Filed: Jun. 21, 2004
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 6-21-2004 GTE Corp v. Allendale Mutl Ins Precedential or Non-Precedential: Precedential Docket No. 03-2139 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "GTE Corp v. Allendale Mutl Ins" (2004). 2004 Decisions. Paper 543. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/543 This decision is brought to you for free and open access by the
Summary: Opinions of the United 2004 Decisions States Court of Appeals for the Third Circuit 6-21-2004 GTE Corp v. Allendale Mutl Ins Precedential or Non-Precedential: Precedential Docket No. 03-2139 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004 Recommended Citation "GTE Corp v. Allendale Mutl Ins" (2004). 2004 Decisions. Paper 543. http://digitalcommons.law.villanova.edu/thirdcircuit_2004/543 This decision is brought to you for free and open access by the ..
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Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
6-21-2004
GTE Corp v. Allendale Mutl Ins
Precedential or Non-Precedential: Precedential
Docket No. 03-2139
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2004
Recommended Citation
"GTE Corp v. Allendale Mutl Ins" (2004). 2004 Decisions. Paper 543.
http://digitalcommons.law.villanova.edu/thirdcircuit_2004/543
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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
