APRIL 2, 2015
Here is an attempt by a losing defendant’s lawyer to chip
away at the court’s decision. The court
reached the correct decision: when PSEG bought a named windstorm insurance, it
expected to be covered for any damages that the storm caused. The insurers tried to argue (and they failed
to persuade the court) that all the massive storm damage was not caused by the
named storm, but a flooding event. Yet,
it was the wind-driven storm surge that had caused the flooding along the
coastline.
These insurers tried to claim
that a storm surge is separate from the named windstorm (very ridiculous
argument) that the court rejected. Basically
the insurers lost on every level. Read
the court’s 21-page opinion to get info on the slaughtering of the insurer’s
arguments. The link is here: http://www.judiciary.state.nj.us/decisions/PSEG%20v.%20Ace%20American;%20ESX-L-4951-13.pdf
Here is a pathetic attempt by one of the insurer’s lawyer’s
to reject the court’s opinion.
The Superior Court of New Jersey, Essex County's ruling in Public
Service Enterprise Group Inc. v. Ace American Insurance Co.[1] on March 23
follows a line of thought advanced by many policyholder lawyers that included a
definition of “Named Windstorm” in a property policy — typically to provide
contract certainty in defining an occurrence and/or the application of
deductibles — which creates a new and unlimited “superperil” that trumps other
policy wordings, including exclusions and sublimits for flood. This argument,
like the notion that storm surge inundation is not “flood,” has been rejected
by almost every court to have seriously considered the issue.
PSEG, a utility, sued ACE American Insurance and other
market insurers for losses from storm surge flooding arising out of Superstorm
Sandy in 2012. The total policy limit was $1 billion, subject to a $250 million
sublimit for flood, per occurrence. It was undisputed that Sandy’s storm surge
inundated and damaged several PSEG properties. In other words, under the well-accepted
common and ordinary meaning of the term, PSEG’s properties were damaged by
“flood.” Nevertheless, the PSEG court refused to apply the flood sublimit,
leaving the insurers potentially exposed for a risk that they did not bargain
for and that they had explicitly sublimited. Or so they had thought.
So how did the PSEG court get there? Through the
“superperil” of “Named Windstorm.” The court never quotes the policy’s “Named
Windstorm” definition in full or tells us where the defined term is actually
used in the policy.[2] All the court tells us is that “storm surge” is included
in the policy’s definition of “Named Windstorm” and that there is no sublimit
for it — ergo, coverage exists up to the full $1 billion policy limit (even for
acknowledged flood damage).[3] Faster than a speeding hurricane, and able to
leap large sublimits in a single bound, the “Named Windstorm” knows no coverage
limitations.
In reaching its conclusion, the court makes an assumption —
without meaningfully analyzing it — that the inclusion of a definition of
“Named Windstorm” was intended and understood to create a broad new peril that
encompasses all of the types of damage that typically accompany hurricanes.
That is a perilous leap. Typically, “Named Windstorm” definitions are included
for the benefit of the insured and to provide contract certainty. They are used
to make clear, for example, that all damage from a “Named Windstorm” is subject
to a single deductible rather than separate deductibles for wind and flood.
They are also used to define a single occurrence, so that policyholders are not
subject to multiple per occurrence deductibles from a single “Named Windstorm.”
What cannot be reasonably deduced or inferred from any typical policy language,
however, is that including a “Named Windstorm” definition is intended to create
an entirely new uber-peril that destroys everything in its path.
The kinds of perils that are addressed in property damage
policies are types of physical loss or damage (e.g., flood, wind, earthquake,
collapse, etc.,). “Named Windstorm” is not a type of physical loss or damage.
It is not disputed that storm surge is water pushed ashore by hurricane winds,
but the damage that it causes is flood damage. Under a property insurance
policy it is the type of damage that matters, and under the policy at issue in PSEG,
flood damage is specifically sublimited.[4]
One of the reasons this is important is that insurance
companies underwrite policies based on the risks of certain types of damage
occurring and the exposures presented. In coastal areas, where the likelihood
of flood damage may be high, insurers limit or manage their exposure through
sublimits, reinsurance and otherwise. Brokers and risk managers know that flood
coverage is limited and expensive so they make decisions about how much flood
insurance to purchase for a particular business based on, among other things,
the client’s exposure, risk tolerance and what the client is willing to pay
for. To paraphrase a question posed by the Ninth Circuit, if PSEG thought it
had “Named Windstorm” coverage that was inclusive of any and all damage from a
“Named Windstorm” up to $1 billion, then why did it purchase a policy that
contained a flood sublimit in it, particularly a sublimit of $250 million — a
level of damage that likely would be sustained, if at all, only in the context
of a hurricane?
The answer, of course, is that it didn’t. Instead, the
policyholder lawyers are playing an expensive and high-stakes “gotcha” game.
The two principal cases addressing whether “Named Windstorm”
is a separate peril that trumps a flood sublimit are Six Flags Inc. v.
