NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NOS. A-1026-17T1 A-1027-17T1
NEW JERSEY TRANSIT CORPORATION,
Plaintiff-Respondent, APPROVED FOR PUBLICATION
November 18, 2019 v. APPELLATE DIVISION CERTAIN UNDERWRITERS AT LLOYD'S LONDON, MAIDEN SPECIALTY INSURANCE COMPANY, RSUI INDEMNITY COMPANY, and WESTPORT INSURANCE CORPORATION,
Defendants-Appellants,
and
TORUS SPECIALTY INSURANCE COMPANY,
Defendant-Respondent,
HUDSON SPECIALTY INSURANCE COMPANY and IRONSHORE SPECIALTY INSURANCE COMPANY,
Defendants. ____________________________ NEW JERSEY TRANSIT CORPORATION,
Plaintiff-Respondent,
v.
CERTAIN UNDERWRITERS AT LLOYD'S LONDON, MAIDEN SPECIALTY INSURANCE COMPANY, RSUI INDEMNITY COMPANY, and WESTPORT INSURANCE CORPORATION,
Defendants-Respondents,
Defendant-Appellant,
HUDSON SPECIALTY INSURANCE COMPANY, and IRONSHORE SPECIALTY INSURANCE COMPANY,
Defendants.
Argued October 8, 2019 – Decided November 18, 2019
Before Judges Yannotti, Currier and Firko.
On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-6977-14. Robert W. Fisher (Clyde & Co US LLP) of the Georgia bar, admitted pro hac vice, argued the cause for appellants Certain Underwriters at Lloyd's,
A-1026-17T1 2 London, Maiden Specialty Insurance Company, RSUI Indemnity Company, and Westport Insurance Corporation (Clyde & Co. US, LLP, attorneys; Robert W. Fisher, Anthony M. Tessitore, and Taylor L. Davis and James M. Bauer (Clyde & Co US LLP) of the Georgia bar, admitted pro hac vice, on the briefs).
Shawn L. Kelly and Michael J. Smith argued the cause for appellant StarStone Specialty Insurance Company f/k/a Torus Specialty Insurance Company (Dentons US, LLP, and Stewart Smith, attorneys; Shawn L. Kelly, Jonathan David Henry, Michael J. Smith, and Bryan W. Petrilla, of counsel and on the briefs).
Kenneth H. Frenchman and Marc T. Ladd (McKool Smith, PC) of the New York bar, admitted pro hac vice, argued the cause for respondent New Jersey Transit Corp. (McKool Smith, PC, attorneys; Robin L. Cohen, Kenneth H. Frenchman, Marc T. Ladd, and Alexander M. Sugzda (McKool Smith, PC) of the New York bar, admitted pro hac vice, on the brief).
The opinion of the court was delivered by
YANNOTTI, P.J.A.D.
New Jersey Transit Corporation (NJT) brought this action seeking a
declaration regarding the coverage provided under its property insurance
program for water damage that occurred during Superstorm Sandy. The trial
court found that the $100 million flood sublimit in the policies did not apply to
NJT's claim, and NJT was entitled to coverage up to the full $400 million
policy limits for the Sandy-related water damage. The trial court also found
that defendant insurers had not submitted sufficient evidence to support their
A-1026-17T1 3 claims for reformation of the policies. Accordingly, the court entered an order
dated September 18, 2017, granting summary judgment in favor of NJT, and
denying the insurers' motions for summary judgment.
In A-1026-17, Certain Underwriters At Lloyd's, London (Lloyd's),
Maiden Specialty Insurance Company (Maiden), RSUI Indemnity Company
(RSUI), Specialty Insurance Company (Specialty), and Westport Insurance
Corporation (Westport) appeal from the September 18, 2017 order. In A-1027-
17, Torus Specialty Insurance Company (Torus) also appeals from the
September 18, 2017 order. We address both appeals in this opinion. 1 For the
reasons that follow, we affirm.
I.
In July 2012, NJT, through its insurance broker, Marsh USA Inc.
(Marsh), secured coverage from eleven insurers in a multi-layered property
insurance policy program for the policy period from July 1, 2012, to July 1,
2013. The policies insured against "all risks" and provided coverage
proportionally in four layers. Lexington Insurance Company (Lexington)
provided coverage in the primary layer and was responsible for the first $50
million of insurance.
1 We refer herein to Lloyd's, Maiden, RSUI, Specialty, and Westport collectively as "Certain Insurers."
A-1026-17T1 4 After the primary layer was exhausted, the policies provided three layers
of excess coverage. The second layer provided coverage up to $100 million,
and the third layer provided an additional $175 million. The fourth layer
provided coverage of $125 million, resulting in a property insurance program
with $400 million of coverage.
Certain Insurers and Torus provided excess coverage in the third or
fourth excess layers, or both. Hudson Specialty Insurance Company (Hudson),
Ironshore Specialty Insurance Company (Ironshore), and Arch Specialty
Insurance Company (Arch) also provided excess coverage. The policies of all
participating insurers included a standard policy form and separate endorsements,
some of which were included in all policies, and some which were unique to
specific insurers.
