A New Jersey appellate court recently decided whether an insurer must provide additional coverage for damage caused to a restaurant by sewage backup in FOUZIA SALIH v. OHIO SECURITY INSURANCE.

After a dreadful toilet clog in a New Jersey restaurant, plaintiff sought coverage in excess of its policy’s $25,000 limit for heavy damage to the restaurant under a lost business income provision.  The clog destroyed the water heater, furnace, restaurant’s tiles, basement, first-floor bathroom, and kitchen, causing $162,933.63 in total damage.   The policy’s general provisions excluded coverage for water damage caused by backup or overflow but included a custom endorsement which provided a $25,000 sublimit for such events.

A public claims adjuster determined that the loss was caused by water discharge while the insurer determined that the cause of loss was raw sewage backup.  The insurer issued checks for $25,000 for the damage and plaintiff filed a lawsuit after finding that the damages far exceeded the endorsement limit.  In the lawsuit, plaintiff sought more coverage and alleged that the insurer breached its terms to provide benefits covered under the policy.

The insurer moved for summary judgment and plaintiff filed an opposition relying on the business income provision, which states that the insurer will cover the actual loss of income sustained due to damage.  The lower court ruled in favor of the insurer, finding that the custom endorsement put plaintiff on notice that the business income provision would not cover damages if the water damage coverage was only created as a result of the endorsement.  Finding that the policy terms were clear, unambiguous, and supported the insurer’s interpretation of the policy, the appellate court affirmed the lower court’s decision.

Thanks to Chelsea Rendelman for her contribution to this post.