This article was published in Law360 on June 23, 2017 by partners Philip Silverberg, William Wilson, and former associate Andrew Rice. This is part 2 of this article. You can find the first part here.
On March 25, 2015, the district court issued an extensive opinion and order, granting Zurich’s motion for summary judgment. The 43-page discussion first addressed whether Lantheus experienced a “necessary suspension” of its “business activities,” as required for coverage under the policy’s CBI provision. The court noted that Zurich’s cited authorities stood for the proposition that courts in New York and across the country had found that business income coverage traditionally required a total cessation of an insured’s business activities. Moreover, because Lantheus’s business activities at the Billerica Facility “concededly did not” cease completely, the court mused that “Zurich would appear to be entitled to summary judgment.” Ultimately, though the court found “cogent reasons for and against interpreting the CBI provision to require a total cessation of operations at the Billerica Facility,” it declined to resolve the issue, noting that coverage was precluded, in any event, by operation of the corrosion exclusion.[1]
The court stated at the outset of its opinion that Zurich met its burden by establishing “that ‘corrosion’ was unambiguous as used in the policy, and that the only reasonable interpretation of ‘corrosion’ include[d] the [highly localized pitting and weakening] that occurred” at the NRU reactor. Moreover, the court noted that Zurich had “the better of the argument” with respect to Lantheus’s claim of machinery breakdown, pointing out that machinery breakdown under the policy was a type of covered “physical loss or damage,”not a separate cause of loss triggering coverage on its own or under the ensuing loss provision.
Inasmuch as the term “corrosion” was not defined in the policy, the court looked to a dictionary definition to import the term’s common, rather than scientific, meaning. As the court observed, Webster’s defines “corrosion,” in part, as “typically: a gradual wearing away or alteration by a chemical or electrochemical essentially oxidizing process (as in the atmospheric rusting of iron).” Next, the court rejected Lantheus’s misguided arguments that the pressure surge was a “predominant cause” of the loss or that the ensuing loss provision restored coverage “if corrosion further back in the causal chain combines with a fortuitous event to cause an accident.” Accepting, for the sake of argument, Lantheus’s position that the through-wall breach occurred because of a “pressure surge…act[ing] upon an already weakened point,” the court went on to ask — in light of the anti-concurrent causation provision — “what process caused the vessel to be ‘already weakened.'”
It was here that the court parted ways with Lantheus on “the crucial point of whether ‘corrosion’ contributed to the loss.” While Lantheus argued that the highly localized pitting and weakening that contributed to the loss was not sufficiently gradual to constitute “corrosion” under the policy, the court disagreed, choosing to join other courts that “have rejected analogous attempts to narrow the definition of ‘corrosion.'” According to the court, a “‘gradual’ process ‘proceed[s] by steps or degrees,’ but it does not necessarily do so slowly.” Adopting the 29-day estimation put forth by Lantheus’s experts, the court found that “even ‘rapid’ corrosion falls within the scope of this Policy’s exclusion.” Indeed, “[t]hat the progress of the electrochemical cell’s effect on the wall can be measured by such increments is, in and of itself, evidence that it was a gradual process.”
The opinion concluded with a succinct analysis of the policy’s ensuing loss provision, which the court properly observed did not restore the coverage precluded by the corrosion exclusion. Here again, the court gave Lantheus the benefit of the doubt, but noted that, “[e]ven under Lantheus’s theory of the case, the aeration cell operated in tandem with the hydraulic transient to cause the through-wall breach — there was, therefore, no ‘ensuing loss.'” Key to this holding was the policy’s anti-concurrent causation language, which obviated a causation analysis and laid bare Lantheus’s arguments that “machinery breakdown” was, itself, the ensuing loss.[2]
Dissatisfied with the district court’s ruling, Lantheus appealed the decision to the Second Circuit and filed its opening brief in late 2015. Lantheus refused to alter its central argument — that the highly localized pitting and weakening was simply too rapid (or not gradual enough) to constitute corrosion — but abandoned its claim that “machinery breakdown” constituted an ensuing loss. Instead, Lantheus attacked Judge Failla’s thorough and sound analysis as having applied the “wrong interpretive methodology” for assessing the policy’s corrosion exclusion. Notably, Lantheus posited that the section heading, text, and broader context of Exclusion 5b (in which “corrosion” appeared) supported its thoroughly debunked argument that corrosion and its neighboring exclusions were intended to apply only to “damage occurring gradually and inevitably over an object’s useful life or resulting from an object’s inherent qualities or defects.” In advancing this argument, Lantheus relied almost exclusively on the Second Circuit’s 2003 decision in City of Burlington, which, of note, applied Vermont law and dealt with a latent defect, rather than corrosion.[3]
On appeal, Zurich adhered to its original arguments, including one adopted by the district court’s opinion, that “corrosion may be gradual, regardless of whether it is more accelerated (i.e. less gradual) in one particular instance than in another.” Zurich also distinguished the Burlington case, arguing that it was inapplicable to the Lantheus matter. Furthermore, Zurich noted the obvious fact, overlooked or ignored by Lantheus, that the heading under which the “corrosion” exclusion appeared was titled “Developing, Latent and Other Causes,” fundamentally undercutting much of Lantheus’s “contextual” argument. Also, although the district court declined to rule on the “necessary suspension” arguments below, Zurich again offered support for why the production slowdowns Lantheus experienced were incapable of triggering the policy’s CBI coverage.
