Continental Insurance Co. v. Arkwright Mutual Insurance Co.

In December 1992, the basement of the Water Street office building in New York City flooded. The floodwater reached electrical switching panels, generating a short circuit that caused an explosion. The explosion resulted in $580,000 in damage to the switching panels. Aside from the switching-panel damage, the floodwater caused about $445,000 in damage to other electrical equipment. Three different insurance companies had issued insurance contracts on the Water Street building. Two of the companies—Continental Insurance Co. (Continental) and Hartford Insurance Co. (Hartford) (collectively, plaintiffs)—had each issued all-risk insurance contracts. Together, the all-risk contracts provided a total of $75,000,000 in coverage per occurrence. However, both of the all-risk contracts excluded coverage for electrical injury or disturbance to electrical appliances caused by electrical currents, if the currents were artificially generated. The third company—Arkwright Mutual Insurance Co. (Arkwright) (defendant)—had issued a contract that included flood loss up to $100,000,000, with a $75,000,000 deductible. In essence, the Arkwright contract provided excess liability insurance for flood loss that exceeded the coverage of the all-risk contracts. In addition, the Arkwright contract provided coverage with a $50,000 deductible for certain losses. The coverage, which was described in a Special Deductible Endorsement, stated that the $50,000 deductible applied to losses from electrical breakdown of any equipment. After the Water Street building flooded, Continental and Hartford covered the losses, including the switching-panel loss. Then, Continental and Hartford filed suit against Arkwright, seeking a declaratory judgment that Arkwright was liable for the switching-panel loss according to Arkwright’s Special Deductible Endorsement. The parties each sought summary judgment. The district court granted summary judgment in favor of Arkwright, upon concluding as a matter of law that the switching-panel loss was caused by the flood and was consequently subject to the higher deductible in the Arkwright policy. Continental and Hartford appealed.