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By Thomas H. Cook, Jr.
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The Superior Court of New Jersey, Essex County's ruling in Public Service Enterprise Group Inc. v. Ace American Insurance Co.[1] on March 23 follows a line of thought advanced by many policyholder lawyers that including a definition of “Named Windstorm” in a property policy — typically to provide contract certainty in defining an occurrence and/or the application of deductibles — creates a new and unlimited “superperil” that trumps other policy wordings, including exclusions and sublimits for flood. This argument, like the notion that storm surge inundation is not “flood,” has been rejected by almost every court to have seriously considered the issue.

PSEG, a utility, sued ACE American Insurance and other market insurers for losses from storm surge flooding arising out of Superstorm Sandy in 2012. The total policy limit was $1 billion, subject to a $250 million sublimit for flood, per occurrence. It was undisputed that Sandy’s storm surge inundated and damaged several PSEG properties. In other words, under the well-accepted common and ordinary meaning of the term, PSEG’s properties were damaged by “flood.” Nevertheless, the PSEG court refused to apply the flood sublimit, leaving the insurers potentially exposed for a risk that they did not bargain for and that they had explicitly sublimited. Or so they had thought.

So how did the PSEG court get there? Through the “superperil” of “Named Windstorm.” The court never quotes the policy’s “Named Windstorm” definition in full or tells us where the defined term is actually used in the policy.[2] All the court tells us is that “storm surge” is included in the policy’s definition of “Named Windstorm” and that there is no sublimit for it — ergo, coverage exists up to the full $1 billion policy limit (even for acknowledged flood damage).[3] Faster than a speeding hurricane, and able to leap large sublimits in a single bound, the “Named Windstorm” knows no coverage limitations.

In reaching its conclusion, the court makes an assumption — without meaningfully analyzing it — that the inclusion of a definition of “Named Windstorm” was intended and understood to create a broad new peril that encompasses all of the types of damage that typically accompany hurricanes. That is a perilous leap. Typically, “Named Windstorm” definitions are included for the benefit of the insured and to provide contract certainty. They are used to make clear, for example, that all damage from a “Named Windstorm” is subject to a single deductible rather than separate deductibles for wind and flood. They are also used to define a single occurrence, so that policyholders are not subject to multiple per occurrence deductibles from a single “Named Windstorm.” What cannot be reasonably deduced or inferred from any typical policy language, however, is that including a “Named Windstorm” definition is intended to create an entirely new uber-peril that destroys everything in its path.

The kinds of perils that are addressed in property damage policies are types of physical loss or damage (e.g., flood, wind, earthquake, collapse, etc.,). “Named Windstorm” is not a type of physical loss or damage. It is not disputed that storm surge is water pushed ashore by hurricane winds, but the damage that it causes is flood damage. Under a property insurance policy it is the type of damage that matters, and under the policy at issue in PSEG, flood damage is specifically sublimited.[4]

One of the reasons this is important is that insurance companies underwrite policies based on the risks of certain types of damage occurring and the exposures presented. In coastal areas, where the likelihood of flood damage may be high, insurers limit or manage their exposure through sublimits, reinsurance and otherwise. Brokers and risk managers know that flood coverage is limited and expensive so they make decisions about how much flood insurance to purchase for a particular business based on, among other things, the client’s exposure, risk tolerance and what the client is willing to pay for. To paraphrase a question posed by the Ninth Circuit, if PSEG thought it had “Named Windstorm” coverage that was inclusive of any and all damage from a “Named Windstorm” up to $1 billion, then why did it purchase a policy that contained a flood sublimit in it, particularly a sublimit of $250 million — a level of damage that likely would be sustained, if at all, only in the context of a hurricane?

The answer, of course, is that it didn’t. Instead, the policyholder lawyers are playing an expensive and high-stakes “gotcha” game.

The two principal cases addressing whether “Named Windstorm” is a separate peril that trumps a flood sublimit are Six Flags Inc. v. Westchester Surplus Lines and Northrop Grumman Corp. v. Factory Mutual Insurance Co.[5] In those cases, the Fifth and Ninth Circuit, respectively, rejected the policyholder’s assertion that a “Named Windstorm” deductible provision or an analogous “Weather Cat Occurrence” provision created a new and unlimited superperil.[6] The PSEG court glosses over those two cases, attempting to distinguish them in a brief one-paragraph discussion.[7]

Instead, the PSEG court relies on two other cases to support its holding: Seacor Holdings Inc. v. Commonwealth Insurance Co. and Pinnacle Entertainment Inc. v. Allianz Global Risks.[8] In Pinnacle, the principal issue was whether storm surge should be considered flood under the excess policies’ flood exclusion. The Pinnacle court concluded that storm surge was not clearly excluded, both because there was no specific language excluding wind-driven flood and because the policy contained a “Weather Catastrophe Occurrence” clause.[9] But, in doing so, the court relied in part on the district court’s opinion in Northrop Grumman, which was later reversed by the Ninth Circuit.[10] Pinnacle remains an unreported district court decision, is based in part on a case that was later reversed and has not been cited to or followed by any other court in the seven years since it was decided. It is the very definition of an outlier.

