Insurance Policy Flood Damage Cap Applies to All Flood Damage, Even Categories of Damage With a Separate, Higher Cap

On June 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in El-Ad 250 W. LLC v. Zurich American Insurance Co., 2014 NY Slip Op. 24173, ruling that an insurance policy's coverage limit for losses "arising during" a flood applied not only to property damage claims but also to "downstream" financial losses resulting from a flood.

In El-Ad, the plaintiff real estate developer made a claim under a Builders Risk Insurance Policy for delay-in-completion losses after a construction project was delayed by damage caused by Hurricane Sandy. The policy had a special limit for flood claims, which provided: "The maximum amount [Zurich] will pay for loss or damage in any one OCCURRENCE, and/or in the aggregate annually for loss or damage from all OCCURRENCES, shall not exceed [$5 million] by the period of FLOOD." "As respects the peril of FLOOD," the policy defined as a covered "OCCURRENCE" "all loss or damages arising during" a flood.

The plaintiff argued that the flood limit applied only to claims for property damage, not other more remote harms, such as delay-in-completion losses. Justice Kornreich rejected this narrow interpretation of the flood limit, explaining:

[A] loss that would not have occurred but for a flood is subject to a $5 million annual aggregate limit, without regard to the type of loss suffered since the expression "all losses or damages arising during [a flood]" clearly does not exclude non-physical losses. Moreover, the delay in completion endorsement clearly and unambiguously states that it does not alter the sublimits in the Policy. Nor does any portion of the endorsement state that the delay in completion's $7 million sublimit is not subject to the flood loss $5 million aggregate limit, just as all of the Policy's other sublimits are so limited.

Finally, it should be noted that it is of no moment that El-Ad paid an extra premium for delay in completion coverage. Had El-Ad not paid this extra amount, it would not have been entitled to such coverage under any circumstances. To be sure, there are myriad possible causes of delay in completion losses. If the cause is something other than a flood (i.e. a terrorist attack, which has a $108 million sublimit), the full $7 million would have been available. However, where, as here, the cause of the loss has its own, lower aggregate limit, that lower limit applies.

Special flood exclusions, caps and deductibles have figured prominently in insurance coverage litigation arising from Hurricane Sandy. This decision illustrates that such provisions are enforced even if they reduce (or eliminate) the insured's recovery under the policy.