The policies cover all perils and damage to NJT's property unless
specifically excluded. In addition, section two of the standard policy form,
entitled "limit of liability," sets forth twenty-seven categories of losses for
which coverage is subject to "100% per occurrence ground-up sublimits." The
terms "sublimit" and "ground-up" are not defined in the policies, but these
terms are commonly used in the insurance industry.
"A 'sublimit' is a limit within the aggregate limit for a certain type of
risk . . . ." David Navetta, The New Privacy Insurance Coverage, 3 No. 1.
A-1026-17T1 5 ABA SciTech Law 14, 17, n.3 (2006). When a sublimit applies, the loss is
covered only up to the amount of the sublimit rather than up to the amount of
the aggregate limit. Ibid. Furthermore, in a "ground-up" multi-layered policy
program, "a given layer of coverage is not implicated until the layer beneath it
is completely exhausted." New Hampshire Ins. v. Clearwater Ins., 129 A.D.3d
99, 106 (N.Y. App. Div. 2015) (quoting North River Ins. v. ACE Am.
Reinsurance Co., 361 F.3d 134, 138 n.6 (2d Cir. 2004)).
The flood sublimit in section two of the standard policy form limits
liability for "losses caused by flood" to $100 million "per occurrence." In
Certain Insurers' policies and the Torus policy, "flood" is defined as :
[A] temporary condition of partial or complete inundation of normally dry land from:
1. The overflow of inland or tidal waters outside the normal watercourse or natural boundaries[;]
2. The overflow, release, rising, back-up, runoff or surge of surface water; or
3. The unusual or rapid accumulation or runoff of surface water from any source.
[S]uch . . . flood shall be deemed to be a single occurrence within the meaning of this policy.
The policies also state that "[e]ach loss by . . . flood shall constitute a
single loss[,]" if:
A-1026-17T1 6 (2) . . . any flood occurs within a period of the continued rising or overflow of any river(s) or stream(s) and the substance of same within the banks of such river(s) or stream(s) or the unusual and rapid accumulation or runoff of surface waters; or
(3) . . . any flood results from any tsunami, tidal wave, or seismic sea waves or series thereof caused by any one disturbance.
The term "occurrence," which appears in section two of the standard
policy form, is defined in the Occurrence Limit of Liability Endorsement
(OLLE). The OLLE states:
The limit of liability of Insurance shown on the face of this policy, or endorsed on to this policy, is the total limit of the Company's liability applicable to each occurrence, as hereafter defined. Notwithstanding any other terms and conditions of this policy to the contrary, in no event shall the liability of the company exceed this limit or amount irrespective of the number of locations involved.
The term "occurrence" shall mean any one loss, disaster, casualty or series of losses, disasters, or casualties, arising out of one event. When the term applies to loss or losses from the perils of tornado, cyclone, hurricane, windstorm, hail, flood, earthquake, volcanic eruption, riot, riot attending a strike, civil commotion, and vandalism and malicious mischief one event shall be construed to be all losses arising during a continuous period of 72 hours. When filing proof of loss, the insured may elect the moment at which the 72 hour period shall be deemed to have commenced, which shall not be earlier than the first loss to the covered property occurs.
A-1026-17T1 7 Section fourteen of Certain Insurers' policies defines the term "[n]amed
windstorm." This provision was added to the policies that were to be in effect
from July 1, 2012, to July 1, 2013. It states:
"Named Windstorm" shall mean wind or wind driven water, storm surge and flood associated with, or which occurs in conjunction with, a storm or weather disturbance which is named by the National Weather Service or any other recognized meteorological authority.
Such storm or weather disturbance shall be considered to be a Named Windstorm until the time such storm or weather disturbance has been downgraded, meaning that the storm or weather condition is no longer considered by the U.S. National Weather Service or any other recognized meteorological authority to be a hurricane, typhoon, tropical storm or cyclone.
Endorsement four of the Torus policy pertains to "named windstorm"
and states:
Named windstorm shall mean direct action of wind including ensuing storm surge when such wind/storm surge is associated with, or occurs in conjunction with a storm or weather disturbance which is named by the National Oceanic and Atmospheric Administration's (NOAA) National Hurricane Center or similar body until sustained wind speeds drop below the parameter for naming storms.
Storm surge is defined as water driven inland from coastal waters by high winds and low atmospheric pressure.
A-1026-17T1 8 On October 29, 2012, Superstorm Sandy struck New Jersey, causing
significant damage to NJT's properties. After the storm, NJT promptly
notified Marsh and the insurers of its losses. NJT's employees, Marsh, and
loss adjuster York Risk Services Group, Inc. (York) arranged for the
inspection of the damaged properties and a valuation of the equipment that had
to be repaired or replaced. Thereafter, Marsh sought a determination as to the
amount of coverage provided for the Sandy-related water damage to NJT's
properties.
