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Penford Corporation v. National Union Fire Insurance

November 29, 2011


Appeal from the United States District Court for the Northern District of Iowa.

The opinion of the court was delivered by: Wollman, Circuit Judge.

Submitted: April 14, 2011

Before WOLLMAN, GILMAN,*fn1 and MELLOY, Circuit Judges.

A severe flood struck Cedar Rapids, Iowa, in 2008, damaging many of its businesses, including a manufacturing facility owned and operated by Penford Corporation (Penford). Penford submitted claims to its insurers, National Union Fire Insurance Company (National Union) and ACE American Insurance Company (ACE) (collectively, insurers), and a coverage dispute ensued. The insurers asserted that certain sublimits in the policy capped reimbursement for damages caused by a flood and that those sublimits applied to both property damage and business interruption losses.*fn2 Penford claimed that the sublimits applied only to property damage.

Penford brought suit, seeking declaratory judgment and asserting claims for breach of contract and bad faith. After Penford presented its case-in-chief, the district court*fn3 granted the insurers' motion for judgment as a matter of law (JMOL) on the bad faith claim. At the close of the evidence, both parties moved for JMOL on the remaining claims. The district court granted the insurers' motion, denied Penford's motion, and entered judgment dismissing the action. Penford appeals from the orders and judgment. We affirm.


Penford produces gasoline-additive ethanol, as well as starch for the paper industry at its Cedar Rapids plant (the plant), which sits on a 29-acre parcel adjacent to the Cedar River. This parcel occupies three different flood zones, as established by the Federal Emergency Management Agency: Zone A (roughly the 100-year flood plain); Zone B (roughly the 500-year flood plain); and Zone C (a higher-elevation area). Numerous buildings are situated within the different flood zones. The plant's operation is integrated, such that personnel and materials pass through and among the flood zones during the production process.

In 2008, Penford purchased flood insurance from the National Flood Insurance Program (NFIP) on eighteen of its buildings. It purchased additional insurance from the insurers, issued on a form entitled "Property All Risk Insurance Subscription Policy," with each insurer sharing equal responsibility for any claim under the policy. The policy encompassed Penford's interests in the plant and other assets and provided coverage for losses of up to $300 million. Specific sublimits capped the insurers' liability according to the type of peril insured against. Under the subheading "Flood," the policy provided: "This 'policy' covers direct physical loss or damage caused by or resulting from Flood." J.A. 927. In a later section, it provided: "This 'policy' insures TIME ELEMENT loss . . . directly resulting from direct physical loss or damage of the type insured against this 'policy.'" J.A. 938.

The policy defined sublimits and explained their operation in a subsection entitled "Limits," which provided:

This "policy" also contains Sublimits as specified under this clause and the various extensions, endorsements, and Sections of this "policy." These Sublimits are part of and not in addition to the [$300 million] Limit of Liability. These Sublimits do not increase the Limit of Liability or any other Sublimit Sublimits stated below apply per "occurrence" for all "locations" and coverages involved. The maximum Sublimit amount collectible under this "policy" shall be the Sublimit applicable for all loss or damage from a peril insured against by this "policy . . . ," regardless of the number of "locations" or coverages involved in the "occurrence."

J.A. 916-17. An accompanying chart identified the various sublimits that applied to specific perils. The peril sublimit for flood was $50 million "per occurrence and annual aggregate." J.A. 917. Specific flood sublimits applied to the plant in Cedar Rapids: $10 million in Zone A "per occurrence and annual aggregate" and $10 million in Zone B "per occurrence and annual aggregate." J.A. 917.

