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Windstorm Knocks Out Sublimit In Coverage Dispute (NJ)

December 6, 2019

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<p style="text-align: justify;">The New Jersey Appellate Division recently held that the New Jersey Transit Corporation (“NJT”) was entitled to the full $400 million in policy limits from its insurers for losses sustained in the wake of Superstorm Sandy, notwithstanding the presence of a $100 million flood sublimit.  The case, <em><a href="">NJ Transit v. Lloyds</a> </em>reaffirms numerous central tenets of insurance law which, in this case, worked decidedly against the insurers.</p>
<p style="text-align: justify;">In 2012, NJT obtained a multi-layered property insurance program from 11 different insurers covering the period from July 1, 2012 to July 1, 2013.  The policies provided “all risk” coverage through four layers of coverage totaling $400 million of limits.  However, the policies contained a $100 million per-occurrence sublimit for “losses caused by flood”.  The definition of “flood” included “surge.”  In addition, by endorsement, the policies separately defined a “named windstorm” as wind and the resulting storm surge caused by a storm named by a national weather service.  Thus, both definitions seemingly included a “surge.”</p>
<p style="text-align: justify;">When Superstorm Sandy struck in 2012, NJT quickly notified its insurers of its losses, and sought coverage under the policies.  The insurers argued that the flood sublimit applied and refused to reimburse NJT for any amounts greater than $100 million.  As a result, NJT filed this action seeking a declaration that the insurers owed the full $400 limits.  The trial court granted NJT’s motion for summary judgment, and the ensuring appeal followed.</p>
<p style="text-align: justify;">There was no dispute that the losses were caused by Superstorm Sandy and the resulting storm surge.  At specific issue on appeal was the effect of the “named windstorm” endorsement and the interplay between that language and the sublimit for “losses caused by flood.”  The insurers argued that, because NJT’s losses were caused by “flood,” which included a “surge”, the sublimit applied.</p>
<p style="text-align: justify;">In affirming the trial court, the appellate court relied on the concept that, when two provisions of an insurance policy address the same subject, the more specific provision controls over the more general.  Here, while the definition of “flood” included a “surge,” the definition of named windstorm specifically extended to wind driven water or storm surge associated with a "named windstorm,” which included Sandy.  Thus, if the parties intended the term “flood” to include a storm surge associated with a named windstorm, the endorsement would have been unnecessary.</p>
<p style="text-align: justify;">The court further rejected the insurers’ arguments that the purpose of the endorsement, when read in conjunction with other provisions, was to highlight that losses caused by a named windstorm within a 72 hour period constitute one “occurrence” under the policy.  Notably, NJT’s broker apparently represented that the flood sublimit would remain applicable notwithstanding the named windstorm definition.  Nonetheless, the court found that the “named windstorm” provision was its own named peril, separate and apart from “windstorms” referenced elsewhere.</p>
<p style="text-align: justify;">The decision highlights the importance of the plain language of the policy.  Although the insurers contended that the broker misrepresented their intentions when adding the “named windstorm” definition, the court sternly held that the insruers “had an obligation to read those terms before agreeing to participate in the program and provide coverage.”</p>
<p style="text-align: justify;">Thanks to Doug Giombarrese for his contribution to this post.  Please email <a href="">Georgia Coats</a> with any questions.</p>


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