In April 2013, Terry S. Lubin, Executive General Adjuster for York,
wrote NJT on behalf of Certain Insurers, Torus, and other excess carriers.
Lubin stated that NJT's claimed losses for water damage were limited by the
$100 million flood sublimit in the policies, and the excess carriers would pay
no more than $50 million in addition to the first-layer coverage provided by
Lexington.
Marsh later advised York that NJT disagreed with the excess insurers'
interpretation of the policies. Marsh explained that none of the sublimits in the
policies applied to losses caused by a "named windstorm," which was a
separately defined peril. Marsh asserted that NJT was entitled to the full $400
million in coverage under the program for its Sandy-related property damage.
A-1026-17T1 9 Arch, which provided coverage in the second, third, and fourth layers of
the program, informed NJT it would not apply the flood sublimit to NJT's
property damage claim. Arch agreed to pay its proportional share of NJT's
losses above the $100 million flood sublimit.
In October 2014, NJT filed this action against Lloyd's, Maiden, RSUI,
Torus, Westport, Hudson, and Ironshore. NJT sought a judgment declaring
that the $100 million flood sublimit did not apply to its claims for property
damage associated with Superstorm Sandy, and defendants were in
anticipatory breach of their insurance contracts. Certain Insurers and Torus
filed answers asserting that they had no contractual obligation to provide
coverage for any water-related damage caused by "flood" that exceeded $100
million.
Certain Insurers and Torus later amended their answers to assert
counterclaims for reformation of their policies. The trial court stayed
proceedings on NJT's claims against Hudson pending arbitration, pursuant to a
provision in Hudson's policy. In March 2017, the trial court granted NJT's
motion to vacate the stay and confirm the arbitration award.
After the completion of discovery, NJT, Certain Insurers, and Torus
filed motions for summary judgment. On August 24, 2017, the Law Division
judge heard oral argument and placed his decision on the record. The judge
A-1026-17T1 10 granted NJT's motion and denied Certain Insurers' and Torus's motions. The
judge memorialized his decision in an order dated September 18, 2017. 2 These
appeals followed.
II.
On appeal, Certain Insurers and Torus argue that the trial court erred by
granting NJT's motion for summary judgment. They contend the water
damage to NJT's properties, which occurred during Superstorm Sandy, were
"losses caused by flood," and therefore are subject to the $100 million flood
sublimit in the policies.
"An appellate court reviews an order granting summary judgment in
accordance with the same standard as the motion judge." Bhagat v. Bhagat,
217 N.J. 22, 38 (2014). Our court rules provide that summary judgment shall
be granted "if the pleadings, depositions, answers to interrogatories and
admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact challenged and that the moving party is
entitled to a judgment or order as a matter of law." R. 4:46-2(c).
"If there exists a single, unavoidable resolution of the alleged disputed
issue of fact, that issue should be considered insufficient to constitute a
2 Although Ironshore sought summary judgment along with Certain Insurers, it has not appealed from the trial court's September 18, 2017 order.
A-1026-17T1 11 'genuine' issue of material fact for purposes of Rule 4:46-2." Brill v. Guardian
Life Ins. Co. of Am., 142 N.J. 520, 540 (1995) (citing Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 250 (1986)). The court "should not hesitate to
grant summary judgment" if "the evidence 'is so one-sided that one party must
prevail as a matter of law.'" Ibid. (quoting Liberty Lobby, 477 U.S. at 252).
Where, as in this case, the issue raised on appeal involves the
interpretation of a contract and the application of case law to the facts of the
case, we review the trial court's decision de novo. Merrill Lynch, Pierce,
Fenner & Smith, Inc. v. Cantone Research, Inc., 427 N.J. Super. 45, 57 (App.
Div. 2012). In doing so, we accord no "special deference" to the trial court's
"interpretation of the law" or its judgment on the "legal consequences that flow
from established facts . . . ." Manalapan Realty, L.P. v. Twp. Comm. of
Manalapan, 140 N.J. 366, 378 (1995).
Here, the trial court found that there was no genuine issue of material
fact that pertains to the interpretation and application of NJT's insurance
policies. The record supports the court's determination. It is undisputed that
during Superstorm Sandy, a surge of water inundated and damaged various
NJT properties. Dr. Philip Orton, NJT's expert, opined that Sandy's record-
setting storm surge caused the flooding of various NJT sites. In addition, Dr.
Lee E. Branscome, the expert for Certain Insurers, opined that the storm surge
A-1026-17T1 12 occurred simultaneously with the flooding "and was an inseparable part of the
flood event."
Thus, the question raised on appeal is whether the Sandy-related water
damage to NJT's properties is subject to the $100 million flood sublimit, or
whether the policies provide coverage for such damage up to the $400 million
limit of NJT's insurance program. In addressing this legal issue, we are guided
by the general principle that insurance policies must be analyzed under the
rules of contract law. Cypress Point Condominium Ass'n, Inc. v. Adria
Towers, L.L.C., 226 N.J. 403, 415 (2016) (citing Kampf v. Franklin Life Ins.,
33 N.J. 36, 43 (1960)).
To determine the meaning of a provision in an insurance policy, we first
consider the plain meaning of the language at issue. Chubb Custom Ins. v.
