N.J. Transit Corp. v. Certain Underwriters At Lloyd's London

• Decision Date: 18 November 2019
• Docket Number: DOCKET NOS. A-1026-17T1,A-1027-17T1
• Citation: 461 N.J.Super. 440,221 A.3d 1180
• Parties: NEW JERSEY TRANSIT CORPORATION, Plaintiff-Respondent, v. CERTAIN UNDERWRITERS AT LLOYD'S LONDON, Maiden Specialty Insurance Company, Rsui Indemnity Company, and Westport Insurance Corporation, Defendants-Appellants, and Torus Specialty Insurance Company, Defendant-Respondent, and Hudson Specialty Insurance Company and Ironshore Specialty Insurance Company, Defendants. New Jersey Transit Corporation, Plaintiff-Respondent, v. Certain Underwriters at Lloyd's London, Maiden Specialty Insurance Company, RSUI Indemnity Company, and Westport Insurance Corporation, Defendants-Respondents, and Torus Specialty Insurance Company, Defendant-Appellant, Hudson Specialty Insurance Company, and Ironshore Specialty Insurance Company, Defendants.
• Court: New Jersey Superior Court — Appellate Division

461 N.J.Super. 440

221 A.3d 1180

NEW JERSEY TRANSIT CORPORATION, Plaintiff-Respondent,

v.CERTAIN UNDERWRITERS AT LLOYD'S LONDON, Maiden Specialty Insurance Company, Rsui Indemnity Company, and Westport Insurance Corporation, Defendants-Appellants,andTorus Specialty Insurance Company, Defendant-Respondent,

and

Hudson Specialty Insurance Company and Ironshore Specialty Insurance Company, Defendants.

New Jersey Transit Corporation, Plaintiff-Respondent,

v.Certain Underwriters at Lloyd's London, Maiden Specialty Insurance Company, RSUI Indemnity Company, and Westport Insurance Corporation, Defendants-Respondents,andTorus Specialty Insurance Company, Defendant-Appellant,Hudson Specialty Insurance Company, and Ironshore Specialty Insurance Company, Defendants.

DOCKET NOS. A-1026-17T1

A-1027-17T1

Superior Court of New Jersey, Appellate Division.

Argued October 8, 2019

Decided November 18, 2019

Shawn L. Kelly and Michael J. Smith argued the cause for appellant StarStone Specialty Insurance Company f/k/a Torus Specialty Insurance Company (Dentons US, LLP, and Stewart Smith, attorneys; Shawn L. Kelly, Jonathan David Henry, Short Hills, Michael J. Smith, and Bryan W. Petrilla, West Conshohocken, of counsel and on the briefs).

Kenneth H. Frenchman and Marc T. Ladd (McKool Smith, PC) of the New York bar, admitted pro hac vice, argued the cause for respondent New Jersey Transit Corp. (McKool Smith, PC, attorneys; Robin L. Cohen, Kenneth H. Frenchman, Marc T. Ladd, and Alexander M. Sugzda, New York, (McKool Smith, PC) of the New York bar, admitted pro hac vice, on the brief).

Before Judges Yannotti, Currier and Firko.

The opinion of the court was delivered by

YANNOTTI, P.J.A.D.

New Jersey Transit Corporation (NJT) brought this action seeking a declaration regarding the coverage provided under its property insurance program for water damage that occurred during Superstorm Sandy. The trial court found that the $100 million flood sublimit in the policies did not apply to NJT's claim, and NJT was entitled to coverage up to the full $400 million policy limits for the Sandy-related water damage. The trial court also found that defendant insurers had not submitted sufficient evidence to support their claims for reformation of the policies. Accordingly, the court entered an order dated September 18, 2017, granting summary judgment in favor of NJT, and denying the insurers' motions for summary judgment.

In A-1026-17, Certain Underwriters At Lloyd's, London (Lloyd's), Maiden Specialty Insurance Company (Maiden), RSUI Indemnity Company (RSUI), Specialty Insurance Company (Specialty), and Westport Insurance Corporation (Westport) appeal from the September 18, 2017 order. In A-1027-17, Torus Specialty Insurance Company (Torus) also appeals from the September 18, 2017 order. We address both appeals in this opinion.¹ For the reasons that follow, we affirm.

I.

In July 2012, NJT, through its insurance broker, Marsh USA Inc. (Marsh), secured coverage from eleven insurers in a multi-layered property insurance policy program for the policy period from July 1, 2012, to July 1, 2013. The policies insured against "all risks" and provided coverage proportionally in four layers. Lexington Insurance Company (Lexington) provided coverage in the primary layer and was responsible for the first $50 million of insurance.

After the primary layer was exhausted, the policies provided three layers of excess coverage. The second layer provided coverage up to $100 million, and the third layer provided an additional $175 million. The fourth layer provided coverage of $125 million, resulting in a property insurance program with $400 million of coverage.

Certain Insurers and Torus provided excess coverage in the third or fourth excess layers, or both. Hudson Specialty Insurance Company (Hudson), Ironshore Specialty Insurance Company (Ironshore), and Arch Specialty Insurance Company (Arch) also provided excess coverage. The policies of all participating insurers included a standard policy form and separate endorsements, some of which were included in all policies, and some which were unique to specific insurers.

