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Commercial Insureds’ Claims Under All-Risk Policies Following Catastrophic Storms

Ellis I Medoway

Summary

  • We can assume severe weather events will continue in the coming years.
  • Where those losses occur will typically implicate which state’s law will be applied.
  • And the policy’s language determine whether available coverage may be reduced or not by the first-party policy’s exclusions and sublimits.
Commercial Insureds’ Claims Under All-Risk Policies Following Catastrophic Storms
Roberto Machado Noa via Getty Images

With climate change comes extreme weather, which has led to catastrophic losses by insured businesses. Two such catastrophic weather events are Hurricane Katrina in 2005 and Superstorm Sandy in 2012. Several commercial insurance coverage actions ensued from the substantial losses sustained in those storms. Depending on the commercial insured’s first-party “all-risk”[] policy language, some insureds successfully litigated the coverage issues involved and, more particularly, whether the policy’s flood exclusion and flood sublimits bar or limit the coverage that may be available. This article discusses some of the commercial coverage cases that resulted from these severe weather events. As is typical in most coverage disputes, the court’s coverage determination in each case largely turned on the policy’s language and which state’s law was applied.

Hurricane Katrina

In Pinnacle Entertainment, Inc. v. Allianz Global Risks U.S. Insurance Co.,[] the insured, a Nevada corporation, owned and operated hotels and casinos in the United States and abroad. One of its casinos located in Mississippi sustained substantial damage from Hurricane Katrina. Following the storm, the insured submitted a claim to its insurers. The insured’s primary coverage was a $25 million “all-risk” policy issued by Westport Insurance Company, which contained “flood sublimits” that could reduce the aggregate amount available if the loss was determined to be caused by a flood. The insured also had several layers of excess coverage that were “follow form” and thus, unless otherwise provided, the terms of the primary policy controlled. Westport paid its primary $25 million of limits, and the first excess layer paid its limits of $75 million. However, two excess carriers (Allianz and RSUI Indemnity) refused to make full payment, claiming the flood exclusions in their excess policies barred coverage for any loss that was caused by flood. The insured then brought a coverage action against the two excess carriers in the federal district court of Nevada.[]

Among the perils defined in the insured’s primary policy were “flood” and “weather catastrophe occurrence.” “Flood” was defined as “[a] general and contemporary condition of partial or complete inundation of normally dry land areas from . . . the overflow of inland or tidal waters.”[] That definition, however, did “not expressly exclude wind-driven inundations of water,” which generally result from a “storm surge.”[]

“Weather catastrophe occurrence” was defined separately in the primary policy as a loss “occurring during a period of 72 consecutive hours which is caused by or results from a storm or weather disturbance which is named by the National Weather Service or any other recognized meteorological authority”; “Storm or weather disturbance” was defined to include “flood, wind . . . hurricane or lightening [sic].”[]

The insured and the two excess carriers cross-moved for summary judgment on the issue of coverage. Analyzing that issue under Nevada law, the district court framed the coverage issue in terms of “whether the exclusion for Flood in the excess policies ‘clearly and distinctly’ excludes wind-driven floods.”[] The court answered that question in the negative, finding an absence of “clarity” in the exclusion’s intent, which was further “underscored by the fact that the primary policy provides specific coverage for Weather Catastrophe Occurrences.”[] The court pointed out that the definition of “weather catastrophe occurrence” includes “all weather phenomenon associated with or occurring in conjunction with the storm or weather disturbance, including, but not limited to flood. . . .”[] By defining that latter term and the term “flood” separately, the court found that the primary policy’s language indicated that “flood damage associated with a named storm or weather disturbance is covered as a separate and distinct event from Flood as defined in the policy.” And because the excess policies are “follow form,” the court concluded those policies also “appear[ed] to provide coverage for a Weather Catastrophe Occurrence.”[]

Ultimately, the court found that (1) because there was absent from the primary and excess policies’ definitions of flood any language that excluded “wind-driven flood” and (2) because of the “specific coverage” available for weather catastrophe occurrence—as defined separately from flood—that was “enough to compel the conclusion that the Flood exclusion in the [excess] . . . policies is not clear and distinct.”[] Accordingly, the court ruled that the excess policies’ flood exclusions did not apply to bar or limit coverage available for the insured’s loss.

