Most homeowners insurance policies contain an exclusion for damage caused by flood. Thus, unless separate flood coverage is purchased, an insured will not be covered for a flood loss. Commercial property insurance policies, on the other hand, typically provide some coverage for flood damage. However, that coverage generally is limited to an amount less than the full policy limit.
Given the limits on flood coverage, following a major flood event it is not unusual for insureds to argue that their damage was caused by something other than flood. For example, following Hurricane Katrina, insureds in Louisiana argued that their loss was caused by the negligent maintenance of the levees or by wind driven water (i.e., storm surge) and not flood. Other insureds have argued that their property was totally destroyed by wind prior to any contact with flood water. Similar arguments were made by insureds located along the East Coast following Hurricane Sandy. For the most part, such arguments have been rejected by the courts.
Two New Jersey insureds came up with a new argument following damage to their home caused by Hurricane Sandy. They argued that the damage to their home was caused by “water-borne unhealthy substances” and not flood. Like many homeowners, they did not have flood coverage. While they lived in a flood zone, and flood coverage had been required in the past by their mortgage company, once they paid off their mortgage they cancelled their flood coverage.
The insurer denied the claim on the basis that the damage was caused by flood, which was not covered under the policy. The insureds then sued their insurer, seeking a ruling that they were entitled to coverage. Both sides moved for summary judgment and the trial court granted the insurer’s motion and denied the insureds’ motion. The insureds then appealed.
In Riccio v. Allstate New Jersey Insurance Company, No. A-4628-13T2, 2015 WL 6181466 (App. Div. Sept. 22, 2105), the Appellate Division affirmed. The court rejected the insureds’ argument that “their damage was caused not by the flood water but by the substances contained therein.” Id. at *5. According to the court:
Under the plain terms of the Allstate policy, damages caused by a flood are excluded. We also agree with [the trial judge] that property loss caused by flood damage includes not only the damage caused by the water, but must also include the damage caused by the toxic substances carried by the flood waters and left behind after that water recedes. To hold otherwise would provide coverage to homeowners who eschew the high cost of flood insurance and maintain only homeowners policies, and would render the flood exclusion in those policies meaningless.
Id. at *5. Because the court found that coverage did not exist, it also held that the insureds bad faith claim also must be dismissed.
While the insureds’ argument was somewhat creative, it was obviously a long shot. The insureds lived on the Shrewsbury River in an area designated as a Special Flood Hazard Area by the National Flood insurance Program. Somewhere between twenty and thirty-six inches of water entered their home. Thus, there was no question that the damage at issue was caused by flood, despite the insureds’ attempt to characterize it otherwise.
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