Northrop Grumman 2009 Annual Report Download - page 98

August 14, 2008, the U.S. Court of Appeals for the Ninth Circuit reversed the earlier summary judgment order
in favor of the company, holding that the FM Global excess policy unambiguously excludes damage from the
storm surge caused by Hurricane Katrina under its “Flood” exclusion. The Ninth Circuit remanded the case to
the District Court to determine whether the California efficient proximate cause doctrine affords the company
coverage under the policy even if the Flood exclusion of the policy is unambiguous. The company filed a
Petition for Rehearing En Banc, or in the Alternative, For Panel Rehearing with the Ninth Circuit on
August 27, 2008. On April 2, 2009, the Ninth Circuit denied the company’s Petition for Rehearing and
remanded the case to the District Court. On June 10, 2009, the company filed a motion seeking leave of court
to file a complaint adding AON Risk Services, Inc. of Southern California as a defendant. On July 1, 2009, FM
Global filed a motion for partial summary judgment seeking a determination that the California efficient
proximate cause doctrine is not applicable or that it affords no coverage under the policy. Both motions have
been fully briefed and argued. Based on the current status of the litigation, no assurances can be made as to the
ultimate outcome of this matter.
During 2008, the company received notification from Munich-American Risk Partners (Munich Re), the only
remaining insurer within the primary layer of insurance coverage with which a resolution has not been reached,
that it will pursue arbitration proceedings against the company related to approximately $19 million owed by
Munich Re to Northrop Grumman Risk Management Inc. (NGRMI), a wholly-owned subsidiary of the
company, for certain losses related to Hurricane Katrina. The company was subsequently notified that Munich
Re also will seek reimbursement of approximately $44 million of funds previously advanced to NGRMI for
payment of claim losses of which Munich Re provided reinsurance protection to NGRMI pursuant to an
executed reinsurance contract, and $6 million of adjustment expenses. The company believes that NGRMI is
entitled to full reimbursement of its covered losses under the reinsurance contract and has substantive defenses to
the claim of Munich Re for return of the funds paid to date.
15. COMMITMENTS AND CONTINGENCIES
Contract Performance Contingencies – Contract profit margins may include estimates of revenues not contractually
agreed to between the customer and the company for matters such as contract changes, settlements in the process
of negotiation, claims and requests for equitable adjustment for previously unanticipated contract costs. These
estimates are based upon management’s best assessment of the underlying causal events and circumstances, and are
included in determining contract profit margins to the extent of expected recovery based on contractual
entitlements and the probability of successful negotiation with the customer. As of December 31, 2009, the
amounts related to the aforementioned items are not material individually or in the aggregate.
Guarantees of Subsidiary Performance Obligations – From time to time in the ordinary course of business, the
company guarantees performance obligations of its subsidiaries under certain contracts. In addition, the
company’s subsidiaries may enter into joint ventures, teaming and other business arrangements (Business
Arrangements) to support the company’s products and services in domestic and international markets. The
company generally strives to limit its exposure under these arrangements to its subsidiary’s investment in the
Business Arrangement, or to the extent of such subsidiary’s obligations under the applicable contract. In some
cases, however, the company may be required to guarantee performance by the Business Arrangement and, in
such cases, the company generally obtains cross-indemnification from the other members of the Business
Arrangement. At December 31, 2009, the company is not aware of any existing event of default that would
require it to satisfy any of these guarantees.
Environmental Matters – The estimated cost to complete remediation has been accrued where it is probable that
the company will incur such costs in the future to address environmental impacts at currently or formerly owned
or leased operating facilities, or at sites where it has been named a Potentially Responsible Party (PRP) by the
Environmental Protection Agency, or similarly designated by other environmental agencies. These accruals do not
include any litigation costs related to environmental matters, nor do they include amounts recorded as asset
retirement obligations. To assess the potential impact on the company’s consolidated financial statements,
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NORTHROP GRUMMAN CORPORATION
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