A different result obtained in Six Flags, Inc. v. Westchester Surplus Lines Ins. Co.[] Like the commercial insured in Pinnacle Entertainment, the insured in Six Flags sustained loss caused by Hurricane Katrina resulting in significant damage to its New Orleans theme park. Six Flags had “multi-layered, all-risk, first party property insurance for its domestic theme parks” that “provided four distinct layers of coverage: (1) a primary layer with $25 million in limits; (2) a first excess layer with $50 million in limits; (3) a second excess layer with $125 million in limits; and (4) a third excess layer with $250 million in limits.”[]

The excess policies insured against all risks, subject to certain limits and deductibles. One “flood sublimit” applied to flood loss that occurred “in a Flood Zone A or V as designated by . . . the Federal Emergency Management Agency [FEMA].”[] Separate deductibles applied to the “perils of Flood and of a Named Storm.”[] Most of the excess policies defined “flood,” in part, as “[a] general and temporary condition of partial or complete inundation of normally dry land areas from . . . the overflow of inland or tidal waters.”[]

The excess policies also contained a separate provision—“weather cat occurrence”—for a “named storm” that occurred within a 72-hour period. The policies defined weather cat occurrence as a

loss or damage occurring during a period of 72 hours which is caused by or results from a storm or weather disturbance which is named by the National Weather Service or any other recognized meteorological authority . . . [which] includes all weather phenomenon associated with or occurring in conjunction with the storm or weather disturbance, including, but not limited to Flood, wind, . . . hurricane or lightning.[]

The storm that became known as “Hurricane Katrina” was named by the National Weather Service. As noted, it caused substantial damage to Six Flags’ New Orleans theme park, interrupting its operations for several weeks. Although flooding caused much of the damage to the theme park, the storm’s high winds also contributed to the loss. The Six Flags theme park was situated within FEMA’s “designated Flood Zone A.”[]

Six Flags submitted its loss to its carriers, and the primary insurers paid their full $25 million in limits. The excess carriers, however, “capped” their liability at $2.5 million based on the flood sublimit. Thereafter, Six Flags filed a declaratory judgment action in the federal court in the Eastern District of Louisiana, claiming the excess insurers breached their policies by not covering its loss based on the separate “named storm” peril. The district court eventually granted the excess carriers’ partial summary judgment motion, concluding the flood sublimit was unambiguous and expressly limited recovery “for Flood in Zone A or V,” which was where the Six Flags theme park was located.[] The district court noted the defined term “flood” made no exception for a “named storm” and, further, that the defined term “weather cat occurrence” did not exclude application of the flood sublimit.[]

On appeal, the Fifth Circuit, applying Louisiana law, affirmed the district court’s conclusions regarding all the excess insurers, except Commonwealth Insurance Co. The appeals court thus concluded that—other than the Commonwealth excess policy—the excess policies “unambiguously establish that the Flood sublimit applies to loss and damage as respects Flood caused by, associated with, or occurring in conjunction with Hurricane Katrina.”[]

As for the Commonwealth policy, however, the court found that its definition of “flood” created an ambiguity that was susceptible to at least one reasonable interpretation favoring coverage; thus, the appellate court reversed the district court’s order granting Commonwealth summary judgment.[]

More specifically, the court found the non-Commonwealth excess policies had “only one reasonable meaning: the Flood sub-limit caps the liability of the [excess carriers] at $2.5 million for all loss or damage per occurrence, including a Weather Cat Occurrence, as respects Flood.”[] This was because (1) the excess policies had “certain limits and sublimits” that fixed their liability on a per occurrence basis; (2) the flood sublimit applied “per occurrence in the term aggregate as respects Flood at any location in Flood Zone A or V” (which is where the insured’s theme park was located); and (3) the excess policies also “contained deductibles that apply on a per occurrence basis.”[] The Fifth Circuit thus concluded that the excess policies defined “occurrence” for purposes of “explain[ing] when sublimits or the deductible apply—[but] not to exclude the applicability of a particular sublimit.”[] In that regard, because “flood” is considered a weather phenomenon within the weather cat occurrence provision, the court found “the Flood sublimit applies one time per such occurrence to limit loss and damage as respects that Flood.”[]

The court reached a different conclusion with regard to Commonwealth’s excess policy because its endorsement definition of “flood” provided two reasonable interpretations, one of which supported the insured’s construction. Commonwealth’s excess policy defined the term “flood” as

loss or damage caused by waves, tidal water or tidal wave, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not. Loss resulting from, contributed to or aggravated by a “flood” caused by a peril not otherwise excluded under this policy shall not be considered in application of the policy “flood” limit or deductible provisions.[]