Prudential Ins. Co. of Am., 195 N.J. 231 (2008) (citing Zacarias v. Allstate Ins.,
168 N.J. 590, 594-95 (2001)). We must read the contract as a whole "in a fair
and common sense manner." Cypress Point, 226 N.J. at 415 (quoting Hardy ex
rel. Dowdell v. Abdul-Matin, 198 N.J. 95, 103 (2009)). The court must "give
effect to the whole policy, not just one part of it." Id. at 416 (quoting Arrow Indus.
Carriers, Inc. v. Cont'l Ins. Co. of N.J., 232 N.J. Super. 324, 334 (Law Div. 1989)).
Our goal in interpreting the policies is to "discover the intention of the
parties[,]" by considering "the contractual terms, the surrounding
A-1026-17T1 13 circumstances, and the purpose of the contract." Marchak v. Claridge
Commons, Inc., 134 N.J. 275, 282 (1993). Moreover, "if the controlling
language of a policy will support two meanings, one favorable to the insurer and
the other to the insured, the interpretation favoring coverage should be applied."
Cypress Point, 226 N.J. at 416 (quoting Butler v. Bonner & Barnewell, Inc., 56
N.J. 567, 575 (1970)).
III.
Certain Insurers and Torus argue that the Sandy-related inundation of
NJT's properties met two separate definitions of "flood" in the policies. They
assert NJT's properties were damaged by either "[t]he overflow, release, rising,
back-up, runoff or surge of surface water;" or "[t]he unusual or rapid
accumulation or runoff of surface water from any source." Defendants
therefore contend the water damage to NJT's properties were "losses caused by
flood," which are subject to the $100 million flood sublimit in the policies.
We disagree.
Here, the trial court correctly determined that the losses at issue are not
subject to the $100 million flood sublimit. As stated previously, the flood
sublimit in the policies applies to "losses caused by flood." The policies define
"flood" to include the "surge of surface water," as well as "the rapid
accumulation or runoff of surface water from any source."
A-1026-17T1 14 However, the Certain Insurers' policies separately define "named
windstorm" to include "wind driven water, storm surge and flood associated with,
or which occurs in conjunction" with a "named windstorm." Similarly, the Torus
policy defines "named windstorm" to mean the "direct action of wind including
storm surge when such wind/storm surge is associated with or occurs in
conjunction with" a named windstorm.
The policies do not define "flood" to include "storm surge" and "wind driven
water" associated with such a "named windstorm." Although the definition of
"flood" includes "surge," the definition of "named windstorm" more specifically
encompasses the wind driven water or storm surge associated with a "named
windstorm." Where, as here, two provisions of an insurance policy address the
same subject, "the more specific provision controls over the more general."
See Homesite Ins. v. Hindman, 413 N.J. Super. 41, 48 (App. Div. 2010).
Furthermore, if the parties had intended that damage from a "storm surge"
would be subject to the flood sublimit, the policies would have stated so in plain
language. Moreover, if the term "flood" already included damage from a "storm
surge" associated with a "named windstorm," as defendants claim, there would
have been no need for the parties to include the "named windstorm" provision in
the policies.
A-1026-17T1 15 In support of their arguments on appeal, defendants place great weight
on the flood sublimit, which applies "per occurrence" to all losses "caused by
flood." Defendants contend the OLLE combines all windstorm, flood, and other
perils in a single event or "occurrence" for purposes of applying the flood sublimit.
Although the OLLE provides that "losses" caused by certain perils are to
be considered a single event or "occurrence," the OLLE does not address
whether the Sandy-related damage to NJT's properties was damage "caused by
flood" or damage resulting from a "named windstorm." In addition, the OLLE
does not expressly provide that damage caused by a "flood" and damage from
a "named windstorm" are to be treated as a single event or "occurrence" for
purposes of applying the flood sublimit.
Defendants further argue the flood sublimit applies to NJT's Sandy-
related property damage because there is no provision in the policies that
specifically removes "storm surge" from the definition of "flood," and no
provision that states the flood sublimit does not apply to the inundation of
property associated with a "named windstorm."
In support of this argument, defendants rely upon a provision of the
policies that pertains to "earthquake and flood." This provision states:
Flood, as defined in this policy, that would not have occurred but for an Earth Movement as described herein, shall be deemed to be proximately caused by Earth Movement regardless of any other cause or
A-1026-17T1 16 event that contributes concurrently or in any sequence to such Flood, and consequently shall be considered Earth Movement.
Defendants contend a similar provision was required in order to remove
water damage resulting from a "named windstorm" from the flood sublimit.
We are convinced, however, that the relevant provisions of the policies are
sufficiently clear and establish that water damage associated with a "named
windstorm" does not come within the definition of "flood" and is not subject to
the flood sublimit.