The policies cover all perils and damage to NJT's property unless specifically excluded. In addition, section two of the standard policy form, entitled "limit of liability," sets forth twenty-seven categories of losses for which coverage is subject to "100% per occurrence ground-up sublimits." The terms "sublimit" and "ground-up" are not defined in the policies, but these terms are commonly used in the insurance industry.

"A ‘sublimit’ is a limit within the aggregate limit for a certain type of risk ...." David Navetta, The New Privacy Insurance Coverage, 3 No. 1. ABA SciTech Law 14, 17, n.3 (2006). When a sublimit applies, the loss is covered only up to the amount of the sublimit rather than up to the amount of the aggregate limit. Ibid. Furthermore, in a "ground-up" multi-layered policy program, "a given layer of coverage is not implicated until the layer beneath it is completely exhausted." New Hampshire Ins. v. Clearwater Ins., 129 A.D.3d 99, 106, 7 N.Y.S.3d 38 (N.Y. App. Div. 2015) (quoting North River Ins. v. ACE Am. Reinsurance Co., 361 F.3d 134, 138 n.6 (2d Cir. 2004) ).

The flood sublimit in section two of the standard policy form limits liability for "losses caused by flood" to $100 million "per occurrence." In Certain Insurers' policies and the Torus policy, "flood" is defined as:

[A] temporary condition of partial or complete inundation of normally dry land from:

1. The overflow of inland or tidal waters outside the normal watercourse or natural boundaries[;]

2. The overflow, release, rising, back-up, runoff or surge of surface water; or

3. The unusual or rapid accumulation or runoff of surface water from any source.

[S]uch ... flood shall be deemed to be a single occurrence within the meaning of this policy.

The policies also state that "[e]ach loss by ... flood shall constitute a single loss[,]" if:

(2) ... any flood occurs within a period of the continued rising or overflow of any river(s) or stream(s) and the substance of same within the banks of such river(s) or stream(s) or the unusual and rapid accumulation or runoff of surface waters; or

(3) ... any flood results from any tsunami, tidal wave, or seismic sea waves or series thereof caused by any one disturbance.

The term "occurrence," which appears in section two of the standard policy form, is defined in the Occurrence Limit of Liability Endorsement (OLLE). The OLLE states:

The limit of liability of Insurance shown on the face of this policy, or endorsed on to this policy, is the total limit of the Company's liability applicable to each occurrence, as hereafter defined.

Notwithstanding any other terms and conditions of this policy to the contrary, in no event shall the liability of the company exceed this limit or amount irrespective of the number of locations involved.

The term "occurrence" shall mean any one loss, disaster, casualty or series of losses, disasters, or casualties, arising out of one event. When the term applies to loss or losses from the perils of tornado, cyclone, hurricane, windstorm, hail, flood, earthquake, volcanic eruption, riot, riot attending a strike, civil commotion, and vandalism and malicious mischief one event shall be construed to be all losses arising during a continuous period of 72 hours. When filing proof of loss, the insured may elect the moment at which the 72 hour period shall be deemed to have commenced, which shall not be earlier than the first loss to the covered property occurs.

Section fourteen of Certain Insurers' policies defines the term "[n]amed windstorm." This provision was added to the policies that were to be in effect from July 1, 2012, to July 1, 2013. It states:

"Named Windstorm" shall mean wind or wind driven water, storm surge and flood associated with, or which occurs in conjunction with, a storm or weather disturbance which is named by the National Weather Service or any other recognized meteorological authority.

Such storm or weather disturbance shall be considered to be a Named Windstorm until the time such storm or weather disturbance has been downgraded, meaning that the storm or weather condition is no longer considered by the U.S. National Weather Service or any other recognized meteorological authority to be a hurricane, typhoon, tropical storm or cyclone.

Endorsement four of the Torus policy pertains to "named windstorm" and states:

Named windstorm shall mean direct action of wind including ensuing storm surge when such wind/storm surge is associated with, or occurs in conjunction with a storm or weather disturbance which is named by the National Oceanic and Atmospheric Administration's (NOAA) National Hurricane Center or similar body until sustained wind speeds drop below the parameter for naming storms.

Storm surge is defined as water driven inland from coastal waters by high winds and low atmospheric pressure.

On October 29, 2012, Superstorm Sandy struck New Jersey, causing significant damage to NJT's properties. After the storm, NJT promptly notified Marsh and the insurers of its losses. NJT's employees, Marsh, and loss adjuster York Risk Services Group, Inc. (York) arranged for the inspection of the damaged properties and a valuation of the equipment that had to be repaired or replaced. Thereafter, Marsh sought a determination as to the amount of coverage provided for the Sandy-related water damage to NJT's properties.

In April 2013, Terry S. Lubin, Executive General Adjuster for York, wrote NJT on behalf of Certain Insurers, Torus, and other excess carriers. Lubin stated that NJT's claimed losses for water damage were limited by the $100 million flood sublimit in the policies, and the excess carriers would pay no more than $50 million in addition to the first-layer coverage provided by Lexington.

Marsh later advised York that NJT disagreed with the excess insurers' interpretation of the policies. Marsh explained that none of the sublimits in the...