Lawyers are students of language, and they have a reputation for building arguments out of long-ago lessons of grammar and language arts.  That reputation is not undeserved.  Something as small as the placement of a comma can have a significant impact on coverage.  But, at the end of the day, insurance contracts are intended to be enforced on the basis of their plain language.  Two recent decisions from New York courts uphold this proposition in the context of applying flood sublimits to Hurricane Sandy losses.

New Sea Crest Healthcare Center

In New Sea Crest Healthcare Center, LLC v. Lexington Ins. Co., No. 12-CV 6414(RJD)(RLM), 2014 WL 2879839 (E.D.N.Y. June 24, 2014), the insureds suffered losses to nursing homes in two locations as a result of Hurricane Sandy.  One of the nursing homes was located in a Special Flood Hazard Area (“SFHA”).

The insureds’ policies contained a flood sublimit, which capped coverage for damage caused by flood to $1 million per year.  The policies provided no flood coverage at all for any property in an SFHA.  The policies defined “flood” in the following way (boldface in original, italics added):

[W]hether natural or manmade, Flood waters, surface water, waves, tide or tidal water, overflow or rupture of a dam, levy, dike, or other surface containment structure, storm surge, the rising, overflowing or breaking of boundaries of natural or manmade bodies of water, or the spray from any of the foregoing, all whether driven by wind or not.  A tsunami shall not be considered a Flood.

The policies also contained a named storm sublimit, which limited coverage to $36,650,000 per year for each named storm (such as Sandy).  The named storm sublimit provided that flood damage occurring during a named storm is still subject to the $1 million flood sublimit.  It also stated that it would apply, “[r]egardless of the number of … Perils involved[,] including … all Flood, (however caused) wind, wind gusts, storm surges, tornados, cyclones, hail or rain.”

Much of the damage at issue in this case resulted from storm surge—a wind-driven inundation of water—which the insurer deemed to be a flood.  Therefore, the insurer paid only $1 million for the property outside the SFHA, and nothing for the nursing home within it.  The insureds argued, however, that flood and storm surge are separate perils, such that the flood sublimit should not apply.  They cited the language of the named storm sublimit, which includes both “Flood” and “storm surges” in its list of “Perils.”  The insureds argued that this statement created an ambiguity as to whether a storm surge could be a flood; under New York law, any such ambiguity must be resolved in favor of the insured.

The court disagreed and granted summary judgment in favor of the insurer.  It explained:

Although the named storm sublimit lists flood and storm surge separately, because flood is in bold the insurer is alerted that the term has a technical definition that applies in the named storm context.  That definition expressly includes the term “storm surge” as a type of flood and further states that a flood includes water driven by wind … [Furthermore, a] ‘storm surge’ is little more than a synonym for a ‘tidal wave’ or wind-driven flood.”  … Thus, the policy definition makes it doubly clear that a storm surge is a type of flood under the policy – it contains that precise word and describes the physical characteristics of a storm surge.

The court also noted that the question of whether storm surge is a separate peril from flood was hotly contested after Hurricane Katrina, and that the Fifth Circuit repeatedly held that “flood” includes “storm surges” in the ordinary meaning of the words.

El-Ad 250 West

In New Sea Crest Healthcare, the court also held that the policies were unambiguous in providing that all loss or damage caused by flood was subject to the flood sublimit.  As a result, the insureds could not recover anything over and above the flood sublimit under additional provisions dealing with debris removal, civil or military authority, demolition, ingress/egress, ordinary payroll, equipment breakdown or service interruption.  This question – whether the flood sublimit should apply to all losses – was at issue in another recent New York case, El-Ad 250 West LLC v. Zurich American Ins. Co., No. 652964/2013, 2014 WL 2931058 (N.Y. Sup. Ct. June 27, 2014).

In El-Ad 250 West, the insured sought “delay in completion” losses under a builder’s risk policy after Hurricane Sandy caused damage to a construction project.  The policy contained a $108 million sublimit for “Physical Damage Coverage” and a $7 million sublimit for “Delay in Completion” coverage, as well as a $5 million annual aggregate limit for flood losses.  The policy defined flood losses as “all losses or damages arising” during a flood.  The parties disputed whether the policy’s sublimit and deductible for flood should apply to the claimed delay in completion losses.

The insured argued that the flood sublimit and deductible should apply only to physical damage to property, not “downstream” financial losses, such as delay in completion losses.  Because flood losses were defined to include “all losses or damages arising” from a flood, however, the insurer argued that the flood sublimit would apply to losses of any kind.

The court found that the dispute presented a matter of first impression under New York law, and it held for the insurer, reasoning that “a loss that would not have occurred but for a flood is subject to a $5 million annual aggregate limit, without regard to the type of loss suffered since the expression ‘all losses or damages arising during [a flood]’ clearly does not exclude non-physical losses.”  Id. at *4.

In sum, and consistent with basic principles of contract interpretation, the courts in both of the above cases applied the plain, unambiguous language of the policies in reaching their decisions that the flood sublimits applied to insureds’ claims.  In New Sea Crest Healthcare Center, the definition of flood unambiguously included “storm surge.”  Therefore, the court held that there was no ambiguity that losses caused by storm surge would be limited by the flood sublimit.  In El-Ad 250 West, the policy provided that the limit applied to “all losses or damages arising” from flood, so it would apply to both physical damage and financial losses resulting from flood.  We note, however, that the insured in the El-Ad 250 West case has appealed the decision, so we will watch to see if the New York appellate court upholds the lower court’s ruling.