Certain Insurers also contend the parties never intended that the "named
windstorm" provision would remove water damage associated with a "named
windstorm" from the flood sublimit. They assert the "named windstorm"
provision merely gives "shape to a particular type of event," which is to
emphasize that all losses arising from a "named windstorm" are those that
occur in a single, seventy-two-hour period.
We cannot agree. The plain language of the policies indicates that the
purpose of the "named windstorm" definition was to differentiate between the
inundation caused by a "surge" of water, which may have no relationship to a
storm, and the inundation resulting from a "storm surge," which the policies
define as wind driven water associated with a "named windstorm."
A-1026-17T1 17 Accordingly, we are convinced the plain language of the policies
provides that water damage resulting from a "storm surge" associated with a
"named windstorm" does not fall within the definition of "flood." Therefore,
the water damage to NJT's properties that occurred during Superstorm Sandy is
not subject to the $100 million flood sublimit.
IV.
The decision in SEACOR Holdings, Inc. v. Commonwealth Insurance, 635
F.3d 675 (5th Cir. 2011), supports our interpretation of the policies. In SEACOR,
the insured had an all-risk policy, which included deductibles that were based on
the source of the damage. Id. at 677. One of the deductibles applied to a loss
directly caused by the peril of "named windstorm," and another deductible applied
to a loss caused directly by the peril of flood. Id. at 678. The policy provided an
aggregate limit of liability for loss caused by flood. Ibid.
The plaintiff's properties had been damaged significantly during a named
hurricane. Ibid. The insurer applied both deductibles to the plaintiff's claim. Id.
at 680. The Fifth Circuit held that the hurricane was the proximate cause of the
plaintiff's water-related damage, even though there were other contributing factors.
Id. at 682. Therefore, only the deductible for "named windstorm" applied. Id. at
682-83.
A-1026-17T1 18 The court stated that the damages were caused by a named windstorm and
therefore did not "trigger" the flood limit of liability. Id. at 683. This was so
"because such losses were not caused by the peril of [f]lood." Ibid. The same
reasoning applies in this case. Because the water damage to NJT's properties
was caused by a "named windstorm" rather than "flood," as those terms are
defined in the policies, the flood sublimit does not apply.
Defendants rely, however, on National Railroad Passenger v. Arch
Specialty Insurance, 124 F. Supp. 3d 264, 273 (S.D.N.Y. 2015) (Amtrak).3 In that
case, Amtrak sought coverage for property damage that arose in the aftermath of
Superstorm Sandy. Id. at 266. Amtrak had all-risk policies issued by various
insurers, which included a $125 million sublimit for flood and earthquake. Id. at
267. Most of the policies defined "flood" as "a rising and overflowing of a body of
water onto normally dry land." Ibid. Other policies defined "flood" to include a
"surge of surface water . . . ." Ibid.
The district court noted that Sandy had generated a "storm surge" that drove
water from the rivers around Manhattan onto the shore and inundated Amtrak's
tunnels under the East River. Ibid. The water damaged Amtrak's equipment. Id.
3 The Court of Appeals affirmed the district court's determination regarding the application of the flood sublimit in an unpublished opinion. Nat'l R.R. Passenger Corp. v. Aspen Specialty Ins., No. 15-2358, 2016 U.S. App. LEXIS 16074, at *13 (2d Cir. Aug. 31, 2016).
A-1026-17T1 19 at 268. In addition, after the water was pumped from the tunnels, it left behind a
residue of "chlorides," which caused additional damage. Ibid.
The court held that the definitions of "flood" in the policies unambiguously
encompassed the inundation of normally dry land caused by a storm surge. Id. at
269. The court noted that the parties had agreed a storm surge "pushes water
beyond its usual borders and onto normally dry land." Ibid.
The court rejected Amtrak's contention that a loss from the peril of flood is
different from the inundation caused by a storm surge or wind driven water. Id. at
270-71. The court found that Amtrak's interpretation of the policies "cannot be
reconciled with the plain language of the policies." Id. at 271.
We are convinced defendants' reliance upon the Amtrak decision is
misplaced. In Amtrak, the court distinguished the policies at issue with policies
that include "storm surge" within the definition of "named windstorm." Id. at 272.
The court emphasized that Amtrak's policies did not provide that floods associated
with a "named windstorm" are to be treated differently from other floods. Ibid.
Here, the policies in NJT's program provided a definition of "named
windstorm," which includes "wind or wind driven water, storm surge and flood
associated with" such storms. Therefore, the policies plainly provide that
water damage associated with a "named windstorm" are to be treated
A-1026-17T1 20 differently from "losses caused by flood." Therefore, such losses are not
subject to the flood sublimit.
In addition, defendants rely upon Six Flags, Inc. v. Westchester Surplus
Lines Insurance, 565 F.3d 948 (5th Cir. 2009). There, the plaintiff obtained multi-
layered, all-risk, first-party property insurance for its theme parks, with a primary
layer providing coverage of $25 million and other layers providing excess
coverage. Id. at 951. The polices included a flood sublimit that capped liability at
$2.5 million for the first layer of excess coverage, and $27.5 million for the second
layer. Id. at 952.
