As we reported in March the issue of whether Named Storm deductibles apply will likely be the subject of Sandy litigation. As a reminder, many state insurance departments issued bulletins indicating that insurance companies should not impose hurricane deductibles on homeowners, mainly because the classification of Sandy shifted from a hurricane to a post-tropical storm as it traveled the East Coast. The bulletins expressly refer to homeowners policies and do not reference commercial lines. Many insurance policies, however, contain “named storm” deductibles rather than hurricane deductibles, which apply when damage is caused by a tropical storm or hurricane that is named by the U.S. National Weather Service or other government authority. We have seen one insurer’s motion to dismiss based on a named storm deductible exceeding the value of the loss denied by the District of New Jersey.
Recently, the federal district court, Central District of California denied the insurer’s motion for summary judgment based on a similar argument, i.e., that the claimed loss was less than the Named Storm deductible. ARE-East River Science Park, LLC v. Lexington Ins. Co., (C.D. Cal. Mar. 27, 2014). In ARE, the plaintiff owned the Alexandria Center for Life Science park located on the East River in Manhattan, which was damaged as a result of Sandy. The policy at issue provided that one of the applicable flood deductibles would be
“5% per unit of insurance involved in loss or damage, subject to a minimum of $100,000 [in] any one occurrence with respect to Named Storms (a storm that has been declared by the National Weather Service to be a Hurricane, Typhoon, Tropical Cyclone or Tropical Storm.”
The term “occurrence” was defined as “any one loss . . . arising out of one event. When the term applies to loss . . . from the perils of . . . hurricane, windstorm, hail, flood . . . one event shall be construed to be all losses arising during a continuous 72 hour period.”
Lexington argued that Sandy was a Named Storm, not only when it was a hurricane, but also when it was a tropical storm and a post-tropical cyclone. Plaintiff argued that the policy language requires the application of the appropriate deductible at the time of the loss and that its damages were sustained after Sandy became a post-tropical cyclone, when the storm was a “convergence of an unnamed Nor’easter, unusual high tides, unrelated to weather conditions, and a ‘post-tropical cyclone.’”
The court first determined that California law controlled the dispute, which is an interesting choice of law analysis that will not be discussed here. Importantly, though, California adheres to the efficient proximate cause doctrine, which is defined as the “cause that is responsible for setting any and all other causes in motion.” Arguably, New York’s efficient proximate cause analysis may have resulted in a different conclusion under Album Realty Corp. v. American Home Assurance Company, 80 N.Y. 2d 1008 (1992). In any event, the ARE court denied the insurer’s motion for summary judgment, determining that there was an issue of fact as to whether the “storm surge began before the storm’s reclassification” or that the “cause was the post-tropical cyclone.”
Because this case was decided under California law, it is unclear what impact it will have on the majority of Sandy litigation cases that will undoubtedly be decided under New York (or New Jersey) causation theories.