat posing a risk B. Exceptions to Exclusions to GTE’s system. 15 The problem is that the systems were programmed only to GTE argues that the District Court recognize the last two digits of the failed to consider all relevant policy date—the preface remaining a constant provisions in finding that GTE’s claim “19.” The fact, however, that at the turn fell within the defective design and of the millennium, the preface would now inherent vice exclusions. In particular, be “20’” rather than “19,” thereby requiring four-digit date recognition, was entirely predictable. The annual change in 16 On appeal, GTE argues that its date, like the road impacting the tire and risk assessment “included risks . . . that the water level rising, is within the scope systems might fail as a result of corrupt or of occurrences for which the system was destroyed data stemming from interactions purposely designed. The flaw—that the with computer systems and networks systems were limited to two-digit date outside of GTE.” Appellant Br. at 48. recognition—is entirely endemic to the But the record reflects no carefully system. That is, the insu red tailored remediation effort that was limited property—GTE’s systems—“contain[s] its just to corrupted data entering from own seeds of destruction” and is not outside sources. Nor, as the District Court “threatened by an outside natural force.” found, does GTE identify what portion, if American Home Assurance Co., 445 F. any, of its extensive $350 million Y2K program targeted that type of external threat.
258 F. Supp. 2d at 378-79. GTE cannot seek reimbursement for the entire cost of remediating its own defective 15 GTE has not attempted to programs merely because some elements characterize the Y2K problem as a of the program might also serve to “computer virus.” In Port of Seattle, the mitigate the effect of corrupted data court rejected a characterization of the entering from outside sources. GTE was Y2K problem as a virus, noting that “[t]he obligated to specifically identify and Port’s Y2K problem was the result of a quantify remediating steps aimed directly deliberate decision by programmers to use at damage from external threats, and a two-digit rather than four-digit year field therefore potentially covered by the . . . [and] [t]his feature does not cause the Insurers’ policies. GTE did not proceed software to be infectious.”
48 P.3d at 338. under such a theory in District Court. We note in passing that the issue of Instead it sought reimbursement for its whether a computer virus constitutes an entire program, and attempted to support “external threat” may pose a different this claim by alleging that some portion of question than the one presented in this its program could mitigate unspecified case. “external” threats. 18 GTE points out that the defective design Med. Center v. Am. Protect. Ins., 226 F. and inherent vice provisions except from Supp. 2d 470, 479 (S.D.N.Y. 2002) (“An the exclusions “resulting damage” and ensuing loss provision does not cover loss “ensuing loss or damage.” caused by the excluded peril, but rather covers loss caused to other property Specifically, the primary layer wholly separate from the defective policies state that the defective design or property itself.”); Prudential Property & specifications exclusion “shall not apply to Cas. Ins. Co.,
2002 WL 31495830, at *19- loss or damage resulting from such 20 (D. Or. 2002). That is, “an ensuing defective design or specifications . . . ; loss provision does not cover loss caused however any such resulting damage will by the excluded peril, but rather covers be subject to all other exclusions in this loss caused to other property wholly Policy.” Additionally, inherent vices are separate from the defective property not covered “unless loss or damage from itself.” Swire Pac. Holdings, Inc. v. a peril insured herein ensues and then this Zurich Ins. Co.,
139 F. Supp. 2d 1374, policy shall cover for such ensuing loss or 1380 (S.D. Fla. 2001) (hereinafter Swire damage.” Similarly, the excess layer I), certified on appeal
284 F.3d 1228(11th policies do not insure against faulty design Cir. 2002) (emphasis in original). or inherent vice “all unless physical Moreover, in the factually analogous Port damage not excluded by this Policy of Seattle case, the Washington Court of results, in which event, this Policy will Appeals rejected the contention that even cover only such resulting damage.” if the Port’s Y2K problem was an We are not persuaded that the excluded inherent vice, the Port could ensuing and resulting loss provisions recover under the ensuing loss provision. allow GTE to recover in this case. Several
48 P.3d at 339-40. courts considering similar policy An alternative reading of the provisions have concluded that the cost of ensuing and resulting loss provisions correcting design defects cannot be would render the policy exclusions covered under an ensuing loss provision virtually meaningless. That is, the where it was incurred to correct an “exception to [the] . . . exclusion cannot excluded peril. See Swire Pac. Holdings be construed so broadly that the rule (the Inc. v. Zurich Ins. Co.,
284 F.3d 1228, exclusion) is swallowed by the exception.” 1231 (11th Cir. 2002) (hereinafter Swire Swire I,
