Hurricane Sandy Plaintiff Wins on Summary Judgment after Proving that Flood Sublimits in Policy Did Not Apply to Storm Surge Damages

In Public Service Enterprise Group, Inc. v. Ace American Insurance Company, the court granted the insured’s motion for summary judgment and denied the insurers’ motion for summary judgment after determining that storm surge losses were not subject to flood sublimits in the applicable insurance policies. After Hurricane Sandy made landfall, the resulting storm surge damaged much of the insured’s property throughout the state of New Jersey, including eight large generating stations that are used to make electricity, as well as a number of substations and switching stations that are used to distribute electricity to consumers. As a result of this loss, the insured made an insurance claim under its first-party property policies.

At the time the insured’s property was damaged, the insured was covered under primary and excess policies with coverage limits of up to $1 billion. The policies did not contain a sublimit for “named windstorms,” other than those occurring in Florida. However, the policies did contain a $250 million sublimit for losses caused by “flood,” as well as a $50 million limit for losses to property “located in Flood Zones A & V.” The insurers paid out some of the claim, but the insured estimated its total property damage exceeded $500 million.

Both the insured and insurers moved for summary judgment with respect to the coverage disputes. The insured argued that (1) coverage should be available up to the full $1 billion limit and coverage for the loss should not be subject to the lower flood sublimits under the policy language; and (2) even if the flood sublimits did apply to losses caused by a storm surge, the insured’s damaged facilities should not be subject to the $50 million sublimit because none of the damaged facilities are located in Flood Zones A & V. The insurers argued that a storm surge is a type of “flood” under the policy, and, as such, the policy’s flood sublimits apply.

Both parties agreed that there was a storm surge; however, the parties disagreed over whether the surge constituted a “flood” under the policy language and whether the policy’s aggregate “per occurrence” flood limits applied. The court noted that no reported case in New Jersey addressed the issue of whether a storm surge is included in the flood definition of an insurance policy. Nevertheless, the court relied on out-of-state court decisions on storm surge losses, rules of contract interpretation, extrinsic evidence proffered by both parties, and the language of the policies at issue to conclude that storm surge losses were not subject to the flood sublimits. Thus, because the flood sublimits did not apply to the insured’s losses caused by storm surge, the court did not address the insured’s second argument with regard to property located in Flood Zones A & V, and granted the insured’s motion for summary judgment.