Northrop Grumman 2010 Annual Report Download - page 100

on November 4, 2005, which is now pending in the U.S. District Court for the Central District of California,
Western Division. In August 2007, the District Court issued an order finding that the excess insurance policy
provided coverage for the company’s Katrina-related loss. FM Global appealed the District Court’s order and on
August 14, 2008, the U.S. Court of Appeals for the Ninth Circuit reversed the earlier summary judgment order
in favor of the company’s interest, holding that the FM Global excess policy unambiguously excludes damage
from the storm surge caused by 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. 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 (Aon) 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. On August 26, 2010, the District Court denied the
company’s motion to add Aon as a defendant to the case pending in the District Court, finding that the
company has a viable option to bring suit against Aon in state court. Also on August 26, the District Court
granted FM Global’s motion for summary judgment based upon California’s doctrine of efficient proximate
cause, and denied FM Global’s motion for summary judgment based upon breach of contract, finding that triable
issues of fact remained as to whether and to what extent Northrop Grumman sustained wind damage apart from
the storm surge. The company believes that it is entitled to full reimbursement of its covered losses under the
excess policy. The District Court has scheduled trial on the merits for April 3, 2012. On January 27, 2011, the
company filed an action against Aon Insurance Services West, Inc., formerly known as Aon Risk Services, Inc.
of Southern California in Superior Court in California alleging breach of contract, professional negligence, and
negligent misrepresentation. Based on the current status of the litigation, no assurances can be made as to the
ultimate outcome of these matters; however, if the company is successful in either of its claims, the potential
impact to the company’s consolidated financial position, results of operations or cash flows would be favorable.
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 Katrina. An arbitration was later invoked by Munich Re in the United
Kingdom under the reinsurance contract. The company was subsequently notified that Munich Re is seeking
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 arbitral panel has set a hearing for November 14, 2011.
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. If matters
are resolved in NGRMI’s favor, then NGRMI would be entitled to the remaining $19 million owed for covered
losses and it would have no further obligations to Munich Re. Payments to be made to NGRMI in connection
with this matter would be for the benefit of the company and reimbursements to be made to Munich Re would
be made by the company, if any.
Subsequent Event – On January 31, 2011, the U.S. Department of Justice first informed the company and
Northrop Grumman Shipbuilding, Inc. of a False Claims Act complaint that the company believes was filed
under seal by a relator in mid-2010 in the United States District Court for the District of Columbia. The
redacted copy of the complaint that the company received alleges that through largely unspecified fraudulent
means the company obtained federal funds that were restricted by law for the consequences of Katrina, and used
those funds to cover costs under certain shipbuilding contracts that were unrelated to Katrina and for which the
company was not entitled to recovery under the contracts. The complaint seeks monetary damages of at least
$835 million, plus penalties, attorney’s fees and other costs of suit. Damages under the False Claims Act may be
trebled upon a finding of liability.
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NORTHROP GRUMMAN CORPORATION