NJ Court: Storm Surge Claims Not Subject to Insurance Policies’ Flood Limits

A New Jersey judge recently ruled that damage caused by Hurricane Sandy’s storm surge did not fall under the flood sublimits of Public Service Enterprise Group, Inc.’s (PSEG) insurance policies.

The issue in Public Service Enterprise Group v. Ace Insurance was one of first impression in New Jersey.

The Facts of the Case

Hurricane Sandy’s storm surge significantly damaged PSEG’s property throughout New Jersey, resulting in a $500 million insurance claim under its first party property policies. The applicable policies did not contain sublimits for “named windstorms,” other than those in Florida. There was, however, a $250 million submit for losses caused by “flood,” and a $50 million limit for losses to property “located in Flood Zones A & V.”

The Hurricane Sandy insurance coverage dispute centered on whether the storm surge constituted a “flood” under the applicable insurance policies. As detailed in the court’s opinion, PSEG maintained that coverage for losses caused by Sandy was available up to the full $1 billion limit of the policies, as a “storm surge” was included in the definition of “named windstorm” and was not subject to the flood sublimits. Meanwhile, the insurers contended that a storm surge rather was a type of “flood” under the policy because the policy language defined flood as “the overflowing or breaking of boundaries of natural or man-made bodies of waters.”

The Court’s Decision

Essex County Superior Court Judge Thomas Vena granted summary judgment in PSEG’s favor, finding that the flood sublimits did not apply.

After stating that there were no reported cases in New Jersey that have considered whether a storm surge was included in the flood definition of an insurance policy, the court looked to two out-of-state cases that interpreted similar policies. Both cases held that losses caused by storm surge were not subject to the flood sublimits.

“The reasoning employed by these courts are sound, and both are consistent with New Jersey’s rules of contract construction that ‘when two provisions dealing with the same subject matter are present, the more specific provision controls over the more general,’” the court ruled.

Judge Vena also considered several other factors, including the parties’ past practices and New Jersey’s efficient proximate cause doctrine, which states that if there are multiple causes of a loss, a restriction in an insurance policy does not apply so long as the efficient proximate cause of the loss is not subject to that restriction. He concluded both supported PSEG’s proffered interpretation of the policies.

“In sum, the applicable language of PSEG’s policy, canons of contract interpretation, the extrinsic evidence proffered by both parties, as well as the relevant case law, all point to the conclusion that storm surge losses are not subject to the flood sublimits,” he stated.

Given the nature of the action and the considerable financial interests at stake, this ruling is likely not the last we will hear about this case. Please stay tuned for updates.