139 F. Supp. 2d at 1381. Rather, II) (citing cases)17 ; see also Montefiore that certification is necessary in this case. 17 In Swire II, the Eleventh Circuit This is not a case in which there is a ultimately certified the question of the particular area of the law that we need the design defect exclusion’s scope to the state courts to clarify; rather, we find Florida Supreme Court. See 284 F.3d at support for our interpretation in the plain 1231, 1234. We do not, however, believe meaning of the contract. 19 the ensuing loss provisions are best read as GTE is entitled to coverage because (1) permitting recovery where a covered peril data destruction and (2) business or damage results from the design defect interruption are specifically covered perils. or inherent vice.18 Thus we disagree that 1. Data Destruction The policies in this case ensure 18 Some courts have more narrowly against “all risks of physical loss of or interpreted ensuing loss clauses to apply damage to property described herein.” only “in those rare cases where the “Physical loss or damage” is defined to reasonable damage expected to be caused include “any destruction, distortion or by [for example] faulty workmanship corruption of any computer data, coding, leads to another peril that causes damage program except as hereinafter excluded” beyond that normally expected.” (emphasis added). Prudential,
2002 WL 31495830, at *19 GTE conceded at argument that (emphasis added). The following “[t]here has to be a physical damage illustration is helpful: resulting from design defect or inherent vice.” Tr. of Argument at 21:22-23. GTE [I]f defectively installed agrees with the Court, for example, that if, roof flashing allows water as a consequence of a defective Y2K to leak into the wall cavity, design, the fire retardation system in a then subsequent damage building does not function and the caused by water, such as dry building goes up in flames, “[t]his rot or mold, to the interior provision means that the building gets of the house is caused by covered, because it is a physical damage to the faulty workmanship and the building, but it doesn’t mean that the not covered. If, however, redesign of the software gets covered.” the water migrates into an Id. at 5:15-18. This concession seriously electrical box and causes an undermines GTE’s argument. In this case, electrical short which in GTE is essentially seeking recovery for turn causes a fire, then the measures taken to correct its systems, and fire damage is a covered not for some eventuating physical damage “ensuing loss.” [That is,] . . mold, unlike fire, is not an “ensuing loss” due to the an “intervening cause” or be “beyond that lack of any intervening normally expected.” Rather, we conclude cause other than time that GTE has failed to establish any beyond the initial water physical damage (whether normally damage. expected or not) “wholly separate from the defective property itself.” Swire I, 139 F. Id. We do not reach the issue of whether Supp. at 1380. the “ensuing loss” needs to be the result of 20 sustained to its property. other databases.” Letter from Raymond J. Alletto, GTE Director of Risk GTE argues that because the Y2K Management, to Ronald H. Davis et. al., problem would inflict physical damage to Executive General Adjuster McLarens the system and/or data, it can recover, Toplis N.A., Inc. (Oct. 12, 1999), J.A. at under the Sue and Labor Provisions 992-93. The record, however, does not discussed more extensively below, for appear to provide support for this preventive measures taken to mitigate this allegation of data corruption. Moreover, “ensuing loss.” The problem, however, is at best this establishes that incorrect data that GTE has failed to adequately may have been generated as a result of demonstrate that it was threatened by problems within GTE’s own systems—it “physical loss” in the form of does not establish that data destruction or “destruction, distortion or corruption of corruption would have ensued “to other any computer data, coding, program,” as property wholly separate from the distinct from the otherwise excluded defective property itself.” Swire I, 139 F. defective design and inherent vice. That Supp. 2d at 1380. Here, the plain is, GTE has not illustrated that the language of the policies provides coverage consequences of failing to correct the two- for data destruction or corruption “except digit date designation system, causing data as hereinafter excluded.” As discussed to enter the system in an unrecognizable above, the defective design and inherent format, are a covered loss. vice exclusions bar recovery, and a In response to this Court’s inquiry reading of the ensuing loss provisions to at oral argument, GTE provided record provide coverage would essentially read citations on the issue of the “data these exclusions out of the policy. destruction, distortion and corruption that 2. Business Interruption GTE potentially faced as distinct from the impact on GTE’s computers and/or GTE also points to the fact that software.”19 GTE’s strongest claim “business interruption” is a specifically appears to be its allegation that absent covered peril. The primary layer policies remediation, “some of [its] . . . systems provide for coverage for “[l]oss resulting might have generated incorrect data, from necessary interruption of business thereby corrupting financial records and conducted by the Insured and caused by loss, damage, or destruction by any of the perils covered herein . . . .” (emphasis 19 Letter from Robert F. Ruyak, added). The “Business Interruption Counsel for GTE Corporation, to Marcia Endorsement” in the excess policies M. Waldron, Clerk for the United States provides coverage for business Court of Appeals for the Third Circuit interruption “resulting from physical