New Jersey Insurance Blog

Judge Travis L. Francis of the Superior Court of New Jersey, Middlesex County, denied a motion for reconsideration filed by Wakefern Food Corporation in a Hurricane Sandy insurance case.  The court had previously granted summary judgment in favor of Lexington Insurance Company and Wakefern asked the court to reconsider its prior decision.

The primary issue was whether a Named Storm deductible applied to Wakefern’s Sandy-related losses.  The Named Storm deductible applied to all losses “arising out of” a Named Storm.  Wakefern argued that the court erred in applying the Named Storm deductible because there was no proof that a Named Storm caused Wakefern’s losses in light of the fact that Sandy was declared a post-tropical cyclone before it made landfall in New Jersey.  The court rejected that argument, noting that “[i]t was unnecessary for the Court to find Plaintiffs’ losses were ‘caused by a Named Strom’ based on the polic[y’s] ‘arising out of’ language . . . .”  Decision at 3.  The court observed that it previously concluded “that as a matter of law, the losses sustained as a result of the storm on October 29, 2012 have a substantial nexus with the Named Storm and are therefore subject to said named storm deductible.”  Id.  According to the court, “[t]he ‘arising out of language’ was dispositive in deciding the extent of the connection required.”  Id.

The court also declined to apply the Appleman Rule to application of the Named Storm deductible.  The Appleman Rule, which applies to the application of policy exclusions, provides that “recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or [w]here the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.”  Id. at 4 (citation omitted).  Wakefern argued that the deductible acted like a policy exclusions and, therefore, the Appleman Rule should apply.  The court rejected that argument

Finally, the court upheld a ruling in Lexington’s favor regarding the calculation of the Named Storm deductible.  The court explained that the Named Storm deductible was to be calculated by subtracting from the total loss two percent of the total insurable values at each loss location, not two percent of a sublimit, as Wakefern had argued.

A link to the decision is below:

Wakefern Food Corp. v. Lexington Ins. Co., No. L-6483-13 (Jan. 23, 2015) (MEMORANDUM ONLY)

In Great Lakes International Trading, Inc. v. Travelers Property Casualty Co. of America, No. 3 13-cv-01522(JAM), 2014 WL 6686633 (D. Conn. Nov. 26, 2014), a Connecticut federal court judge, applying New Jersey law, held that a flood exclusion barred coverage for a loss arising out of Sandy.  Great Lakes involved an insurance claim for damage that occurred at a warehouse in New Jersey located near the Hackensack River.  In addition to the flood damage, the roof of the warehouse was damage by high winds, which allowed rainwater to enter the warehouse.  The insured sustained more than $1.5 million in damage to goods that were stored in the warehouse.

Prior to the loss, the insured had obtained a Marine Open Cargo policy from defendant Travelers Property Casualty Company of America (“Travelers”).  A marine cargo policy typically limits coverage to losses arising out of the transportation of goods or merchandise by vessels, including any inland transportation that occurs as part of the shipment.  The particular policy at issue, however, contained a Warehouse Coverage endorsement, which extended coverage to goods stored at the New Jersey warehouse.

The Warehouse Coverage endorsement specifically provided that “’[i]t is further understood and agreed that the peril of Flood is excluded.”  Travelers paid the insured approximately $900,000 for damage it believed was caused by rainwater that entered the warehouse as a result of the wind damage to the roof.  It denied coverage, however, for approximately $650,000 in damage that the insured claimed was caused by flood.

Although the term “Flood” apparently was not defined in the policy, the court held that the flood “exclusion plainly extends to the type of inundation by means of rising waters from the Hackensack River that occurred in this case.”  Id. at *2.  It would seem that the fact that a flood exclusion applies to flood damage is a fairly simplistic and uncontroversial conclusion.

The insured argued, however, that the exclusion did not apply because it was “not located in a part of the Warehouse Coverage endorsement that lists other exclusions.”  Id.  Rather, the “exclusion [was] quite infelicitously tacked on at the very end of the endorsement without its own paragraph number or sub-heading and as if conjoined to a collection of several preceding paragraphs that appear under a subheading for ‘Earth Movement Sublimit & Deductible’ . . . .”  Id.  Due to the “locational discrepancy” of the exclusion, the insured argued “that the flood exclusion applies only when an earthquake or other earth movements induce a flood.”  Id.

The court rejected the insured’s argument, noting:

Although the flood exclusion surely could more appropriately have been set off from other text or located elsewhere in the endorsement, its wording inter se as a flood exclusion is clear. Moreover, the preambular words to the exclusion—that “[i]t is further understood and agreed” (emphasis added)—make clear that the flood exclusion stands apart from the remainder of the preceding paragraphs referring to earth-movement related sublimits and deductions.  Indeed, there is no common sense reason why an exclusion would or should be tethered to a sublimit or deduction; they deal with wholly different aspects of coverage. Nor is it plausible to conclude that the parties’ interest with respect to protecting goods at a coastal New Jersey location was to limit liability only to earth-movement-induced floods as opposed to floods of any other (and far more likely) origin.

Id.

The insured also argued the despite the flood exclusion, “coverage may still exist under the efficient-proximate-cause or concurrent-causation doctrines.”  As noted by the court:

“The concurrent causation doctrine allows for recovery where the loss essentially is caused by an insured peril with the contribution of an excluded peril merely as part of the chain of events leading to the loss,” and “the efficient proximate cause doctrine allows coverage if an insured peril is the proximate cause of the loss, even if other contributing causes specifically are excluded from coverage.”

Id. at *3 (citations omitted).  Reasoning as follows, the court rejected the insured’s argument that the efficient-proximate-cause or concurrent-causation doctrines precluded application of the flood exclusion:

Floods are not spontaneous and might always be ascribed to underlying causes. It would plainly defeat the purpose of a flood exclusion were a plaintiff permitted to circumvent it by means of attributing a classic flood of the kind at issue in this case to non-excluded sources.

Id.

Sandy caused a significant amount of flood damage throughout New Jersey and surrounding areas.  A number of insureds have tried to avoid application of flood exclusions by arguing that the damage they sustained was caused by something other than a flood.  The same thing occurred following Hurricane Katrina.  In its decision, the Great Lakes court took a practical approach to the application of a flood exclusion to damage arising out of Sandy.  It remains to be seen whether judges in New Jersey will take a similar approach.

© William D. Wilson and NJInsuranceBlog.com, 2015.  Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.  Excerpts and links may be used, provided that full and clear credit is given to William D. Wilson or NJInsuranceBlog.com with appropriate and specific direction to the original content.