Insurance – Policy Provision That Caps Recovery – Ambiguous Provision

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The subject policy provision is ambiguous, and the district court erred in concluding otherwise.

We reversed the district court’s order granting summary judgment to the insurers and remanded.

A company and its insurers disagreed about how a policy provision that caps recovery applies to an accident at an aluminum processing facility. We concluded a key phrase in the relevant provision is susceptible to at least two reasonable interpretations and South Carolina law requires courts to adopt the interpretation most favorable to the company.

JW Aluminum Company owns facilities that melt, process, and finish aluminum. The company holds insurance policies with four insurers. The self-styled “All-Risk” policies are similar in all respects relevant to this appeal and broadly insure JW Aluminum’s facilities against physical property damage. In 2020, there was a major incident at a JW Aluminum facility in South Carolina. While JW Aluminum workers were “doing a routine maintenance related item,” “a small quantity” of molten aluminum “went up in the [air] approximately 35 feet.” The molten aluminum landed on a roof support beam, which started a fire by igniting combustible aluminum dust on the beam. The fire spread to the facility’s roof, causing debris to fall and to damage structures and equipment. To avoid an explosion, JW Aluminum shut off the power and natural gas lines, which caused molten aluminum to harden inside other equipment, damaging it. The fire department eventually brought the fire under control, which caused water damage to the facility. The total damage was around $35 million.

JW Aluminum sought to collect, but the insurers argued that their liability was capped at $10 million in total. The insurers cited a policy provision that is labeled “endorsement” and addresses harms caused by “Molten Material.” “Occurrence” is defined in a separate provision as “any loss or series of losses arising out of one event, regardless of the number of locations affected.” The policies do not define the Molten Material provision’s other terms, including “direct,” “physical,” “loss or damage,” “by heat,” or “caused.” JW Aluminum sued the insurers in federal court. The district court concluded the Molten Material provision limited the insurers’ liability to $10 million. The court acknowledged that most of JW Aluminum’s losses were “directly caused by fire, falling debris, water, and frozen molten aluminum inside the equipment” rather than the molten metal itself. But the court viewed that as “an immaterial distinction” because the later harms “arose out of and were caused by one event: the accidental discharge of molten metal.” And because the Molten Material provision capped the insurers’ liability at “$10,000,000 per occurrence,” the district court concluded the insurers were not liable for more than that amount as a matter of law. Because this is a diversity case involving no federal-law issues, state law governs.

The Molten Material provision is ambiguous and the district court erred in concluding otherwise. We thus reversed the district court’s order granting summary judgment to the insurers and remanded for further proceedings.

The policies have a combined general limit of $250 million. On the one hand, the Molten Material provision confirms these policies “do[] insure against direct physical loss or damage cause [sic] by heat from Molten Material, which has been accidentally discharged from equipment.” On the other hand, it also subjects such losses “to a limit of $10,000,000 per occurrence.” But what does “direct physical loss or damage cause[d] by heat from Molten Material” mean? In the district court’s view, this provision “unambiguously” reaches any “resulting losses” that “arose out of and [were] caused by” “heat from Molten Material” regardless of whether those losses were “directly caused by fire, falling debris, water, and frozen molten aluminum.” We disagreed. In effect, the district court read the Molten Material provision as if it said, “direct physical loss or damage cause by [stemming] heat from Molten Material, which has been accidentally discharged from equipment.” That may or may not be a defensible interpretation of the Molten Material provision. But it is neither the only nor the unambiguously correct one. Other policy provisions only reinforce the Molten Material provision’s ambiguity.

Reversed and remanded.

JW Aluminum Company v. Ace American Insurance Company (Lawyers’ Weekly No. 003-012-25, 9 pp.) (Toby Heytens, J.) Appealed from the U.S. District Court for the District of South Carolina, at Charleston (Bruce H. Hendricks, J.) Argued: Craig A. Boneau, Reid Collins & Tsai LLP, Austin, Texas, for Appellant; Brian Cantwell Duffy, Duffy & Young, LLC, Charleston, South Carolina, for Appellees. On Brief: Beattie B. Ashmore, Greenville, South Carolina; Scott D. Saldaña, Dylan E. Jones, Morgan M. Menchaca, Julia L. Di Fiore, Reid Collins & Tsai LLP, Austin, Texas, for Appellant; Hunter Windham, Duffy & Young, LLC, Charleston, South Carolina, for Appellees ACE American Insurance Company, Westport Insurance Corporation, and General Security Indemnity Company of Arizona; Keith Moskowitz, Chicago, Illinois, Catharine Luo, Washington, D.C., Douglas Janicik, Dentons US LLP, Phoenix, Arizona, for Appellee AIG Specialty Insurance Company. U.S. Court of Appeals for the Fourth Circuit Unpublished