loss (December 15, 2003) (citing J.A. at 992- or damage of the type insured against by 94, 995-99, 1209-10, 1220-27, 3839-40, this Policy, to property not otherwise 3885). excluded by this Policy.” (emphasis 21 added). is a covered peril. However, GTE cannot claim business interruption losses ensuing As the District Court explained, in or resulting from the specifically excluded this case, in contrast to the factually intrinsic design defect and inherent vice analogous Port of Seattle case, “GTE has perils. Any other reading of the done more than claim testing losses; GTE exclusionary provisions would render the clearly claims that had it not remediated its provisions a virtual nullity. GTE could computer system in preparation for Y2K, argue, for example, that any upgrade to or it would have faced separate business correction of a defective system is interruption losses of a great magnitude.” reimbursable because the ensuing loss
258 F. Supp. 2d at 380. Viewing the from failing to correct the system would evidence in the light most favorable to result in “business interruption.” GTE, the District Court concluded that GTE faced potential business interruption In sum, we conclude that even losses and its remediation efforts were when read in conjunction with the other taken to prevent su ch losses. terms of the policies—the ensuing loss, Nevertheless, the District Court concluded data destruction, and business interruption that, pursuant to the terms of the policies, provisions—GTE’s claim is still barred by the alleged business interruption losses the defective design and inherent vice were not insurable. We agree. exclusions. The District Court explained that C. Consideration of After-The-Fact “[t]he ensuing loss provisions clearly only Correspondence provide coverage for a covered loss Finally, GTE argues that the ensuing from one of the excluded perils.” District Court, in interpreting the
258 F. Supp. 2d at 381. Moreover, foregoing contract provisions, erred by “[u]nder the plain language of the policies, failing to consider the Insurers’ alleged the business interruption loss must be after-the-fact efforts to amend the policies caused by a covered peril.”
Id.As a to exclude coverage for Y2K costs. To result, because design defects and inherent begin, GTE points out that the Insurers vices are not perils covered, “the business chose to extend GTE’s insurance policies interruption loss ensuing from a design through the millennium without including defect or inherent vice would not be a a Y2K exclusion. Moreover, GTE alleges covered loss.”
Id.In other words, GTE that, in 1998 and the spring of 1999, each cannot recover for just any ensuing or Insurer asked GTE to accept a Y2K resulting business loss—the underlying exclusion.20 GTE contends that Insurers peril resulting in business interruption must be covered. Returning to the fire example above, business interruption 20 GTE suggests that its decision to losses ensuing or resulting from any reject such policies resulted in subsequent physical damage sustained by a fire would cancellation of its IRI and Federal be covered because such physical damage policies, as well as Allendale’s 22 should not now be permitted to obtain In fact, the correspondence in this from the Court contract terms they were case does not even appear to support unsuccessful in negotiating, and suggests GTE’s contention that the Insurers sought that the efforts to negotiate Y2K to amend the policies to exclude Y2K exclusions illustrate an awareness on the coverage. In a fax dated June 3, 1998, part of Insurers that under the existing GTE’s Counsel requested that Allendale language they were liable for GTE’s Y2K include clarifying language that it would remediation measures. We conclude that not add such a Y2K exclusion. The fax such alleged after-the-fact correspondence provides: is not properly considered in interpreting The letter received was this contract, and, moreover, that the incomplete in GTE and our correspondence in this case does not estimation based on our appear to support GTE’s claim. meeting and Allendale’s New Jersey courts consider the positive response. We insurer’s conduct in determining whether would like the letter to read a policy’s terms are ambiguous. See as follows: Fortunato v. Highlands Ins. Group, 785 Allendale will not A.2d 963, 967 (N.J. Super. Ct. Law Div. add any additional 2001) (“The ambiguity of the umbrella exclusions, policy here is also shown by the conduct amendments or of the insurer.”). Moreover, courts do not endorsements “permi[t] insurance companies to seek regarding Year 2000 refuge in the literal language of their issues (inability to policies when the company’s conduct and recognize the correct actions . . . causes [sic] the insured to act data including Year or to fail to act based on that conduct.” 2000) to the Doto v. Russo,
