One of the most litigated issues in the Gulf States in the wake of Hurricane Katrina was whether flood exclusions bar coverage for loss by storm surge. The courts ultimately decided that the answer was yes. The Superstorm Sandy jurisdictions have yet to address that question, but a recent federal case in New York suggests that the matter will ultimately be resolved in the same fashion in the Empire State. The decision is New Sea Crest Healthcare Center, LLC, et al. v. Lexington Ins. Co., — F.Supp.2d —, 2014 WL 2879839 (E.D.N.Y., June 24, 2014).
At present, the issue will not crop up nearly as frequently as it did in the wake of the 2005 storm because Katrina taught a lesson to underwriters everywhere; virtually all of today’s policies make it crystal clear that storm surge is a type of flood. The policy at issue in this case is a good example, but the Eastern District nonetheless implied that it would have barred coverage even if that were not the case.
The policyholder owned a nursing home in Brooklyn, and it procured a property policy with Lexington Insurance Company. The contract of insurance had a $1 million flood sublimit, and “flood” was defined as follows:
whether natural or manmade, Flood waters, surface water, waves, tide or tidal water, overflow or rupture of a dam, levy [sic], dike, or other surface containment structure, storm surge, the rising, overflowing or breaking of boundaries of natural or manmade bodies of water, or the spray from any of the foregoing, all whether driven by wind or not.
There was also a named storm provision with a sublimit of $36,650,000 for loss occasioned by the perils of “Flood, (however caused) wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain.” The named storm provision recited that damage by flood during a named storm was capped at the flood sublimit. Read more ›
On October 29, 2012, the policyholder, El-Ad 250 West LLC, was converting an 11-story office building into a 12-story luxury condominium complex in lower Manhattan. Superstorm Sandy damaged the project to the tune of more than $20 million according to the insured. El-Ad had a builder’s risk insurance policy issued by Zurich American Insurance Company. The contract of insurance had a $115 million overall limit of liability, but delay in completion coverage was sub-limited to $7 million. In addition, there was a $5 million annual aggregate limit for flood loss, which was defined as follows:
The policyholder Sandra Willis’ home was damaged by a fire on June 14, 2012, and she made a claim under her homeowner’s policy with Allstate Insurance Company. The insurer then hired an attorney, David Waldrop, to provide an opinion on coverage. Waldrop did so in a letter dated February 19, 2013, and Allstate subsequently denied liability. The insured responded by filing suit for breach of contract and bad faith.
One of the two principal bones of contention was a claim for over $50,000 for a feng shui consultant. Dr. Patel utilized feng shui when she initially opened her dental practice. Prior to reopening after the fire, she did so once again, and the claim included a “Five Elements Feng Shui Invoice” in the amount of $50,275. According to her affidavits, the feng shui consultant was retained “to come in and change crystals and perform additional cures to help to restore the location to its original condition,” to “restore energy balance,” and to determine “placement of furniture and dealing with forces of Qi.” The policy insured against “direct physical loss of or damage to Covered Property,” an0d Dr. Patel contended that the consultant’s services fit within that definition because she had used him when she had originally set the office up. She also sought to invoke coverage under the contract of insurance’s extra expense provision. 
On February 16, 2006, State Farm submitted a quarterly bill for the two policies, payable on or before April 6
Richard Palkimas was insured under a homeowner’s policy issued by State Farm Fire & Casualty Company, and he sustained two losses. The first occurred in September 2006, “when workers negligently used a toilet that had been blocked off resulting in a buildup of sewage, and the breaking and rupturing of a sanitary pipe, as well as the spreading of sewage and fecal matter throughout the home.” Then in January of the following year, the policyholder discovered that “freezing temperatures caused substantial damage to [his] home, including fracturing of the plaster walls and building structure.”
The policyholder owned an apartment complex that was insured by Dryden Mutual. The structure was damaged when waste water inundated the first floor, entering the units through toilets, bathtubs, and drains. The insurer denied liability, contending that coverage was barred by two “Water Damage” exclusions. The first recited that loss caused by “water which backs up through sewers and drains” was excluded, while the second barred coverage for “loss caused by repeated or continuous discharge, or leakage of liquids or steam from within a plumbing … system.” The second of these exclusions, however, went on to state that Dryden Mutual would pay for “loss caused by the accidental leakage, overflow or discharge of liquids or steam from a plumbing … system.”
In Mirarchi, a fire damaged the insured’s property. The insurer paid the entire undisputed amount, and the parties proceed to appraisal on the remainder of the claim. An umpire entered an award close to the amount sought by the policyholder, and the carrier paid. Thereafter, however, the insured filed an action against the insurance company in federal court, asserting that the insurer had delayed payment in bad faith, and he requested discovery of the company’s reserve information. Seneca Specialty refused to provide the requested information, and the district court held that it was not obligated to so so. The trial court subsequently dismissed the bad faith claims in their entirety, noting that the insurer had paid the undisputed amount despite the lack of any contractual or legal obligation to do so and further that the insurer, in valuing the claim lower than the appraisal award, had relied on reasonable expert opinions. 
TRIA is activated once an event has been certified as an “act of terrorism” by the Secretaries of the Treasury and the Departments of State and Homeland Security. There is presently a $27.5 billion annual aggregate retention level, meaning that industry-wide commercial and worker’s compensation claims from a terrorist attack must exceed $27.5 billion before TRIA kicks in. The statute also has an 85/15 co-pay; above $27.5 billion, the federal government pays 85% of the loss and the insurance industry pays the remaining 15% up to a cap of $100 billion. Finally, each individual insurance company has a deductible that it must fund equal to 20% of its total property and casualty insurance premiums. 
In 