On June 13, 2008, the Cedar River breached the diking system that surrounded the plant. The river crested two days later, reaching a level twelve feet higher than the previous record set in the 1920s. The flood caused extensive damage to the plant, and plant operations were shut down. In the months that followed, the parties disagreed over what losses were subject to the flood sublimits and over the timeliness and amount of payments due under the policy. The insurers eventually paid $20.5 million, but declined to pay additional claims for business interruption losses.*fn4 During the ensuing litigation, the parties agreed that intent was crucial to interpreting which losses were subject to the flood sublimits, but disagreed over what they had respectively intended. They offered competing accounts of the circumstances leading up to the issuance of the policy, including the negotiations over which policy form would be used; discussions of the amount and extent of coverage the policy would contain; and the objectives of those involved in the negotiations.

A. Selection and Issuance of the All Risk Property Policy

Penford contracted with Marsh USA, Inc. (Marsh), an insurance brokerage services firm, to obtain insurance and to handle claims. Under their agreement, Marsh was "engaged to act as [Penford's] risk management advisor and consultant and insurance broker." J.A. 3379. Marsh was also authorized "to represent and assist [Penford] in all discussions and transactions with insurers relating to the lines of insurance" to be procured. J.A. 3380. The agreement provided that Marsh would "negotiate on [Penford's] behalf with insurers and keep [Penford] informed of significant developments in the negotiations." J.A. 3382.

Marilyn Rehmer, a Marsh employee, began to consult with Penford on its property insurance coverage in 2006 and was charged with renewing coverage through March 2008. Marsh had helped Penford procure its previous policy through the insurers, and Rehmer resumed discussions with National Union's underwriters, Michael Gunty and Timothy Scott, on the possibility of renewal. At the underwriters' suggestion, Marsh replaced the policy form used the previous year with a policy form that had been used on a different account, which Marsh had brokered as well.

The next year, Rehmer again led the process of obtaining coverage through March 2009. She submitted Penford's specifications to various commercial insurers, including the insurers, and invited reply bids. The submission, dated January 28, 2008, proposed a $300 million limit and "$15,000,000 per occurrence and annual aggregate as respects the peril of Flood in Cedar Rapids, IA." J.A. 2875. Rehmer commenced negotiations with Gunty and Scott of National Union and with Justin Weltscheff, underwriter for ACE. Neither insurer was willing to underwrite $15 million of flood coverage for the Cedar Rapids plant. Both had internal underwriting policies that restricted coverage to $5 million for areas prone to flooding. After further communications, each insurer offered to underwrite $5 million in coverage per flood zone, for a total of $10 million in coverage for Zone A and another $10 million for Zone B. On February 28, 2008, the insurers issued a binder reflecting this figure, and Rehmer renewed coverage on Penford's behalf through March 2009.

In early June 2008, it became apparent that the Cedar River would flood. Mark Wynne, Penford's Vice President and Comptroller for North America, contacted Rehmer with questions about deductibles and qualifications for making a claim. Rehmer replied by email on June 11, offering, among other things, the following coverage summary: "Penford currently purchases National Flood Insurance Program policies for several buildings on the Cedar Rapids, IA campus. Penford also purchases all risk property insurance which includes coverage for flood in Cedar Rapids, IA for both Flood Zone A for $10,000,000 and in Flood Zone B for $10,000,000." J.A. 2912. Rehmer attached a chart to the email that explained the coverage provided by the NFIP policy and by the insurers' policy.

On June 17, 2008, days after the river crested, Steven Cordier, Penford's Chief Financial Officer and Senior Vice President, wrote a draft press release that was consistent with Rehmer's coverage summary. It stated:

In addition to [the National Flood Insurance Program], the Company maintains several policies with highly rated insurance companies. The coverage provided includes property damage and business interruption protection. The applicable all risk policy has flood sub-limits aggregating to $20 million for a Cedar Rapids location.

J.A. 3074. When cross-examined about the draft press release at trial, Cordier agreed that "aggregating" meant "taken together as a whole" or "combined." J.A. 289-91.

The same day that Cordier drafted the press release, he met with the loss adjuster named in the policy. The adjuster, together with personnel sent by Marsh, began surveying and documenting the damage throughout the plant and later shared their findings with Penford's management. ...

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