Westchester Surplus Lines and Northrop Grumman Corp. v. Factory Mutual
Insurance Co.[5] In those cases, the Fifth and Ninth Circuit, respectively,
rejected the policyholder’s assertion that a “Named Windstorm” deductible
provision or an analogous “Weather Cat Occurrence” provision created a new and
unlimited superperil.[6]
The PSEG court glosses over those two cases,
attempting to distinguish them in a brief one-paragraph discussion.[7]
Instead, the PSEG court relies on two other cases to support
its holding: Seacor Holdings Inc. v. Commonwealth Insurance Co. and Pinnacle
Entertainment Inc. v. Allianz Global Risks.[8] In Pinnacle, the principal issue
was whether storm surge should be considered flood under the excess policies’
flood exclusion. The Pinnacle court concluded that storm surge was not clearly
excluded, both because there was no specific language excluding wind-driven
flood and because the policy contained a “Weather Catastrophe Occurrence”
clause.[9]
But, in doing so, the court relied in part on the district court’s
opinion in Northrop Grumman, which was later reversed by the Ninth Circuit.[10]
Pinnacle remains an unreported district court decision, is based in part on a
case that was later reversed and has not been cited to or followed by any other
court in the seven years since it was decided. It is the very definition of an
outlier.
In Seacor, the insurer sought to apply two deductibles, one
for “Named Windstorm” and one for “Flood,” to damages from hurricanes. The
court concluded that only the single “Named Windstorm” deductible applied and,
because of that, the flood sublimit was likewise inapplicable.[11] Seacor, also
from the Fifth Circuit, is admittedly somewhat difficult to reconcile with Six
Flags. However, in Seacor, the policy’s “Named Windstorm” deductible specifically
describes “Named Windstorm” as a “peril,”[12] which is atypical. Additionally,
I would suggest that the court’s decision can be explained by the insurer’s
attempt to apply two deductibles notwithstanding the broad “Named Windstorm”
deductible language, which undercut its position with respect to the
application of a separate flood sublimit. There is no indication from the PSEG
opinion that either of these factors were present here.
Certainly, the policy language at issue in PSEG wasn’t
perfect. It gave the policyholder lawyers an opening and it created a
not-insignificant risk for the carriers as illustrated by the court’s decision.
Nevertheless, neither the definition of “Named Windstorm” in the occurrence
section of the policy nor the use of the term “Named Windstorm” in connection
with the Florida sublimit should be construed to create a new peril of “Named
Windstorm.”[13]
In the many years of hurricane-related litigation both before and after Hurricane Katrina, the clear consensus of U.S. courts is that storm surge is simply a type of flood and that storm surge flood damage is subject to policy exclusions and sublimits for flood. Stated differently, a flood is a flood. In recognizing a “Named Windstorm” superperil, bound only by the policy’s outer limits, the PSEG decision is at odds with settled case law and erodes contract certainty.[14]
In the many years of hurricane-related litigation both before and after Hurricane Katrina, the clear consensus of U.S. courts is that storm surge is simply a type of flood and that storm surge flood damage is subject to policy exclusions and sublimits for flood. Stated differently, a flood is a flood. In recognizing a “Named Windstorm” superperil, bound only by the policy’s outer limits, the PSEG decision is at odds with settled case law and erodes contract certainty.[14]
[1] Public Service Enter. Grp. Inc. et al. v. ACE American
Ins. Co. et al., No. ESX-L-4951-13 (N.J. Super. Ct. Law Div. March 23,
2015) (hereafter “PSEG”)
[2] From a copy of one of the policies, however, it appears
that “Named Windstorm” is defined in the “Occurrence” section and is also
referenced in a $50 million sublimit for “Named Windstorm” in Florida.
[3] Id. at *3-5.
[4] Curiously, the court states that in the PSEG policy “the
flood sublimits do not apply to the peril of flood but rather apply ‘per
occurrence’”. Id. at *4. This reflects an unfortunate lack of understanding of
the policy wording. The court quotes the policy’s flood sublimit as
“$250,000,000 Flood — per occurrence ...” Id. Thus, the sublimit plainly
applies to the peril of flood, with a limit of $250 million per occurrence. It
is unclear (and the court does not explain) how it concludes that the flood
sublimit does not apply to the peril of flood under the policy wording
presented.
[5] Six Flags Inc. v. Westchester Surplus Lines Ins. Co. et
al., 565 F.3d 948 (5th Cir. 2009); Northrop Grumman Corp. v. Factory Mutual
Ins. Co., 563 F.3d 777 (9th Cir. 2009).
[6] Six Flags, 565 F.3d at 957; Northrop, 563 F.3d at 787.
[6] Six Flags, 565 F.3d at 957; Northrop, 563 F.3d at 787.
[7] PSEG at *5.
[8] Seacor Holdings Inc. v. Commonwealth Ins. Co., 635 F.3d
675 (5th Cir. 2011); Pinnacle Entertainment Inc. v. Allianz Global Risks U.S.
Ins. Co., No. 2:06-CV-00935 (D. Nev. March 26, 2008).
[9] Pinnacle at *5.
[10] Id. at *5-6.
[11] Seacor, 635 F.3d at 683.
[12] Id. at 678.
[13] The court’s decision also found for PSEG based on New
Jersey’s efficient proximate cause doctrine. That issue is beyond the scope of
this article. As a fundamental principle, however, even courts that follow a
similar doctrine have generally held that this simply requires allocation
between wind damage and flood damage in the context of a hurricane. See, e.g.,
Corban vs. United Serv. Auto. Ass’n, 20 So. 3d 601, 619 (Miss. 2009).
[14] Although not relevant to the PSEG discussion here,
there has been a recent push in the London market, particularly by brokers, to
treat all hurricane-caused damage as a singular peril of “Named Windstorm.”
This approach would represent a marked departure from how U.S. underwriters
have typically underwritten the separate perils of flood and wind. This kind of
approach would require specific policy language to make the intent clear and
would present a challenge in terms of evaluating and underwriting the total
exposure. It also presents a risk of inconsistencies between policy forms and
coverage layers. Perhaps this will merit its own article at some point in the
future.