“[N]ow I only hear/ Its melancholy, long, withdrawing roar,/ Retreating, to the breath/
Of the night-wind, down the vast edges drear/ And naked shingles of the world.”
— Matthew Arnold
As this blog has reported, exclusions and limits for flood coverage have generally held up against the tide of claims arising from Superstorm Sandy. Now that the water is gone, however, new losses have been discovered, and new challenges arise. Last month, in National Railroad Passenger Corp. v. Aspen Specialty Ins. Co., No. 15-2358-cv (2d Cir. Aug. 31, 2016), the U.S. Court of Appeals for the Second Circuit examined two possible holes in the dyke. The court ruled that corrosion which allegedly began only after the flood had ended was subject to a flood sublimit, notwithstanding the “Ensuing Loss” clause in the plaintiff’s policies. But the court also left open the possibility that a Demolition and Increased Cost of Construction (“DICC”) clause might still provide coverage for future repairs affecting undamaged property.
When Superstorm Sandy made landfall near New York City in October 2012, it generated a storm surge that that drove the waters of the Hudson and East Rivers over portions of lower Manhattan and New Jersey. Among other things, the surge inundated tunnels under both rivers that belonged to Amtrak (officially, the “National Railroad Passenger Corporation”).
Eventually, the storm subsided, and Amtrak pumped more than 15 million gallons of water out of the tunnels. While the tunnels were still flooded, however, chlorides from the brackish water infiltrated concrete and steel structures inside them. Once the water was removed, these chemicals were exposed to oxygen for the first time, and the resulting chemical reaction allegedly accelerated corrosion of the structures in which they were found—a phenomenon known as a “chloride attack.”
The Fine Print
Following the storm, Amtrak sought coverage under its all-risk insurance program, comprised of primary and excess policies. The primary layer included a $125 million flood sublimit, which provided:
With respect to the perils of flood and earthquake, this Company shall not be liable, per occurrence … for more than its proportion of $125,000,000.
This provision was complicated by the fact that Amtrak’s various policies contained three different definitions of “flood.” One of the policies provided that a “flood” included
surface water, flood waters, waves, tide or tidal waters, sea surge, tsunami, the release of water, the rising, overflowing or breaking of defenses of natural or manmade bodies of water, or wind driven water, regardless of any other cause or [e]vent contributing concurrently or in any other sequence of loss.
The other policies defined flood as “a rising and overflowing of a body of water onto normally dry land,” or “a temporary condition of partial or complete inundation of normally dry land.” These other definitions cited several possible causes of inundation that would make the condition qualify as a “flood,” but these causes did not include “wind driven water.”
The flood sublimit was also subject to an “Ensuing Loss” provision, which stated:
Even if the peril of flood … is the predominant cause of loss or damage, any ensuing loss or damage not otherwise excluded herein shall not be subject to any sublimits or aggregates specified in this Clause [ ].
Separately, the policies provided DICC coverage, which applies in the event of government action mandating demolition, construction or repair:
In the event of loss or damage under this policy that causes the enforcement of any law, ordinance, governmental directive or standard regulating the construction, repair, use, or occupancy of property, [the insurer] shall be liable for:
(1) the cost of demolishing the undamaged property including the cost of clearing the site;
(2) the proportion that the value of the undamaged part of the property bore to the value of the entire property prior to loss; [and]
(3) increased cost of repair or reconstruction of the damaged and undamaged property on the same or another site, limited to the cost that would have been incurred in order to comply with the minimum requirements of such law or ordinance regulating the repair or reconstruction of the damaged property on the same site . . . .
Amtrak’s insurers applied the flood sublimit to the Sandy claim, setting up a common carrier-vs.-insurance carrier coverage dispute. The U.S. District Court for the Southern District of New York awarded summary judgment to the insurers, and Amtrak appealed.
