Defining Occurrence – When Policy Definitions Do Not Apply To All Coverages
September 24, 2020
A New Jersey trial court held this week that storm surge from Superstorm Sandy was not included in a policy’s definition of “flood” and therefore not subject to flood sublimits, permitting a more than $500 million recovery for the insured. See Public Service Enterprise Group, Inc., et. al. v. Ace American Ins. Co., et. al., Civ. No. ESX-L-4951-13 (N.J.Super.Law.Div. – Essex, March 23, 2015).
The Essex County vicinage of the New Jersey Superior Court granted summary judgment on all of the policyholder’s arguments but one, which the Court did not analyze based on other findings. The ruling agrees with a widely discussed Fifth Circuit case regarding damage from Hurricane Katrina, but rules contrary to many other cases that determine surge to be equivalent to floodwaters and therefore excluded.
In the subject case, Public Service Enterprise Group, Inc. (PSEG) and associated plaintiffs sued various insurers for Superstorm Sandy losses to properties under standard coverage limits of $1 billion. The insurers asserted that the losses were subject to flood sub-limits of $250 million per occurrence, not to exceed $50 million in the aggregate during one policy year for property in designated flood zones.
Plaintiffs presented several arguments: First, plaintiffs asserted that the loss was caused by a “storm surge.” That phrase was included in the definition for named windstorm, a cause of loss not subject to a sub-limit. Second, plaintiffs argued that New Jersey’s proximate cause doctrine, coupled with a portion of the flood definition in the policy, provided independent reasoning that storm surge was not subject to the flood sub-limits. Finally, plaintiffs argued that even if the sub-limits applied to the losses, the reference to the smaller sub-limit only applies to property located in Flood Zone A & V on the Flood Insurance Rate Maps issued by the Federal Emergency Management Agency.
The insurers asserted that the plain meaning of the policy terms included storm surge in the category of flood and cited to case law from numerous other jurisdictions in support of their argument. The Court, asserting several times in its opinion that the courts of New Jersey had not previously addressed whether storm surge is included in the flood definition of an insurance policy, did not find those other cases persuasive.
Both parties cited the SEACOR Holdings, Inc. v. Commonwealth Ins. Co., 635 F.3d 675 (5th Cir. 2011) case. The SEACOR case held that flood limits did not apply to Hurricane Katrina-generated water damage. In the SEACOR policy, there were definitions for flood, windstorm and named windstorm. The definition of windstorm and named windstorm did not include the phrase “storm surge,” but the definition of flood included wind-driven water. The SEACOR court held that all damage caused by Katrina was the result of a named windstorm and therefore the larger general limits, rather than the smaller flood sublimits, applied. The PSEG policy included “storm surge” in its definition of “named windstorm,” but not in its definition of flood.
The insurers argued that SEACOR was inapplicable because the Fifth Circuit partially relied on Louisiana’s efficient proximate cause doctrine, which New Jersey did not apply outside the interpretation of exclusion language. The insurers also argued that the doctrine applied to disputes regarding multiple sequential causes of loss and not to multiple combined causes of loss. However, the New Jersey Court found that the doctrine was not limited to exclusion interpretation and could apply where the wind was the efficient proximate cause of all the water-related damage. Because the experts in the case agreed that wind caused the storm surge, which caused most of the damage, the loss was sequential in nature.