The policies defined "Weather Cat Occurrence," to mean "[a]ll loss or
damage occurring during a period of [seventy-two] hours which is . . . named by
the National Weather Service or any other recognized meteorological authority."
Id. at 953. The policies also stated that the term "[s]torm or weather disturbance
includes all weather phenomenon associated with or occurring in conjunction with
the storm or weather disturbance, including but not limited to [f]lood, wind, hail,
sleet, tornadoes, hurricane or lightning." Ibid.
The plaintiff's property sustained heavy damage during Hurricane Katrina
and the plaintiff submitted losses totaling $150 million to the insurers. Ibid. The
primary-layer carriers paid the plaintiff $25 million; however, the excess carriers
applied the flood sublimit and capped their liability at $2.5 million. Ibid. The
A-1026-17T1 21 court held that the flood sublimit applied because the definition of "occurrence" in
the policies grouped certain losses for adjustment purposes. Id. at 957. The court
found that an "occurrence" is "distinct from the concept of a peril, which is the
cause of the loss." Ibid.
Defendants' reliance upon Six Flags also is misplaced. Here, the definition
of "occurrence" in the policies groups losses pertaining to certain perils. However,
the flood sublimit only applies to "losses caused by flood." Under NJT's policies,
losses caused by a "storm surge" associated with a "named windstorm" are not
"losses caused by flood," and are not subject to the flood sublimit. Thus, Six Flags
does not support defendants' interpretation of the policies.
On appeal, NJT argues that even were we to conclude that NJT's losses were
caused by both a "flood" and a "named windstorm," it would nevertheless be
entitled to coverage under New Jersey's efficient proximate cause doctrine. We
agree.
When there is a conflict as to whether, for coverage purposes, losses
should be considered to be "caused by" an excluded risk or by a covered peril,
the New Jersey courts employ the efficient proximate cause test, which is
sometimes referred to as Appleman's Rule. See generally Search EDP, Inc. v.
Am. Home Assurance Co., 267 N.J. Super. 537, 543-46 (App. Div. 1993)
A-1026-17T1 22 (discussing and applying Appleman's Rule). Accord Zurich Am. Ins. v.
Keating Bldg. Corp., 513 F. Supp. 2d 55, 70 (D.N.J. 2007); Flomerfelt v.
Cardiello, 202 N.J. 432, 447 (2010); Auto Lenders Acceptance Co. v. Gentilini
Ford, Inc., 181 N.J. 245, 257-58 (2004).
Under this test, if an exclusion "bars coverage for losses caused by a
particular peril, the exclusion applies only if the excluded peril was the 'efficient
proximate cause' of the loss." Zurich, 513 F. Supp. 2d at 70 (emphasis added)
(quoting Auto Lenders, 181 N.J. at 257). "Where a peril specifically insured
against sets other causes in motion which, in an unbroken sequence and connection
between the act and final loss, produces the result for which recovery is sought, the
insured peril is regarded as the proximate cause of the entire loss . . . ." Auto
Lenders, 181 N.J. at 257 (quoting 5 John Alan Appleman, Insurance Law &
Practice § 3083 at 309-11 (1970)).
Here, the "storm surge" associated with Superstorm Sandy was a "peril
specifically insured against . . . ." Auto Lenders, 181 N.J. at 257. Because
Sandy's "storm surge" caused, "in an unbroken sequence," any losses that might
otherwise not be covered under the flood sublimit, the storm surge is "regarded as
the proximate cause of the entire loss." Ibid.
Defendants argue, however, that the efficient proximate cause doctrine does
not apply here. They advance several reasons for their argument.
A-1026-17T1 23 First, Certain Insurers contend the policies excluded application of the
efficient proximate cause doctrine because they include a "single loss" clause. An
anti-concurrent causation or anti-sequential causation clause will "exclude
coverage when a prescribed excluded peril, alongside a covered peril, either
simultaneously or sequentially, causes damage to the insured." Simonetti v.
Selective Ins., 372 N.J. Super. 421, 431 (App. Div. 2004). The single-loss clause
in NJT's policies does not exclude coverage for losses occasioned by a
sequence of causes, some of which are included and some of which are not.
Therefore, it is not an anti-sequential causation clause.
Next, Certain Insurers argue that the efficient proximate cause doctrine does
not apply because the policies were negotiated by a sophisticated insured that used
the services of a professional broker. They assert that "if a rule" of interpretation,
including the efficient proximate cause doctrine, "favors the insured, it cannot
apply where a sophisticated insured like [plaintiff] negotiated the [p]olicies."
In support of this argument, Certain Insurers cite Chubb Custom. In that
case, the Court stated that "the rules tending to favor an insured that has entered
into a contract of adhesion are inapplicable where . . . both parties are sophisticated
commercial entities with equal bargaining power." Chubb Custom, 196 N.J. at 246
(citing Pacifico v. Pacifico, 190 N.J. 258, 267-68 (2007)).
