In National Railroad Passenger Corp. v. Aspen Specialty Ins. Co., 2016 U.S. App. LEXIS 16074 (2d. Cir. Aug. 31, 2016), Amtrak sought the entire $675 million of available coverage from a number of its insurers for damages incurred as a result of Superstorm Sandy. Most of Amtrak’s damages resulted from flooding of tunnels under the East and Hudson Rivers. The trial court granted summary judgment for the insurers finding that the damages caused by seawater entering the tunnels was subject to the policies’ $125 million flood sublimit, that corrosion of equipment that occurred after the water was pumped out was not an “ensuing loss,” and that Amtrak failed to establish that it was entitled to coverage under the Demolition and Increased Cost of Construction (“DICC”) provision. National Railroad Passenger Corp. v. Arch Specialty Ins. Co., 124 F. Supp. 3d 264 (S.D.N.Y. 2015). Amtrak appealed.
The Second Circuit held that even though there were three definitions of flood in the applicable policies, the inundation of seawater in the tunnels was a “flood” within the meaning of all three definitions. In reaching this conclusion, the court noted that the fact that there were three different definitions of the term “flood” in the policies “did not render the term ambiguous.”
The court then analyzed the ensuing loss provision, which stated that “Even if the peril of flood . . . is the predominant cause of loss or damage, any ensuing loss or damage not otherwise excluded herein shall not be subject to any sublimits.” Amtrak argued that the corrosion was a “chloride attack” that occurred after the flood waters had been pumped out of the tunnels, and because the corrosion did not occur contemporaneously with the flooding, the corrosion was an ensuing loss. The Second Circuit rejected this argument, finding that Amtrak’s interpretation of the ensuing loss provision was “so broad . . . that it would contravene the flood limit’s purpose,” and that the corrosion could not be “meaningfully separated from water damage that is plainly subject to the flood sublimit.”
The court reversed the trial court’s grant of summary judgment to the insurers with respect to the DICC clause. The DICC clause is typical of many property policies, which provides in relevant part, “In the event of loss or damage . . . that causes the enforcement of any law [or] ordinance . . . regulating the construction, repair, use or occupancy of the property,” the insurer shall be liable for “the cost of demolishing the undamaged property,” and “increased costs of repair or reconstruction of the damaged and undamaged property . . . limited to the cost that would have been incurred in order to comply with the minimum requirements of such law or ordinance regulating the repair or reconstruction of the damaged property . . . .” The lower court determined that flooding had not caused the enforcement of any law, and therefore granted summary judgment to the insurer on this issue. The Second Circuit held that the lower court’s decision was premature because the DICC clause “does not have a time limit,” and the insured should not be precluded from bringing suit against the carrier if the Federal Railroad Administration or requirements of the Americans with Disabilities Act required Amtrak to make changes to undamaged portions of the tunnels at some time in the future.
This Second Circuit decision reinforces the concept that ambiguity is not created by the mere fact that an insurance policy incorporates different definitions of a term. In addition, the holding on ensuing loss follows the majority of jurisdictions finding that an ensuing loss provision should not be interpreted to swallow the associated exclusion.
(Although we have litigated a number of Storm Sandy cases involving the types of issues presented in this case, Robinson & Cole LLP was not counsel in this case.)