Losses from storm surge associated with a named windstorm were not caused by flood; Flood sublimit did not apply

New Jersey Transit Corp. v. Certain Underwriters at Lloyd's London, ___ A.3d ___, 2019 WL 6109144 (N.J. Super. Ct. App. Div. Nov. 18, 2019)

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A New Jersey appellate court affirmed the decisions of a lower court which rejected contentions by insurers that the water damage to properties of the New Jersey Transit Corporation during Superstorm Sandy, were "losses caused by flood," and therefore are subject to the $100 million flood sublimit in the policies.

When Superstorm Sandy struck in October of 2012 (see "Superstorm Sandy Coverage Issues", Newswire, December 4, 2012), New Jersey Transit Corporation ("NJT") sustained substantial damages to its property and submitted claims to its insurers. At the time, NJT was insured under a program of property insurance with eleven insurers, involving total limits of $400 million, including a primary layer and three excess layers. NJT's massive losses exceeded the $50 million primary layer of insurance, which was quickly exhausted, and coverage under various excess layers was potentially triggered.

The policies insured against "all risks", based upon standard policy forms and separate endorsements. Thus, the policies covered all perils and damage to NJT's property unless specifically excluded. Also, the standard policy form set forth twenty-seven categories of losses for which coverage was subject to "100% per occurrence ground-up sublimits." A specific flood sublimit limited liability for "losses caused by flood" to $100 million per occurrence. In pertinent part, policies defined "flood" to mean "[A] temporary condition of partial or complete inundation of normally dry land from ... [t]he overflow of inland or tidal waters outside the normal watercourse or natural boundaries[;] and [t]he unusual or rapid accumulation or runoff of surface water from any source."

In response to the claim, various insurers participating in the excess layers, through their executive general adjuster, took the position that NJT's claimed losses for water damage were limited by the $100 million flood sublimit in the policies, and the excess carriers would pay no more than $50 million in excess over the $50 million primary coverage. NJT disagreed and commenced an action seeking a declaratory judgment that the $100 million flood sublimit did not apply to its Sandy claims, and alleging breach of contract. After discovery, the parties submitted motions for summary judgment. NJT included its expert's opinion that a record-setting storm surge during Superstorm Sandy caused flooding of various NJT sites. However, defendants' expert indicated that the storm surge occurred simultaneously with the flooding, and "was an inseparable part of the flood event." The lower court granted NJT's motion while denying motions of the defendants.

On appeal, defendant insurers argued that NJT's claims came within two separate definitions of "flood" in the policies and thus were subject to the $100 flood sublimit. NJT contended that the Sandy-related water damage was a separately-defined peril, a "named windstorm", which was not subject to the flood sublimit, and the court agreed. "The policies do not define 'flood' to include 'storm surge' and 'wind driven water' associated with 'named windstorm.' Although the definition of 'flood' includes 'surge,' the definition of 'named windstorm' more specifically encompasses the wind driven water or storm surge associated with a 'named windstorm.' Where, as here, two provisions of an insurance policy address the same subject, the more specific provision controls over the more general." Id., 2019 WL 6109144, at *5. Had the parties intended to subject damage from a "storm surge" to the flood sublimit, the policies would reflect it in plain language; and including "storm surge" associated with "named windstorm" within the term flood would render the "named windstorm" provision in the policies mere surplusage. The court also rejected defendants' arguments that the flood sublimit applied "per occurrence", and that an Occurrence Limit of Liability Endorsement ("OLLE") combined all windstorm, flood, and other perils in a single event or "occurrence" for purposes of applying the flood sublimit. The OLLE did not address whether Sandy-related damage was "caused by flood" or, conversely, resulted from a "named windstorm"; nor did it expressly provide that damages from "flood" and "named windstorm" were to be treated as a single event or occurrence for the purposes of applying the flood sublimit. The court was unswayed by the argument that the policies did not specifically remove "storm surge" from the definition of flood and did not create a specific exception to the flood sublimit for damage caused by "named windstorm". Defendants also contended that the "named windstorm" provision was meant to group such losses that came within a 72-hour time period. However, the court saw the purpose of the definition as distinguishing a "surge" of water from a "storm surge". "Accordingly, we are convinced the plain language of the policies provides that water damage resulting from a 'storm surge' associated with a 'named windstorm' does not fall within the definition of 'flood.' Therefore, the water damage to NJT's properties that occurred during Superstorm Sandy is not subject to the $100 million flood sublimit." Id., at *6.

The court further agreed with NJT that, even if the court were to conclude that NJT's losses were caused by both a 'flood' and a 'named windstorm,' it would nevertheless be entitled to coverage under New Jersey's efficient proximate cause doctrine. "Because Sandy's 'storm surge' caused, 'in an unbroken sequence,' any losses that might otherwise not be covered under the flood sublimit, the storm surge is 'regarded as the proximate cause of the entire loss.'" Id., at *8. Several theories why the doctrine did not apply were rejected.

There was no genuine issue of material fact as to the interpretation and application of the flood sublimit, which could be determined by the court as a matter of law. Therefore, the lower court had not erred by not considering extrinsic evidence relating to whether the parties intended that water damage from a storm surge would be subject to the flood sublimit.

Finally, the court affirmed the lower court in granting summary judgment dismissing a claim for reformation of the policy on the basis of equitable fraud. It had been alleged that changes to terms of an expiring policy, which included inclusion of the definition of a "named windstorm" were presented with misrepresentations as to the purpose and as to the effect upon application of the flood sublimit. The court disagreed that there had been a false statement of fact. In any event, the defendant had a duty to read the terms before agreeing to participate in the program and provide coverage.

The New Jersey Transit decision is not the first to address flood provisions in the context of Superstorm Sandy property insurance claims. (See, e.g., "New Jersey High Court Finds Limit to Flood Coverage for Sandy Damage", Newswire May 30, 2017). However, in addition to its dramatic impact upon the NJT's ability to recover and its unanimous decision on various important points of law, it is important in providing policy holders a powerful legal precedent for pursuing named-storm-related claims when the next, inevitable, major storm comes to New Jersey.

If you have questions regarding the New Jersey Transit decision, or Sandy or other storm-related claims, contact Glenn A. Jacobson.

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