Amtrak’s principal argument was that the “chloride attack” it had suffered was not subject to the flood sublimit, because it constituted an “ensuing loss or damage not otherwise excluded.” This argument hinged on evidence that the accelerated corrosion of Amtrak’s concrete and steel structures could not have begun until the chlorides from the seawater were exposed to oxygen—in other words, after the inundation was over.
The district court held that the chloride attack did not qualify as an “ensuing loss,” because it had flowed directly from the flood, rather than from the action of “a separate damage-causing agent.” Amtrak contended that this was a legal error.
Ensuing loss … does not predicate recovery on a break in causation or an intervening cause. … Requiring such a break in causation runs afoul of the plain meaning of ‘ensue’: there need not be any break in causation for a loss to follow ‘as a chance, likely, or necessary consequence’ of an excluded loss. It also runs contrary to the plain language of Amtrak’s policies, which states that a loss ensuing from flood is not subject to the flood sublimit. This clause would have no meaning if it were read to require a loss ensuing from some cause other than flood.
The Second Circuit read the law differently. It found that the law does require a “separate damage-causing agent”— to prevent an “ensuing loss” clause from swallowing the underlying exclusion or sublimit:
‘[W]here a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded [or sublimited] risk.’ … Thus, ‘an ensuing loss provision . . . provides coverage when, as a result of an excluded peril, a covered peril arises and causes damage.’ … In general, therefore, courts should not allow coverage “for [an] ensuing loss directly related to the original excluded risk.’
Applying those rules to the chloride attack, the court found that
[t]he corrosion of Amtrak’s metal equipment cannot meaningfully be separated from water damage that is plainly subject to the flood sublimit, nor can it be attributed to a distinct ‘covered peril’ … arising from the original, sublimited peril (the flood).
Therefore, the corrosion damage was also subject to the flood sublimit.
Flood? What Flood?
Amtrak also asserted that the flood sublimits applicable to all but one of its policies did not apply to the inundation of its tunnels. It conceded that the events of 2012 fell within the “flood” definition of one policy—the one that defined the term to include inundation caused by “wind driven water.” But it contended that it is industry practice to specify whether coverage is limited to “typical flooding, such as when heavy rains cause a river to overflow its banks,” or whether it extends to the less common results of wind-driven water, which includes storm surges. On this basis, Amtrak contended that the definitions in all the rest of its policies either excluded storm surges or, at best, were ambiguous as applied to the circumstances of this case.
The Court of Appeals disagreed again, finding that even those definitions which omitted any reference to wind-driven water were “sufficiently broad to include an inundation of seawater driven by storm surge or a wind storm under their plain meaning.”
Tear It Down!
Lastly, Amtrak argued for coverage, under the policies’ “Demolition and Increased Costs of Construction” clause, for property that had not been damaged by Sandy, but which might have to be repaired or replaced in the course of repairing damaged property under a directive from the Federal Railroad Administration (“FRA”). The district court held that the DICC clause would not provide coverage for replacing undamaged portions of the tunnels. Amtrak argued that this conclusion was an error, and, moreover, that the $125 million limit of the DICC clause could be “stacked” on top of the flood sublimit, for a total of $250 million in coverage.
The district court’s award of summary judgment was based on a finding that future FRA enforcement was unlikely. The Second Circuit noted, however, that the DICC Clause “does not have a time limit,” and that Amtrak had not yet submitted its repair plans to the FRA. It therefore found the award of summary judgment to be “premature.”
In the event that the FRA does require Amtrak to replace undamaged portions of its tunnels – and [that] a covered peril caused the FRA to issue such a directive – Amtrak should be able to file a claim with its insurers seeking DICC coverage.
The court declined to address the related question of stacking (which the district court had not reached), directing the district court to decide it on remand.
Storms like Sandy are complex events, with ramifications that can extend beyond even an unambiguous limit or exclusion. The Second Circuit’s opinion goes a long way to facilitate closure, but the last train has not yet left the station.