United Launch Alliance, LLC v. Factory Mutual Insurance Coverage

Background

United Launch Alliance, LLC brought claims for breach of contract and declaratory relief against a group of insurance-company defendants. United Launch Alliance resolved its disputes with all defendants except Factory Mutual Insurance Coverage. Factory Mutual had refused to indemnify United Launch Alliance for losses connected to a September 30, 2020, aborted Delta IV Heavy launch.

The insurance policy was effective from May 1, 2020, to May 1, 2021. Section Q provided coverage for reasonable and necessary incremental costs associated with an aborted launch or launch hold when the event was due to immediately impending insured physical loss or damage. The policy also excluded faulty workmanship, material, construction, or design, as well as certain other listed risks. The exclusion stated that physical damage not otherwise excluded could still be insured.

During the launch attempt, an automated safeguard at seven seconds before launch detected a signal indicating that a valve for diverting hydrogen fumes was not in the correct position. The launch was aborted. A later investigation determined that the signal was incorrect and that the hydrogen would not have ignited if the launch had continued. United Launch Alliance alleged losses from delayed future launches, efforts to reduce the business impact, and processing the vehicle for another launch attempt.

Factory Mutual denied coverage on two grounds: Section Q was not triggered because there was no covered loss or damage immediately impending, and the design-defect exclusion applied because the sensor was faulty. United Launch Alliance moved for judgment on the pleadings, which asks the court to rule based on the pleadings when no material factual issue remains and the moving party is entitled to judgment as a matter of law.

Choice of Law

The court considered Colorado and Florida law. United Launch Alliance’s principal place of business was in Colorado, and the alleged loss occurred in Florida. The parties largely agreed that either state’s law could apply and briefed both. The court concluded that the relevant law from Colorado and Florida did not provide different substantive rules for the issues presented. The court did not apply Rhode Island law, although Factory Mutual argued for it, because Factory Mutual had not shown that Rhode Island had a more significant relationship to the events than Colorado or Florida.

Section Q

The court held that Section Q’s phrase “due to immediately impending insured physical loss or damage” limits both types of events listed in the provision: an aborted launch and a day-of-launch hold. United Launch Alliance’s interpretation would have provided coverage whenever a launch was aborted, regardless of the reason. The court found that interpretation unreasonable because it would disconnect the provision from the policy’s broader purpose of insuring against physical loss or damage and, in limited circumstances, the cost of preventing such loss or damage.

The court rejected United Launch Alliance’s arguments based on the wording and structure of the provision, including its distinction between an automated abort and a manual launch hold. The court also rejected reliance on the “last antecedent rule,” a grammatical principle that can limit a modifying phrase to the words immediately before it. The court found the policy language unambiguous and concluded that the modifying phrase applies to both an abort and a launch hold.

Because coverage depends on the reason for the sensor error, and the relevant facts had not yet been established, the court denied judgment for United Launch Alliance on this defense.

Design-Defect Exclusion

The court held that the design-defect exclusion was unambiguous and could preclude coverage depending on the facts. It interpreted the provision as having two separate parts: an exclusion for losses caused by listed risks, including faulty workmanship and latent defects, and an exception for certain resulting physical damage.

The court described the exception as an “ensuing loss” clause. That type of clause can preserve coverage for a separate, otherwise covered loss that follows an excluded event, but it does not cover the excluded event itself. The court concluded that the exception did not apply on the pleadings because it addressed physical damage, and United Launch Alliance claimed no physical damage.

The court rejected United Launch Alliance’s argument that the exclusion applied only to losses involving physical damage. The court stated that further fact development might show that the claimed losses were not caused by faulty workmanship or another excluded risk, but the exclusion was not categorically inapplicable to the claimed nonphysical losses.

Disposition

Judge Lorna G. Schofield denied United Launch Alliance’s motion for judgment on the pleadings. The Clerk was directed to close the motion at Docket 30. The opinion left both of Factory Mutual’s coverage defenses available and did not finally determine whether the policy covers United Launch Alliance’s losses.