The court concluded the Commonwealth “flood” definition created an ambiguity because one reasonable interpretation of that endorsement was that “loss resulting from a flood caused by a peril (such as a Named Storm) is not subject to the Flood sublimit.”[] Because the court found that a reasonable interpretation of Commonwealth’s definition of “flood” led to the conclusion that the flood sublimit or other deductible should not apply to a named storm peril, the Fifth Circuit reversed the district court’s order that had granted summary judgment to Commonwealth and remanded the matter to the district court.[]

An all-risk Commonwealth primary policy was the subject of another coverage action, in SEACOR Holdings, Inc. v. Commonwealth Insurance Co.,[] in which the insured’s property was significantly damaged by Hurricane Katrina. The principal coverage issue presented there was whether the property damage should be subject to the policy’s “Named Windstorm” deductible only or also to the policy’s “flood” deductible. On cross-motions for partial summary judgment on that issue, the district court, applying Louisiana law, concluded that only the named windstorm deductible applied.[] On appeal, the Fifth Circuit court of appeals affirmed, emphasizing that the policy’s definitional terms guided its ultimate determination.

The Commonwealth policy defined Named Windstorm as “any Windstorm . . . or any atmospheric disturbance which [has] been declared to be a tropical storm and/or hurricane by the National Weather Service or the National Hurricane Center.” The court found significant that this definition included “atmospheric disturbances” declared to be a hurricane—regardless of whether such a weather event satisfied the policy’s definition of a “Windstorm.”[]

The term “flood”—which is not referenced in the policy’s definition of “Named Windstorm”—was defined as “waves, tide or tidal water, inundation, rainfall and/or resultant runoff, and the rising (including overflowing or breakage of boundaries) of lakes, ponds, reservoirs, rivers, harbors, streams, or similar bodies of water whether wind driven or not.”[] In contrasting the definitions of “Named Windstorm” and “flood,” the court highlighted the fact that the policy did not indicate whether multiple deductibles could be applied to the insured’s loss.

In the absence of specific language authorizing multiple deductibles, the appeals court framed the issue in terms of whether the policy required the insured “to pay the Flood and Named Windstorm deductibles or whether the single Named Windstorm deductible encompasses [Hurricane] Katrina’s wind and water damage.”[] In concluding that only the named windstorm deductible should apply, the appeals court pointed out that the definition of “Named Windstorm” included “any atmospheric disturbance” the National Weather Service declared to be a hurricane. Here, the National Weather Service declared Katrina to be a hurricane and, thus, this weather event and the damage it caused to the insured’s property fell precisely within the named windstorm definition. Consequently, the named windstorm deductible applied.[]

The same, however, could not be said of the flood deductible. This was because the policy did not contain a specific exclusion for water-related events that often accompany a windstorm. Instead, the policy contained separate deductibles for the perils of named windstorm and flood. Moreover, the policy failed to indicate when, if at all, multiple deductibles could be applied.[] In short, the policy language did not support the insurer’s contention “that the limit for the peril of Flood should apply when, under the policy, all damages were under the umbrella of a Named Windstorm.”[]

Superstorm Sandy

Coverage results for commercial losses sustained in Superstorm Sandy, as in Hurricane Katrina, differed depending on the all-risks’ policy language at issue, as well as which state’s law was applied.

On October 29, 2012, Superstorm Sandy made landfall in New Jersey, causing catastrophic damage to commercial and residential properties. In Public Service Enterprise Group, Inc. v. Ace American Insurance Co.,[] the insured’s properties—including eight generating stations used to produce electricity, as well as a number of substations and switching stations used to distribute electricity to consumers—sustained significant damage as a result of the storm. The insured, Public Service Enterprise Group (PSEG), had $1 billion in first-party property coverage and notified its primary and excess carriers of the loss.[] Notably, the insured’s policies did not contain a sublimit for “named windstorm” (other than named windstorms that occurred in Florida). However, there was a $250 million sublimit in the policies at issue “for losses caused by ‘flood,’ and a $50 million limit for losses to property ‘located in Flood Zones A & V.’” Although the insurers provided coverage for a portion of the insured’s loss, over $500 million in damages remained in dispute.[]

Consequently, PSEG brought a coverage action in New Jersey state court; thereafter, the parties cross-moved for summary judgment. PSEG asserted that it was entitled to the full limits of its $1 billion in coverage for losses sustained because (1) the term “storm surge” was included in the definition of “named windstorm” and, further, there was no sublimit in its policies for loss caused by a named windstorm outside of Florida, which meant a storm surge cannot be subject to the policies’ flood limits; (2) under New Jersey law, when there are multiple causes for a loss (as here), any restrictions in the policy do not apply so long as the “efficient proximate cause” of the loss is not subject to those restrictions—and here “wind was the proximate cause of the storm surge that caused the damage,” not flood; and (3) the policies’ flood definition allowed for a reasonable interpretation that damage caused by a “named windstorm” is not subject to the policies’ flood sublimits.[]

