Flood Insurance

Court Finds Storm Surge Damage From Superstorm Sandy Is Not Subject To Flood Coverage Sublimits

A New Jersey court, applying New Jersey law, held that damage from Superstorm Sandy was not subject to flood-related limits in the company’s insurance policies. The determination hinged on whether damage from storm surge was part of “named windstorm” coverage or “flood” coverage, under the policies. The court ultimately found that the narrower provisions of the “named windstorm” coverage prevailed, and therefore, the sublimits applicable to “flood” coverage did not apply to the damage from storm surge.

Superstorm Sandy caused damage to Public Service Enterprise Group Inc.’s (“PSEG”) property in excess of $500 million. PSEG made an insurance claim under its first-party property policies, which provided coverage totaling up to $1 billion. However, all of the policies included sublimits for losses caused by “flood” or for losses to property located in specified Flood Zones.

With the exception of one company, which was dismissed from the case, all of the policies’ definitions of “named windstorm” included “storm surge,” while there was no reference to “storm surge” or “wind-driven water” in the definition of “flood” in the policies. The insurers argued that a storm surge is a type of flood because the policy defined “flood” as “the overflowing or breaking of boundaries of natural or man-made bodies of waters.”

In holding that storm surge fell under the “named windstorm” coverage, the court relied on case  law from other jurisdictions which interpreted similar provisions and held that flood sublimits did not apply to hurricane-generate water damage. Additionally, the court noted that “when two provisions dealing with the same subject matter are present, the more specific provision controls over the more general.” In applying this premise, the court rejected the insurers’ argument that the specific-over-general principle did not apply where there was no “clear conflict in need of resolution.” The court found there was a clear conflict because resolution in favor of one interpretation over the other would determine how much coverage was owed to PSEG. Because the specific term “storm surge” was included in the definition of “named windstorm” but not in the definition of “flood,” the court found that the more specific “named windstorm” provision controlled.

The court also addressed extrinsic evidence from the underwriting process regarding the intended application of the flood sublimits. The court found that the evidence tended to support PSEG’s position that the insurers knew that storm surge was not subject to the flood sublimits.

Finally, the court discussed New Jersey’s proximate cause doctrine, “Appleman’s Rule,” which mandates that a loss is covered if a covered cause starts or ends the sequence of events leading to the loss. The court agreed with PSEG that the wind was the efficient proximate cause of the losses, citing the experts’ agreement that “wind caused the storm surge.”

The court did not address the insurers’ arguments regarding the application of the sublimits to property located in Flood Zones, as it had held that the storm surge was not a flood. Public Serv. Enterprise Gp. v. Ace American Ins. Co., No. ESC-L-4951-13 (N.J. Super. Ct. Mar. 23, 2015).

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