It has been just over six years since Hurricane Sandy made its devastating landfall in New York and New Jersey, causing nearly $70 billion in damages, but Sandy-related insurance litigation is still steadily making its way through the courts.

In Madelaine Chocolate Novelties Inc v Great Northern Insurance Company., the Second Circuit Court of Appeals recently held that a potential internal ambiguity in the policy mandated that the District Court’s judgment in favor of the insurer be vacated and remanded for further proceedings.  The relevant facts are straightforward:  Madelaine Chocolate suffered significant damage caused by the Sandy “storm surge,” the water pushed onto land by the force of the storm winds.  Madelaine timely submitted its claim to Great Northern for $40 million in property damage, and $13.5 million in extra operational expenses.  Great Northern disclaimed most of the claim on the basis that storm surge damage was excluded from coverage.

The Policy contained a ‘Windstorm Endorsement’ that provided coverage for “wind, wind-driven rain, erosion of soil….regardless of any other cause or event that directly or indirectly: contributes concurrently to; or contributed in any sequence to, the loss or damage…,” an anti-concurrent causation clause (“ACC”).  Great Northern’s disclaimer, upheld by the District Court, was premised on the Policy’s Flood Exclusion, which states that there is no coverage for “waves, tidal water or tidal waves, rising, overflowing…of any..  body of water or watercourse…, regardless of any other cause or event that directly or indirectly contributes concurrently to, or contributes in any sequence to, the loss or damage.”

While the District Court agreed that the Flood Exclusion unambiguously excluded storm surge damage, the Appellate Court disagreed, parsing the lower court’s analysis.  First, the Court ruled that the District Court relied on non-precedential opinions to decide that a storm surge  can be fairly categorized as a “flood,” noting that the cases relied upon did not include endorsements that added an ACC to the definition of covered peril.  Second, the Court found that the District Court’s reliance on several 5th Circuit Katrina cases was also misplaced, as none of the policies at issue in those cases likewise added an ACC to the definition of covered peril insured.

The key question on remand is whether or not the ACC clause in the Windstorm Endorsement conflicts with, or creates an ambiguity, with respect to the Flood Exclusion, reminding the District Court to “be mindful of well-established precedents requiring exclusions to be set out in clear and unmistakable language.”  ACC clauses have been held ambiguous in certain Katrian cases.  As Madelaine Chocolate continues its path through the New York court system, further clarity to these complex coverage questions will continue to inform the way coverage is analyzed, and perhaps how coverage is written, as significant storms become more common.

Thanks to Vivian Turetsky for her contribution to this post.