In contrast, the insurers argued they were entitled to summary judgment because “a storm surge is a type of ‘flood’ under the policy, and, as such, the policy’s flood sublimits apply.” Relying on case law from other jurisdictions, the insurers emphasized that the plain meaning of the definitional term for flood includes a storm surge.[]

In ultimately ruling in favor of the insured—that PSEG’s policies’ flood sublimits did not apply to its losses caused by “storm surge”—the court reasoned as follows: First, in the absence of any New Jersey published decisions on whether “storm surge is included in the flood definition,” the court relied on two previously discussed decisions—SEACOR Holdings and Pinnacle Entertainment—which both held that losses caused by a storm surge were not subject to flood sublimits. In SEACOR, the Fifth Circuit found that property damage caused by Hurricane Katrina was the result of a “named windstorm” as defined in the policy and, thus, the flood limit deductible did not apply.[] In a similar manner, the Pinnacle Entertainment court found the policies’ flood exclusion inapplicable where property damage was caused by a storm surge. This was because the flood definition did not include a reference to “wind-driven water,” while a “weather catastrophe occurrence” was defined to include flood “associated with or occurring in conjunction with” a named storm.[] The PSEG court found the “reasoning” of the SEACOR and Pinnacle courts to be “sound” and consistent with New Jersey coverage law.[]

In addition, the PSEG court found that the insured’s position on coverage was more consistent with New Jersey principles on contract interpretation, as well as with the parties’ past practices, which was confirmed by a substantial amount of extrinsic evidence.[] And, last, the PSEG court found that New Jersey’s “efficient proximate cause” doctrine also supported the insured’s position on coverage.[] Accordingly, the court concluded that the policies’ flood sublimits did not apply to PSEG’s losses caused by storm surge.

In National Railroad Passenger Corp. v. Arch Specialty Ins. Co.,[] a different result obtained, with the insurers prevailing on a similar coverage issue based on New York law. In that case, the National Railroad Passenger Corp., or Amtrak, sought coverage for property losses it sustained as a result of Superstorm Sandy making landfall near New York City. Sandy generated a storm surge that caused water from the East and Hudson Rivers to inundate Amtrak’s tunnels situated under those bodies of water. The water that entered the tunnels caused substantial damage to Amtrak equipment. In addition, the subsequent removal of water from the tunnels left behind “chlorides” from the “brackish water” that caused additional damage.[]

Amtrak had all-risk policies from several carriers that provided $675 million in total coverage. The primary policies, however, contained a $125 million sublimit for flood and earthquake.[] The term “flood” was defined by a majority of the policies to mean “a rising and overflowing of a body of water onto normally dry land.” The other policies defined “flood” to also include a “surge of surface water. . . .”[]

The federal district court noted that whether the $125 million flood sublimit applied to reduce the amount of coverage available to Amtrak for its losses caused by Sandy turned on whether the policies’ flood definitions “encompass inundation caused by storm surge.”[] If so, the flood sublimit would apply.

The district court ultimately concluded that both definitions of flood “unambiguously encompass inundation of normally dry land that is caused by storm surge.” Consequently, applying New York law, the court found the policies’ $125 million flood sublimit applied to Amtrak’s loss, thereby reducing its coverage.[] In reaching that conclusion, the court rejected Amtrak’s contention that the definition of flood did not include “storm surge-caused inundation.” Amtrak had argued that “storm surge” is a conceptually different type of weather phenomenon that is separate and distinct from a flood event. The district court rejected that contention and thus distinguished the decisions Amtrak relied on—SEACOR Holdings, PSEG, and Pinnacle Entertainment. The court emphasized that those decisions involved different policy language that indicated floods associated with storms were to be treated differently for coverage purposes. More specifically, the policies at issue in those decisions included “storm surge” within the definition of “named windstorm,” whereas Amtrak’s policies did not indicate that floods associated with a “named windstorm” were to be treated differently from other floods.[]

Recently, a New Jersey appellate court, applying New Jersey law, sided with the insured in two consolidated appeals, finding the insurers’ flood sublimit did not apply to water damage to the insured’s properties that occurred during Superstorm Sandy. In New Jersey Transit Corp. v. Certain Underwriters at Lloyd’s London,[] the insured had a multi-layered property insurance program with 11 insurers. The policies insured against “all risks” and provided proportional coverage in four separate layers. The primary layer provided $50 million in coverage. Once that layer exhausted, the second layer provided coverage up to $100 million, with the third layer providing an additional $175 million in coverage. The fourth layer provided another $125 million in coverage. Thus, the insured had a total of $400 million in first-party property coverage.[]