On May 25, 2016, the Second Circuit issued a summary order, affirming the district court’s grant of summary judgment to Zurich.[4] While reviewing the grant of summary judgment de novo, the circuit court recognized Judge Failla’s analysis as “thorough and sound,” noting that the district court had drawn “all inferences in favor of Lantheus,” and “specifically declined to resolve certain outstanding factual ambiguities that were not necessary to decide Zurich’s summary judgment motion.” Beyond this, the court offered a concise overview of the parties’ arguments, and the basis for affirming summary judgment in Zurich’s favor. The court expressly held that “it was not error for the District Court to draw the factual conclusion that ‘the [highly localized pitting and weakening] contribute[d] concurrently or in any sequence to the…damage,'” especially when the district court was relying on Lantheus’s own experts. Indeed, “[t]aking the facts in the light most favorable to Lantheus, the [highly localized pitting and weakening] of the reactor vessel took approximately twenty-nine days to occur and was caused at least in part by the differential aeration cell.” Accordingly, there was “no question of material fact that the NRU Reactor shutdown falls into Exclusion 5b, even accepting Lantheus’s proposed version of events.”
Like the district court below, the Second Circuit declined to rule on whether the policy’s CBI provision, requiring a “necessary suspension” of the insured’s “business activities,” meant a “total cessation of the operations at the Billerica Facility.” The circuit court echoed Judge Failla’s sentiments that this newer form of CBI coverage had not yet been “fully delineated by the courts,” and differed from the well-established and thoroughly applied business interruption coverage.
Key Takeaways
The Lantheus decision represents a strong rebuke of the narrow definition of “corrosion” advanced by some in the insurance industry. The cases cited herein, along with Judge Failla’s thoughtful and reasoned analysis, present a reading of the corrosion exclusion that honors its meaning and recognizes the varied nature of corrosion.
Equally important is the principle, reinforced by the district court and Second Circuit in Lantheus, that anti-concurrent causation language means what it says and, in the field of policy application, precludes a causation analysis.
Philip C. Silverberg is a New York-based partner of Mound Cotton Wollan & Greengrass LLP, with more than 25 years of experience in commercial, tort, corporate, insurance and reinsurance litigation.
William D. Wilson is the lead partner of the firm’s New Jersey office. With over 25 years of experience in all aspects of commercial litigation, his practice includes insurance defense, insurance coverage disputes, subrogation, contract disputes, products liability, employer liability, premises liability and general negligence. He is also is an adjunct professor of law at Seton Hall University School of Law and the author of NJInsuranceBlog.com.
Andrew H. Rice is a New York-based associate at Mound Cotton who focuses on first-party property insurance coverage issues and disputes.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] The district court, like the Second Circuit after it, assumed for the purposes of the summary judgment motion that Lantheus was entitled to claim under the CBI provision.
[2] As previously noted, the court already had distinguished “machinery breakdown” as a type of loss or damage, not a covered peril.
[3] City of Burlington v. Indem. Insurance Co. of N. Am., 332 F.3d 38 (2d Cir. 2003).
[4] No. 15-1717, 2016 WL 3006869, at *1 (2d Cir. May 25, 2016) (summary order).