A-1026-17T1 24 However, Chubb Custom does not support Certain Insurers' argument. That
case dealt with the application of contra proferentem, which applies when the court
finds contract terms ambiguous. Id. at 238 (citing Pacifico, 190 N.J. at 258, 268).
The court then "generally will adopt the meaning that is most favorable to the non-
drafting party if the contract was the result of negotiations between parties of
unequal bargaining power." Ibid. (citing Pacifico, 190 N.J. at 258, 268).
Chubb Custom does not address the efficient proximate cause doctrine.
Moreover, there is no provision in NJT's policies which expressly precludes
application of the doctrine to losses caused by "flood" and losses resulting from a
"storm surge" associated with a "named windstorm."
In addition, endorsement one in the standard policy states that the parties
understand and agree that New Jersey law would apply to "[a]ny dispute
concerning the interpretation of the terms, conditions, limitations and/or exclusions
. . . ." New Jersey law applies the efficient proximate cause doctrine. Search EDP,
267 N.J. Super. at 543-46.
Certain Insurers and Torus also contend the efficient proximate cause
doctrine does not apply to "all-risk" policies because it is always possible to look
back to a remote event in a chain of causation and find a covered peril. According
to defendants, this would allow the insured to avoid application of the flood
sublimit and defeat the purpose of having exclusions.
A-1026-17T1 25 Defendants were free, however, to negotiate the terms of a policy that
specifically precluded the application of the efficient proximate cause doctrine
when damage is caused by "flood" and a "storm surge" associated with a "named
windstorm." They did not do so. As we stated previously, the court cannot make a
new and better contract for defendants than they made for themselves. Cypress
Point, 226 N.J. at 415 (quoting Kampf, 33 N.J. at 43).
Certain Insurers also argue the efficient proximate cause doctrine only
applies "to exclusions, not sublimits." Again, we disagree. The flood sublimit
bars coverage for losses "caused by flood" that exceed $100 million. The
sublimit therefore excludes coverage for certain claims. Moreover, Certain
Insurers has not offered any persuasive reason for treating a sublimit
differently from other exclusions for purposes of applying the efficient
proximate cause doctrine.
Accordingly, we conclude that if NJT's losses are deemed to have been
caused both by "flood" and by a storm surge associated with a "named
windstorm," and the efficient proximate cause doctrine is applied, NJT's
claims for Sandy-related water damage would not be subject to the $100
million flood sublimit in the policies.
VI.
A-1026-17T1 26 Although Certain Insurers and Torus argue that relevant policy
provisions are clear, they alternatively argue that certain extrinsic evidence
created a genuine issue of material fact that precluded the grant of summary
judgment to NJT on the coverage issue. They assert the extrinsic evidence
raises a genuine issue as to whether the parties intended that the water damage
from a "storm surge" would be subject to the flood sublimit.
Disputes concerning intent or credibility ordinarily should not be
resolved on summary judgment. McBarron v. Kipling Woods, LLC, 365 N.J.
Super. 114, 117 (App. Div. 2004). However, if "[t]he facts needed to interpret
the contract are not in dispute . . . , under ordinary circumstances the court
should award summary judgment . . . and require specific performance of the
contract." Kilarjian v. Vastola, 379 N.J. Super. 277, 283 (Ch. Div. 2004).
Here, there is no genuine issue of material fact relevant to the
interpretation and application of the flood sublimit. We have determined as a
matter of law that under the plain language of the policies, NJT's losses
resulting from the "storm surge" associated with Superstorm Sandy are not
subject to the sublimit for "losses caused by flood."
We therefore conclude the trial court was not required to consider the
extrinsic evidence proffered by defendants and the court did not err by
granting summary judgment on the coverage issue.
A-1026-17T1 27 VII.
In its appeal, Torus argues that if we conclude the flood sublimit does
not apply to NJT's losses, it presented sufficient evidence for reformation of its
policy on the basis of equitable fraud. Torus therefore contends the trial court
erred by granting summary judgment to NJT on its reformation claim.4
"The general rule with respect to the reformation of contracts applies
equally to insurance policies: relief will be granted only where there is mutual
mistake or where a mistake on the part of one party is accompanied by fraud or
other unconscionable conduct of the other party." Heake v. Atl. Cas. Ins., 15
N.J. 475, 481 (1954). Accord Phillips v. Metlife Auto & Home/Metro. Grp.
Prop. & Cas. Ins., 378 N.J. Super. 101, 104 (App. Div. 2005). "Every fraud in
its most general and fundamental conception consists of the obtaining of an
undue advantage by means of some act or omission that is unconscientious or a
violation of good faith." Jewish Ctr. of Sussex Cty. v. Whale, 86 N.J. 619, 624
(1981).