The policies contained certain sublimits, including a “flood sublimit.”[] The flood sublimit reduced the amount of coverage available for property loss that is caused by flood to $100 million “per occurrence.” The term “flood” was defined as follows:

[A] temporary condition of partial or complete inundation of normally dry land from:
1. The overflow of inland or tidal waters outside the normal water-course or natural boundaries[;]
2. The overflow, release, rising, back-up, runoff or surge of surface water; or
3. The unusual or rapid accumulation or runoff of surface water from any source.
[S]uch . . . flood shall be deemed to be a single occurrence within the meaning of this policy.[]

The policies also contained a provision for a “named windstorm,” which was defined as follows:

“Named Windstorm” shall mean wind or wind driven water, storm surge and flood associated with, or which occurs in conjunction with, a storm or weather disturbance which is named by the National Weather Service or any other recognized meteorological authority.
Such storm or weather disturbance shall be considered to be a Named Windstorm until the time such storm or weather disturbance has been downgraded, meaning that the storm or weather condition is no longer considered by the U.S. National Weather Service or any other recognized meteorological authority to be a hurricane, typhoon, tropical storm or cyclone.[]

When Superstorm Sandy struck New Jersey, the insured’s properties sustained significant water damage. In adjusting the insured’s claims, it became immediately apparent that the carriers were taking the position that the “flood sublimit” applied, thereby reducing the primary and excess coverage available to $100 million. Whether the flood sublimit applied essentially turned on whether the separately defined peril of “Named Windstorm” negated application of the policies’ flood sublimit. If that were the case, then the insured would have the policies’ entire $400 million in limits available to cover its property losses. When the parties could not reach an agreement on coverage, the insured filed a declaratory judgment action against several of the carriers.[]

Following the completion of discovery, the parties cross-moved for summary judgment. The trial court granted the insured’s motion and denied the insurers’ cross-motions. Ultimately, the trial court found there were no material facts in dispute, that the damages to the insured’s properties during Superstorm Sandy were not “losses caused by flood,” and that the $100 million flood sublimit thus did not apply. On appeal, the appellate court affirmed.[]

The appellate court noted it was undisputed that during Superstorm Sandy, “a surge of water inundated and damaged various NJT properties” and, further, that the policies’ definition of “flood” included the “surge of surface water.”[] However, in affirming the trial court’s rulings based on New Jersey’s general interpretive principles employed in construing insurance policies, the appellate court emphasized that the policies in question separately defined a “named windstorm” to include “wind driven water,” “storm surge,” and “flood associated with, or which occurs in conjunction with,” a “named windstorm.”[] While the definition of “flood” included the word “surge,” that definition did not include the words “storm surge” and “wind driven water” associated with a “named windstorm.” On the other hand, however, a “named windstorm” specifically included within its definition “wind driven water” and “storm surge” associated with a “named windstorm.”[]

In other words, based on the plain language of the above definitions, the appeals court was “convinced” that “the policies are sufficiently clear and establish that water damage associated with a ‘named windstorm’ does not come within the definition of ‘flood’ and is not subject to the flood sublimit.”[]

In rejecting the insurers’ arguments to the contrary, the appellate court further explained its holding as follows:

The plain language of the policies indicates that the purpose of the “named windstorm” definition was to differentiate between the inundation caused by a “surge” of water, which may have no relationship to a storm, and the inundation resulting from a “storm surge,” which the policies define as wind driven water associated with a “named windstorm.”

Accordingly, we are convinced the plain language of the policies provides that water damage resulting from a “storm surge” associated with a “named windstorm” does not fall within the definition of “flood.” Therefore, the water damage to [the insured’s] properties that occurred during Superstorm Sandy is not subject to the $100 million flood sublimit.[]

Conclusion

We can assume severe weather events will continue in the coming years, with similar catastrophic commercial property losses sustained as in Hurricane Katrina and Superstorm Sandy. Where those losses occur will typically implicate which state’s law will be applied. And the policy’s language—as interpreted by the applicable state’s law—will determine whether available coverage may be reduced or not by the first-party policy’s exclusions and sublimits. Consequently, as in all coverage litigation—illustrated by the cases discussed in this article—whether the insurer or insured prevails in the reduction or expansion of coverage will depend largely on the policy’s language and which state’s law governs its interpretation.

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