One of the most litigated issues in the Gulf States in the wake of Hurricane Katrina was whether flood exclusions bar coverage for loss by storm surge. The courts ultimately decided that the answer was yes. The Superstorm Sandy jurisdictions have yet to address that question, but a recent federal case in New York suggests that the matter will ultimately be resolved in the same fashion in the Empire State. The decision is New Sea Crest Healthcare Center, LLC, et al. v. Lexington Ins. Co., — F.Supp.2d —, 2014 WL 2879839 (E.D.N.Y., June 24, 2014).
At present, the issue will not crop up nearly as frequently as it did in the wake of the 2005 storm because Katrina taught a lesson to underwriters everywhere; virtually all of today’s policies make it crystal clear that storm surge is a type of flood. The policy at issue in this case is a good example, but the Eastern District nonetheless implied that it would have barred coverage even if that were not the case.
The policyholder owned a nursing home in Brooklyn, and it procured a property policy with Lexington Insurance Company. The contract of insurance had a $1 million flood sublimit, and “flood” was defined as follows:
whether natural or manmade, Flood waters, surface water, waves, tide or tidal water, overflow or rupture of a dam, levy [sic], 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.
There was also a named storm provision with a sublimit of $36,650,000 for loss occasioned by the perils of “Flood, (however caused) wind, wind gusts, storm surges, tornadoes, cyclones, hail or rain.” The named storm provision recited that damage by flood during a named storm was capped at the flood sublimit.
The nursing home was damaged by Superstorm Sandy, and the primary cause was storm surge, which the court characterized as “a wind-driven inundation of water.” Lexington informed the insured that the maximum recovery for any flood loss – as opposed to any loss attributable solely to wind or wind-driven sand – was the $1 million sublimit. The policyholder responded by filing suit, and it argued that Lexington could not limit its coverage to the flood sublimit because the policy was ambiguous as to whether storm surge was a type of flood. The Eastern District disagreed, and it granted Lexington’s motion for summary judgment two weeks ago.
Judge Raymond J. Dearie’s decision was bottomed on the clarity of Lexington’s wording. The policyholder contended that ambiguity resided in the fact that the named storm provision distinguished between storm surge and flood because it listed them as separate perils. According to the court, however:
The policies are unambiguous that a storm surge is a type of flood. The policies warn insurers [sic] on the first page that bold terms have technical definitions. Although the named storm sublimit lists flood and storm surge separately, because flood is in bold the insurer [sic] 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[.]
Then, moving beyond the wording of the contract of insurance at issue in the case, Judge Dearie continued by observing as follows:
A “ ’storm surge’ is little more than a synonym for a ‘tidal wave’ or wind-driven flood.” Bilbe v. Belsom, 530 F.3d 314, 317 (5th Cir. 2008).
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[W]hether a storm surge is a separate peril from a flood was hotly contested in the wake of Hurricane Katrina, and the Fifth Circuit “repeatedly held that the term ‘flood’ includes storm surges” in the ordinary meaning of the words. Id. at 316; See Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 436-38 (5th Cir. 2007). Although these cases were decided in the context of water-damage exclusions in homeowner insurance policies, the policy definitions of water-damage at issue are similar to Lexington’s definition of flood in that they include wind-driven water[.]
Current policy forms with their express reference to storm surge will probably obviate the need to litigate this issue in the future, but it now seems clear that any court that does have occasion to address the question today would almost certainly hold that storm surge is nothing but a type of flood.