A party claiming equitable fraud need not establish that the perpetrator
knew the falsity of the misrepresentation. Ibid. Instead, the party must
establish, by "clear and convincing evidence," that: (1) a party made a
4 We note that in the trial court, Certain Insurers also sought reformation of their policies. However, on appeal, these defendants have not challenged the trial court's grant of summary judgment to NJT on their reformation claims.
A-1026-17T1 28 misrepresentation or omission of material fact; (2) knowing the falsity of the
statement; (3) intending that the misrepresentation or omission be relied upon;
(4) resulting in the injured party's reasonable reliance; and (5) damages.
DepoLink Court Reporting & Litig. Support Servs. v. Rochman, 430 N.J.
Super. 325, 336 (App. Div. 2013) (citing Jewish Ctr., 86 N.J. at 624).
Here, Torus alleges that Marsh masked its "intention [of] increas[ing]
coverage limits . . . [with] the named windstorm definition . . . ." Torus claims
Marsh highlighted the changes to the terms of the expiring policy, but failed to
highlight the "named windstorm" section in the new policy that would be in
effect from July 1, 2012, to July 1, 2013. Torus further alleges that Marsh
"falsely stat[ed] that the named windstorm definition was required to be
included . . . solely for 'concurrency' purposes," and that Marsh
"misrepresent[ed]" that the flood sublimit "would remain applicable ."
We are not persuaded by Torus's contention that it presented sufficient
evidence to support its claim for reformation of its policy. Here, Torus claims
Nicholas Trent, a Marsh underwriter, told Torus underwriter Michael
Argenziano that the "named windstorm" definition would be added to the
policies solely for "concurrency" purposes.
Assuming that Trent made that statement, it was not a factual
representation regarding the scope of coverage, and it was not false.
A-1026-17T1 29 Moreover, Argenziano stated that he understood "concurrency" to mean "the
same language" in all the policies providing excess coverage. The "named
windstorm" definitions in the policies are, in fact, essentially the same.
Torus further alleges that Trent "misled" Argenziano "to believe that the
named windstorm definition would not affect the [f]lood [s]ublimit at all."
However, Torus has not presented any evidence showing that Trent or any
other Marsh agent made a specific statement, which misrepresented the effect
the "named windstorm" definition would have on the flood sublimit.
Therefore, Torus's reformation claim is not based on any affirmative
misrepresentations. Instead, the claim is based on the allegation that Marsh
failed to disclose material facts about the "named windstorm" definition and
the flood sublimit. See Jewish Ctr., 86 N.J. at 624.
In support of that claim, Torus relies on statements that Argenziano
made to Trent. Torus asserts that Argenziano repeatedly informed Trent he
could not underwrite more than $5 million in flood coverage. Torus claims
Trent "knowingly permitted" Argenziano to proceed with that "false
understanding."
Although "[s]ilence in the face of a duty to disclose may constitute a
fraudulent concealment" in certain circumstances, we have limited the duty to
disclose in the commercial context to "three general classes of transactions
A-1026-17T1 30 . . . ." United Jersey Bank v. Kensey, 306 N.J. Super. 540, 551 (App. Div.
1997). "The first involves fiduciary relationships such as principal and agent
or attorney and client." Ibid. The second relates to circumstances in which
either party "expressly reposes . . . a trust and confidence in the other ." Ibid.
The third relates to "contracts or transactions which in their essential nature,
are 'intrinsically fiduciary,' and . . . 'necessarily call[] for perfect good fai th
and full disclosure . . . .'" Ibid. (quoting Berman v. Gurwicz, 189 N.J. Super.
89, 94 (Ch. Div. 1981)).
Here, there is no basis for recognizing a duty on the part of Marsh to
make any specific disclosures regarding the effect the addition of the "named
windstorm" definition would have on the flood sublimit. Marsh and Torus did
not have a principal and agency relationship. Furthermore, Marsh was acting
on behalf of NJT, and was engaged in arms-length negotiations with the
insurers for renewal of NJT's property insurance program.
Moreover, Marsh and Torus did not have a relationship in which either
reposed "trust and confidence" in the other. In addition, the insurance policies
were not contracts of a fiduciary nature, and did not necessarily require
"perfect good faith and full disclosure . . . ." Ibid.
Thus, neither NJT nor Marsh had a duty to explain the significance of
the "named windstorm" definition or any other provision in the policies to
A-1026-17T1 31 Torus. Rather, Torus and its underwriters had an obligation to read those
terms before agreeing to participate in the program and provide coverage. See
Aden v. Fortsh, 169 N.J. 64, 86 (2001) (noting that if a contracting party fails
to read the contract before agreeing to its terms, the party cannot later claim
the agreement was different from that which was expressed in writing).
Therefore, viewing the evidence in the light most favorable to Torus, we
are convinced the trial court did not err by granting summary judgment to NJT
on Torus's reformation claim. We conclude the evidence pertaining to this
claim was "so one-sided" that NJT was entitled to prevail as a matter of law.
Brill, 142 N.J. at 540 (quoting Liberty Lobby, 477 U.S. at 252).
Affirmed.
A-1026-17T1 32