After the insured's attempted launch failed and coverage was denied. the insured's motion for judgment on the pleadings was unsuccessful. United Launch Alliance, LLC v. Factory Mut. Ins. Coverage, et al., 2024 U.S. Dist. LEXIS 210380 (S.D. N. Y. Nov. 18, 2024).
United Launch Alliance, LLC (United) was a launch services provider that manufactured and operated launch vehicles and launched satellites, spacecrafts and payloads into orbit. Factory Mutual provided coverage to United related to its launches. Section Q of the policy provided:
In the event that a launch is aborted or subject to a day of launch hold due to immediately impending insured physical loss or damage, this Policy shall pay the reasonable and necessary incremental costs associated with the launch abort or day of launch hold . . .
The policy also contained certain exclusions to coverage, including a "design-defect" exclusion. The provision read,
This Policy excludes the following, but if physical damage not excluded by this Policy results, then only that resulting damage is insured: 1) faulty workmanship, material, construction or design from any cause . . . 3) deterioration, depletion, rust, corrosion or erosion, wear and tear, inherent vice or latent defect.
The process for a launch included a countdown, and the launch team could call a manual launch hold up until T-10 seconds. Thereafter, the launch control equipment took over and automatically aborted the launch if certain preprogrammed system safeguards were triggered.
During a launch attempt from Cape Canaveral Space Force Station, a safeguard was triggered at T-7, and the launch was automatically aborted because a signal sensor indicated that a valve designed to divert hydrogen fumes was not in the correct position. Had the signal been correct, the hydrogen gas would have ignited and caused a catastrophic failure. A later investigation determined that the signal was incorrect and that the hydrogen gas would not have ignited had the launch proceeded. Because the launch was aborted, United incurred losses associated with the delay of future launches and costs to mitigate the impact on United's business.
United notified Factory Mutual. Coverage was denied because the launch abort did not prevent immediately impending physical loss or damage as required by Section Q. Further, losses caused by the abort were excluded under the design defect exclusion because the sensor was faulty. United sued.
The court noted that Section Q limited coverage to events "due to immediately impending insured physical loss or damage" which applied both to launch holds and launch aborts. Therefore, the policy covered the launch abort only if it was due to immediately impending insured physical loss or damage. United was denied judgment on the pleadings because coverage depended on the reason for the sensor error, which caused the launch abort. These facts were not yet determined.
The limiting language in Section Q – "due to immediately impending insured physical loss or damage" – unambiguously restricted coverage for both a launch abort and a day of launch hold. United offered an interpretation that would have coverage attach regardless of the cause of any aborted launch.
Section Q provided coverage for costs associated with preventing "immediately impending insured physical loss or damage." No actual physical loss or damage was contemplated in the provision because the launch abort or launch hold would have prevented it. United's interpretation would extend coverage to costs associated with a launch abort that occurred for any reason. The provision would read, "In the event that a launch is aborted, this policy shall pay the reasonable and necessary incremental costs associated with the launch abort . . ." This interpretation was unreasonable and implausible because it was untethered to the fundamental purpose of the policy to insure against physical loss or damage.
Judgment on the pleadings was also denied in regards the design defect exclusion. The exclusion was unambiguous and, depending on the facts, could preclude coverage. The exclusion unambiguously excluded losses due to faulty workmanship, latent defects, and other specified risks, which could be relevant depending on the cause of the incorrect sensor signal. The exception to the exclusion did not apply because it pertained only to certain physical damage, and United did not claim any physical damage.
The exception to the exclusion – "if physical damage not excluded by the policy results, then only that resulting damage is insured" – was an "ensuing loss' clause. Here, the carve out applied only to physical damage, and United claimed no physical damage at all. So the ensuing loss provision was not applicable. After discovery, United could show that the alleged losses were not caused by faulty workmanship or another excluded risk, but the exclusion was not categorically inapplicable to the non-physical losses at issue here.
Therefore, the motion for judgment on the pleadings was denied.
