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Policyholders win insurance coverage legal dispute in US after explosion

16 April 2012

A US federal court ruled that an insurance company's knowledge of an explosion risk before it sold an all-risk property insurance policy to a crystal manufacturer negated the insurer's defence to deny coverage under the known-loss defence principle.

NDK's Belvidere facility after the explosion, which caused one fatality
NDK's Belvidere facility after the explosion, which caused one fatality

NDK Crystal Inc. and NDK America Inc., subsidiaries of Tokyo-based Nihon Dempa Kogyo Co. Ltd., filed a motion to dismiss Nipponkoa Insurance Co. Ltd.'s suit that alleged that a high-pressure vessel explosion at NDK's Belvidere, Illinnois, facility was not the result of a “fortuitous” event and therefore its policy did not cover any losses.

In dismissing the insurer's nonfortuity claim, the federal court in Rockford, Ill. held that Tokyo-based Nipponkoa knew the risk of vessel explosion and continued selling NDK property insurance without specific exclusion for explosions.

A December 2009 explosion in a high-pressure vessel that grows synthetic crystals damaged NDK's Belvidere facility and caused one fatality.

Prior to the explosion, NDK become aware of a large crack in one of the vessel's lids. NDK temporarily ceased operations in 2007 and notified Nipponkoa of potential claims. Later in the year, NDK resumed operations, after which Nipponkoa warned NDK that it would not provide insurance coverage in the event of loss or damage as a result of operating the vessels in their current condition.

But an all-risk property insurance policy was issued by Nipponkoa to NDK with coverage beginning Aug. 1, 2009, according to court documents.

“Even when viewed in the light most favorable to (Nipponkoa), the facts alleged by (Nipponkoa) establish that (Nipponkoa) had knowledge of the stress corrosion cracking and…even issued warnings and reports to (NDK) regarding that risk,” Judge Frederick J. Kapala wrote in the ruling.

The court held that an ensuing loss provision restored coverage because even if the exclusion asserted by Nipponkoa applied, they resulted in the explosion, which was a specified covered loss.

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