Court Rules Flood Sublimits Do Not Apply to Loss Caused by Storm Surge

On March 23, 2015, New Jersey Superior Court Judge Thomas R. Vena handed down an opinion¹ siding with the plaintiff, PSEG, ruling that storm surge caused by Superstorm Sandy should not trigger flood sublimits in PSEG’s insurance policies, as the term “storm surge” was included in the definition of a “named windstorm” in the policies.

On October 29, 2012, during Superstorm Sandy, Public Service Enterprise Group (“PSEG”) suffered catastrophic losses as a result of the storm surge. “This storm surge inundated and damaged PSEG’s property throughout the State of New Jersey, including eight large generating stations that are used to make electricity, as well as a number of substations and switching stations that are used to distribute electricity to consumers.”²

At the time of the loss, “PSEG was insured under primary and excess property policies that were issued by Ace America and the other named defendants in the case.”³ PSEG estimated damages exceeding $500 million. The issue PSEG faced after they made their claim for damages was as follows:

The total amount of coverage available under the policies is $1 billion. There is no sublimit in the policies for “named windstorms,” other than named windstorms in Florida. There is, however, a $250 million sublimit in the 2011-2012 policies for losses caused by “flood,” and a $50 million limit for losses to property “located in Flood Zones A & V.

The defendants sought to apply the $250 million and $50 million sublimits to PSEG’s claims and litigation followed. Both parties filed motions for summary judgment concerning the coverage issues. The plaintiff put forth two arguments:

First, Plaintiff contends that coverage for losses caused by Sandy is available up to the full $1 billion limit of the policies, and that coverage for such losses is not subject to the lower flood sublimits under the language of the applicable policies. According to Plaintiff, a “storm surge” is included in the definition of “named windstorm,” and there is no sublimit in the policies for losses caused by a named windstorm outside of Florida. Indeed, there is no reference to a “storm surge” or “winddriven water” in the definition of “flood” in the policies…

Moreover, Plaintiff contends that New Jersey’s proximate cause doctrine, coupled with the last sentence of the flood definition, provide two independent reasons for concluding that losses caused by storm surge are not subject to the flood sublimits: one, under New Jersey case law, if there are multiple causes of a loss, a restriction in an insurance policy does not apply so long as the efficient proximate cause of the loss is not subject to that restriction (and here, Plaintiff submits that wind was the proximate cause of the storm surge that caused the damage); and two, under the last sentence of the flood definition in the policies, loss “not otherwise excluded from resulting from flood will not be considered loss by flood within the terms and conditions of [the] policy,” which 5 other courts have held can be reasonably interpreted to mean that damage caused by a named windstorm is not subject to the flood sublimit of a policy.

Secondly, Plaintiff argues that assuming arguendo that the flood sublimits apply to losses caused by a storm surge, the reference in the $50 million flood sublimit to “Flood Zones A & V” applies only to flood damage to property located in Flood Zone A & V in accordance with the plain meaning of the policy language and the FEMA Flood Insurance Rate Maps (“FIRMs”), which contain the official FEMA designations of the flood zones in which PSEG’s facilities are located. PSEG avers that there is no support in the language of the policies, FEMA documents, insurance industry customs and practices, or otherwise for the argument that Flood Zone A & V includes any of the areas in which PSEG’s damaged facilities are located.⁴

Defendants based their arguments to apply the sublimits on the definition on a flood: “a storm surge is a type of “flood” under the policy, and, as such, the policy’s flood sublimits apply. This is because, according to Defendants, the plain language of the policy defines flood as “the overflowing or breaking of boundaries of natural or man-made bodies of waters.”

Because New Jersey had no precedential case law on the issue, the court looked to other jurisdictions for guidance. The court, and the parties, relied heavily upon two cases: SEACOR Holdings, Inc. v. Commonwealth Insurance Company⁵ and Pinnacle Entertainment v. Allianz Global Risks U.S. Insurance Company.⁶

In SEACOR, “[t]he Fifth Circuit determined that the definition of ‘named windstorm’ included all damage caused by a hurricane, including storm surge, based on both the language of the definition and applicable case law,” and that there was, “nothing to indicate that the limit for the peril of Flood should apply when, under the policy, all damages were under the umbrella of a Named Windstorm.”⁷

In Pinnacle, the court stated, “[w]here an insurance policy provides coverage for the peril of named windstorm and that peril is defined or interpreted to include storm surge . . . courts have held that losses caused by storm surge are not subject to flood sublimits.”⁸

Ultimately, the court sided with the plaintiff, granting their motion for summary judgment and denying the insurers’ motions. In doing so, the court referenced SEACOR and Pinnacle and stated:

Here, the court does not have the benefit of any New Jersey cases that have interpreted policies that define “named windstorm” to include “storm surge” but do not include any reference to “storm surge” or “wind-driven water” in their definition of flood. However, as noted above, there are two out-of-state cases that have interpreted such policies, both of which have held that losses caused by storm surge are not subject to the flood sublimits. The reasoning employed by these courts are sound, and both are consistent with New Jersey’s rules of contract construction that “when two provisions dealing with the same subject matter are present, the more specific provision controls over the more general.⁹

This is an interesting decision and it will be fascinating to see what becomes of it the future. Certainly there is a lot of case law left to write in New Jersey concerning first-party insurance claims as a result of Superstorm Sandy; I can’t wait to see where it takes us.

As always, I’ll leave you with a (mildly) related tune—the Eagles, with Take it to the Limit:

https://youtube.com/watch?v=0HYiaYyfp8Q%3Frel%3D0

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¹ Public Service Enterprise Group, Inc., v. Ace Am. Ins. Co., (N.J. Sup. Ct. March 23, 2015).
² Id. at 3.
³ Id.
⁴ Id. at 4-5.
⁵ SEACOR Holdings, Inc. v. Commonwealth Ins. Co., 635 F.3d 675 (5th Cir. 2011).
⁶ Pinnacle Entertainment, Inc. v. Allianz Global Risks U.S. Ins. Co., 2008 WL 6874270 (D. Nev. 2008).
⁷ Public Service Enterprise Group, citing SEACOR.
⁸ Public Service Enterprise Group, citing Pinnacle.
⁹ Id. at 12.