GTE Corp. v. Allendale Mutual Insurance , 372 F.3d 598 ( 2004 )


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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    Precedential or Non-Precedential: Precedential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
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    Recommended Citation
    "GTE Corp v. Allendale Mutl Ins" (2004). 2004 Decisions. Paper 543.
    http://digitalcommons.law.villanova.edu/thirdcircuit_2004/543
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    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. 317
    is, 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 at
    374-
    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