659 A.2d 1371, 1377 (N.J. currently in force 1995). We have already concluded, G T E/ Allendale however, that the terms of the policy policies prior to the unambiguously exclude GTE’s claim. expiration of such Therefore, we find no reason to look to the policies (July 1, Insurers’ alleged conduct. In addition, 2000). GTE has failed to point to conduct by the Insurers that caused GTE to act or fail to J.A. at 4156 (emphasis added). act—this is not a case where GTE took On June 15, 1998, Allendale some action, to its detriment, in reliance appears to have transmitted to GTE’s on the Insurers’ statements or conduct. insurance broker proposed agreements between Allendale, Affiliated, and GTE. cancellation of selective policies. One of the stated objectives of the See Appellant Br. at 21. agreement was to “[e]liminat[e] 23 uncertainty and achiev[e] mutual policy.21 agreement as to how the policy responds IV. Sue and Labor Provisions to Y2K or other similar date or time recognition claims.” Letter from Brian J. GTE contends that it is entitled to Krais, Vice President and Operations reimbursement under the Sue and Labor Manager of Allendale Insurance, to Adam Provisions. GTE argues that these Kagan, J & H Marsh & McLennan (June provisions require the company to avert 15, 1998), J.A. at 4129. The proposed certain losses22 and then obligate the agreement provided that “Afilliated and Insurers to reimburse GTE for those GTE agree that Affilliated will not endorse onto the existing policy any restriction or clarification to the policy 21 At oral argument, GTE’s counsel language specifically relating to Y2K.” contended that there is a “disputed fact” as
Id.The agreement went on to explain, to whether GTE or the Insurers sought however, that the parties would “agree that clarification on whether the policy covered a proper construction and interpretation of Y2K measures, indicating “we haven’t the policy is as follows: 1) the policy does had discovery on that issue yet.” Tr. of not pay for remediation, repair or Argument at 18:7-10. Even assuming that assessment of any Y2K or similar date or the Insurers sought the clarification, time recognition problem in any electronic GTE’s argument still fails. The fact that data processing equipment and media, Insurers may have sought clarification and whether preventative or remedial . . . .” after negotiations agreed not to add Id. at 4129-30. However, there is no additional Y2K exclusions does not indication in the record that the parties support GTE’s claim that the Insurers ever assented to the agreement. represented that Y2K measures were The fact that agreements clarifying covered. the scope of Y2K coverage were 22 discussed, and that GTE may have sought The language of the Preservation to have Insurers clarify that no “additional and Protection of Property Clause, in the exclusions” would be added in no way excess layer policies, does not appear to suggests that GTE believed, much less that explicitly obligate GTE to take action. Allendale represented, that the policies Rather, it merely provides that “the provided for Y2K coverage. In fact, expenses incurred by the Insured in taking GTE’s attempts to ensure that no reasonable and necessary actions for the “additional exclusions” pertaining to Y2K temporary protection and preservation of would be added suggest that GTE property . . . shall be added to the total anticipated that at least some Y2K physical loss or damage otherwise measures were not covered under the recoverable . . . .” Whether or not GTE was obligated to take such measures, however, is ultimately immaterial to our holding. 24 expenses. We decided in Part III that, of loss that is the subject of the policy; that because of the policies’ exclusions, GTE’s is, the clause is designed to allow actions were not aimed at averting a reimbursement for measures taken by the covered loss. Therefore, the only insured to mitigate damages in order to remaining question is whether the Sue and reduce the insurer’s obligation under the Labor Provisions provide an independent policy. See Swire I, 139 F. Supp. 2d at basis for recovery. They do not. 1383. While there is some dispute as to whether the covered loss has to occur to The Sue and Labor Provisions do invoke coverage, see Swire II, 284 F.3d at not save GTE’s claims from the policy 1232 (citing cases), it seems undisputed exclusions. Rather, as the District Court that the actions must at least be aimed at a explained, covered loss. An alternative view, [T]he purpose of the sue construing the Sue and Labor Provisions and labor clause is to as separate insuring agreements, would reimburse the insured for read the defective design and inherent vice costs incurred to satisfy the exclusions out of the policy. insured’s duty to the insurer. Thus, the Sue and Labor Provisions If the insured acts to prevent do not provide an independent basis for a loss that is not covered by GTE’s recovery. Such an interpretation of the policy, there is no duty the Sue and Labor Provisions is necessary or benefit to insurer; “[t]he to avoid rendering the exclusionary obligation only exists when provisions meaningless; an alternative the action taken is to interpretation would permit GTE to prevent a loss for which the recover for improvements and measures underwriter would be taken to address a host of uninsured risks. liable.” *****
258 F. Supp. 2d at 373(quoting Port of Seattle,
48 P.3d at 340). In Port of Seattle, For the foregoing reasons, we will the Washington Court of Appeals held affirm the District Court’s grant of that expenses incurred to prevent Y2K summary judgment. losses were not covered under the sue and labor clause because the Port sought to prevent a loss that would occur after the policies expired.
48 P.3d at 340. While Port of Seattle is arguably distinguishable on some grounds and is certainly not binding precedent, the underlying rationale of the court’s decision is persuasive. The purpose of a sue and labor clause is to encourage the prevention 25
Document Info
Docket Number: 03-2139
Citation Numbers: 372 F.3d 598
Judges: Ambro, Chertoff, Fuentes
Filed Date: 6/21/2004
Precedential Status: Precedential
Modified Date: 10/19/2024