In Seacor, the insurer sought to apply two deductibles, one for “Named Windstorm” and one for “Flood,” to damages from hurricanes. The court concluded that only the single “Named Windstorm” deductible applied and, because of that, the flood sublimit was likewise inapplicable.[11] Seacor, also from the Fifth Circuit, is admittedly somewhat difficult to reconcile with Six Flags. However, in Seacor, the policy’s “Named Windstorm” deductible specifically describes “Named Windstorm” as a “peril,”[12] which is atypical. Additionally, I would suggest that the court’s decision can be explained by the insurer’s attempt to apply two deductibles notwithstanding the broad “Named Windstorm” deductible language, which undercut its position with respect to the application of a separate flood sublimit. There is no indication from the PSEG opinion that either of these factors were present here.

Certainly, the policy language at issue in PSEG wasn’t perfect. It gave the policyholder lawyers an opening and it created a not-insignificant risk for the carriers as illustrated by the court’s decision. Nevertheless, neither the definition of “Named Windstorm” in the occurrence section of the policy nor the use of the term “Named Windstorm” in connection with the Florida sublimit should be construed to create a new peril of “Named Windstorm.”[13]

In the many years of hurricane-related litigation both before and after Hurricane Katrina, the clear consensus of U.S. courts is that storm surge is simply a type of flood and that storm surge flood damage is subject to policy exclusions and sublimits for flood. Stated differently, a flood is a flood. In recognizing a “Named Windstorm” superperil, bound only by the policy’s outer limits, the PSEG decision is at odds with settled case law and erodes contract certainty.[14]

—By Thomas H. Cook Jr., Zelle Hofmann Voelbel & Mason LLP

Thomas Cook Jr. is a partner in Zelle Hofmann Voelbel & Mason's Dallas office. Mr. Cook was counsel for Factory Mutual Insurance Company in the Northrop Grumman matter referenced above.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Public Service Enter. Grp. Inc. et al. v. ACE American Ins. Co. et al., No. ESX-L-4951-13 (N.J. Super. Ct. Law Div. March 23, 2015) (hereafter “PSEG”)

[2] From a copy of one of the policies, however, it appears that “Named Windstorm” is defined in the “Occurrence” section and is also referenced in a $50 million sublimit for “Named Windstorm” in Florida.

[3] Id. at *3-5.

[4] Curiously, the court states that in the PSEG policy “the flood sublimits do not apply to the peril of flood but rather apply ‘per occurrence’”. Id. at *4. This reflects an unfortunate lack of understanding of the policy wording. The court quotes the policy’s flood sublimit as “$250,000,000 Flood — per occurrence ...” Id. Thus, the sublimit plainly applies to the peril of flood, with a limit of $250 million per occurrence. It is unclear (and the court does not explain) how it concludes that the flood sublimit does not apply to the peril of flood under the policy wording presented.

[5] Six Flags Inc. v. Westchester Surplus Lines Ins. Co. et al., 565 F.3d 948 (5th Cir. 2009); Northrop Grumman Corp. v. Factory Mutual Ins. Co., 563 F.3d 777 (9th Cir. 2009).

[6] Six Flags, 565 F.3d at 957; Northrop, 563 F.3d at 787.

[7] PSEG at *5.

[8] Seacor Holdings Inc. v. Commonwealth Ins. Co., 635 F.3d 675 (5th Cir. 2011); Pinnacle Entertainment Inc. v. Allianz Global Risks U.S. Ins. Co., No. 2:06-CV-00935 (D. Nev. March 26, 2008).

[9] Pinnacle at *5.

[10] Id. at *5-6.

[11] Seacor, 635 F.3d at 683.

[12] Id. at 678.

[13] The court’s decision also found for PSEG based on New Jersey’s efficient proximate cause doctrine. That issue is beyond the scope of this article. As a fundamental principle, however, even courts that follow a similar doctrine have generally held that this simply requires allocation between wind damage and flood damage in the context of a hurricane. See, e.g., Corban vs. United Serv. Auto. Ass’n, 20 So. 3d 601, 619 (Miss. 2009).

[14] Although not relevant to the PSEG discussion here, there has been a recent push in the London market, particularly by brokers, to treat all hurricane-caused damage as a singular peril of “Named Windstorm.” This approach would represent a marked departure from how U.S. underwriters have typically underwritten the separate perils of flood and wind. This kind of approach would require specific policy language to make the intent clear and would present a challenge in terms of evaluating and underwriting the total exposure. It also presents a risk of inconsistencies between policy forms and coverage layers. Perhaps this will merit its own article at some point in the future.