New Jersey Trial Court Holds Storm Surge Not Subject to Flood Sublimit Where Policy Expressly Includes “Ensuing Storm Surge” in Named Windstorm Coverage

In recent years, many courts have held that storm surge is a species of excluded flood loss; we reported on a New York example in July.  This week, in Public Serv. Enter. Group, v. ACE Amer. Ins. Co., 2015 WL 1428370, Unpub. LEXIS 620 (N.J.Super., Mar. 23, 2015), a New Jersey trial court granted summary judgment to Public Service Electric & Gas (PSEG) and held that the flood sublimit did not apply to a claim for Superstorm Sandy loss from storm surge where the contracts of insurance specifically recited that coverage for a “named windstorm” – which was not subject to any sublimit  –  included “ensuing storm surge.”

shutterstock_172810640Eight large PSEG generating stations and a number of smaller distribution facilities were damaged when Superstorm Sandy came ashore in New Jersey on October 29, 2012.  The utility’s current estimate of the loss exceeds $500 million.  It was undisputed that a storm surge – which the court described as “a hurricane-generated inundation of water” – of “record-breaking height” caused the lion’s share of the damage.

PSEG had $1 billion in layered property coverage from 11 different insurers, and it made claim for the loss.  The policies had no sublimit for “named windstorms” in New Jersey, but there was a $250 million sublimit for loss occasioned by the peril of “flood” and a $50 million sublimit for flood loss to property “located in Flood Zones A & V.”  The insurers took the position that PSEG’s recovery was capped at $50 million, and the utility brought suit.  On Monday of this week, Judge Thomas Vena granted PSEG’s motion for summary judgment and held that the flood sublimits did not apply to its Superstorm Sandy claims.

As noted above, courts throughout the country have consistently held that storm surge is a type of excluded flood in the years since Hurricane Katrina.  See, e.g., Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419 (5th Cir. 2007);  Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346 (5th Cir. 2007); New Sea Crest Healthcare Ctr. v. Lexington Ins. Co., 2014 WL 2879839, 2014 U.S. Dist. LEXIS 86585 (E.D.N.Y. 2014); Corban v. United Services Auto. Ass’n., 20 So.3d 601 (Miss. 2009).  They have done so when interpreting the scope of exclusions for flood loss, however, and the issue before Judge Vena was which sublimit applied.  PSEG’s policies included the words “ensuing storm surge” in the definition of what constituted a “named windstorm;”  the definition of “flood,” on the other hand, referenced neither “storm surge” nor “wind-driven water.”  Under those circumstances, the court held that the flood sublimits were inapplicable as a result.

The problematic part of Judge Vena’s analysis flows from the fact that the court then (and unnecessarily) went beyond the policy definitions and purported to analyze the effect of New Jersey’s efficient proximate cause doctrine.  The judge correctly noted that the state has “adopted the approach known as ‘Appleman’s Rule,’ pursuant to which the loss is covered if a covered cause starts or ends the sequence of events[.]”  Unfortunately, he mistakenly held both that Appleman’s Rule is not limited to disputes over exclusions and that PSEG’s damage was occasioned solely by multiple causes operating sequentially as opposed to in combination with one another to produce an indivisible loss.  The court was wrong on both counts.  The court also held that PSEG’s reasoning was “more sensical” [sic] because the flood definition concluded as follows:

However, physical loss or damage not otherwise excluded resulting from flood will not be considered loss by flood within the terms and conditions of this policy.

In Judge Vena’s words:

In the present case, wind caused the storm surge and wind is a covered peril other the [sic] flood.  As such, storm surge is not subject to the flood sublimits under the last sentence of the flood definition.

The court’s logic turns the sequence of events on its head; the last sentence applies if a non-excluded loss results from the flood.  Here, of course, it was the other way around – the storm surge resulted from the wind.  As a result, the last sentence has no applicability.

The decision will undoubtedly be appealed.  In addition, given the unique language in PSEG’s policies and the relatively narrow issue before the court, it can be  argued that it should have little impact on the question of whether storm surge is a species of excluded flood.  It has now been well-established, as the Fifth Circuit explained in Leonard, that “[t]he phrase ‘storm surge’ is little more than a synonym for a ‘tidal wave’ or wind-driven flood[.]”  The wrong-headed application of the efficient proximate cause doctrine is nonetheless troubling, and the subsequent history of this litigation will bear watching.

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About The Property Insurance Law Observer
For more than four decades, Cozen O’Connor has represented all types of property insurers in jurisdictions throughout the United States, and it is dedicated to keeping its clients abreast of developments that impact the insurance industry. The Property Insurance Law Observer will survey court decisions, enacted or proposed legislation, and regulatory activities from all 50 states. We will also include commentary on current issues and developing trends of interest to first-party insurers.
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