Howard B. Epstein
Theodore A. Keyes
In November 2005, in the wake of the damage and destruction brought on by Hurricane Katrina and Hurricane Rita, we published a Corporate Insurance Law column in which we discussed insurance claims for flood and wind damage caused by those storms.1 With the Northeast now suffering from the catastrophic harm inflicted by Hurricane Sandy, this column provides an update regarding storm-related insurance issues arising under homeowners' policies and commercial property damage policies.
Flood Insurance
In 1968, in response to the increasing costs of disaster relief for flood victims, Congress enacted the National Flood Insurance Act, creating the National Flood Insurance Program (NFIP).2 Under the act, each community was mapped to show the probability of flooding in a particular area over the next 100 years. The act established an insurance program that made subsidized coverage available to property owners in at-risk communities in exchange for the communities' agreement to enforce flood plain management ordinances and other land-use restrictions to reduce the risk of future flood damage. Parts of New York City, including areas in each of the five boroughs, are mapped as eligible under the NFIP as at-risk areas.
Lenders generally require borrowers in at-risk areas to purchase flood insurance as a condition to a mortgage. However, property owners in at-risk areas are not otherwise required to purchase flood insurance, and many property owners in at-risk areas decline to purchase flood insurance. Following a storm, that can leave homeowners searching for coverage under standard homeowners' policies and commercial property owners searching for coverage under all risk or named peril property damage policies. Unfortunately, in the case of homeowners, whether or not there is coverage may turn on the fortuity of whether the storm damage was caused predominantly by wind instead of water.
Commercial property policies are also likely to contain flood exclusions. However, such policies may also offer business interruption coverage, which may potentially provide coverage for business loss not subject to a flood exclusion. In the case of business interruption insurance, whether there is coverage may turn on a number of issues, including whether there was actual physical damage to property owned by the insured, or in some cases to property owned by a supplier or customer of the insured.
Homeowners' Insurance
Generally speaking, unless an insured purchases specific flood insurance, a homeowners' policy will exclude coverage for damages caused by flooding.
Standard flood exclusions typically bar coverage for "flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not…." Water that backs up from a sewer or drain may also be excluded or, in some cases, may be subject to a separate lower policy limit.
Many homeowners' policies do expressly provide coverage for damages caused by wind or hurricanes. When homes are damaged by a hurricane, that can lead to a dispute over whether the damages were caused predominantly by flooding, which would be excluded, or by high winds, which may be ?covered.
Despite our fair share of Nor'easters and other storms over the years, and despite the fact that four of the five boroughs are islands, there is surprisingly little New York case law addressing insurance coverage disputes over flood and wind issues. We reviewed most of these cases in our 2005 column and found that flood exclusions were generally enforced by the courts, although there were several cases in which the court held that whether damage was caused by wind or water was an issue of fact to be determined at trial. Although there have not been any additional New York cases of particular interest since our prior column, there have been a number of relevant cases in other jurisdictions concerning insurance claims under homeowners' and commercial policies for damages caused by Hurricane Katrina.
Hurricane Katrina Cases
In several cases, insureds have attempted to challenge the application of the flood exclusion to damages caused by Hurricane Katrina. For the most part, these challenges have been unsuccessful. In Corban v. United Services Automobile Association,3 the insureds sought coverage for hurricane damage to their two-story residence under both a homeowners' policy and flood policy issued by the United Services Automobile Association (USAA). The flood exclusion in the homeowners' policy barred coverage for "water damage, meaning: (1) flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind…."4
USAA paid out the limits of the flood policy, but denied coverage under the homeowners' policy for all damage to the first-story living area based on the flood exclusion, because the first floor damage was determined to be caused by "flooding and wave wash." Plaintiffs argued that the flooding of the first floor was caused by storm surge and that, since storm surge is not explicitly excluded, the flood exclusion did not apply. The Supreme Court of Mississippi rejected this argument, finding that storm surge, a synonym for wind-driven water, is included within the water damage exclusion. However, the court did remand the case for a determination as to what damage was caused by wind and what damage was caused by flood, including storm surge.5
In Northrop Grumman v. Factory Mutual Insurance,6 the U.S. Court of Appeals for the Ninth Circuit also rejected the insured's attempt to argue that damage caused by storm surge was not barred by the flood exclusion. In that case, the insured's Mississippi shipyards were pounded by winds of up to 175 miles per hour and flooded by storm surge as high as 22 feet during Hurricane Katrina.
The insured sought coverage under primary and excess commercial all-risk policies issued by Factory Mutual. Both the primary and excess policies contained a flood exclusion, but the insurer paid out the limits of the primary policy for wind damage. The insured argued that the flood exclusion in the excess policy was not applicable to storm surge damages, because the definition of flood did not expressly include the phrase "whether driven by wind or not." The Ninth Circuit rejected this argument, finding that the absence of this phrase did not confer coverage for damages due to flooding caused by storm surge.7
In In re Katrina Canal Breaches Litigation,8 plaintiffs, a group of policyholders with homeowners', renters or commercial property policies, sought coverage for damages sustained due to flooding resulting from the breaches or overtopping of levees in the aftermath of Hurricane Katrina. The plaintiffs contended that the flood exclusion did not bar coverage because the actual cause of the damages was the negligent design, construction and maintenance of the levees. The U.S. Court of Appeals for the Fifth Circuit rejected this argument, finding that the inundation of water into the city of New Orleans constituted a flood within the meaning of the policy and therefore that the claims were barred by the flood exclusion.
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