As the Atlantic hurricane season reaches its peak in September, bringing with it rainfall and flooding, a recent New Jersey court held a sewer overflow resulting from rainfall was not caused, directly or indirectly, by a flood and therefore did not trigger a flood exclusion. This decision, and the insured’s submission of evidence to prove causation, serves as a roadmap for policyholders challenging an insurer’s overbroad application of an exclusion. In G.E.M.S. Partners LLC v. AmGUARD Ins. Co., — F.Supp. 3d —, No. CV 22-1664, 2024 WL 3568932 (D.N.J. July 29, 2024)), the New Jersey district court denied an insurer’s motion for summary judgment, holding that property damage caused by rainfall associated with a hurricane did not trigger the policy’s flood exclusion.

The insured, G.E.M.S. Partners LLC (the Insured), purchased a commercial property policy from AmGUARD Insurance Companyy (AmGUARD). In September 2021, Hurricane Ida brought heavy rainfall that overwhelmed the local infrastructure and sewer system causing water to leak from plumbing fixtures. The Insured sought coverage under a Water Back-Up and Sump Overflow Endorsement covering “damage . . . caused by . . . [w]ater . . . which backs up through or overflows or is otherwise discharged from a sewer[.]” AmGUARD denied the insured’s claim for property damage citing a flood exclusion:

THIS IS NOT FLOOD INSURANCE. We will not pay for loss or damage from water or other materials that back up or overflow from any sewer, drain or sump that itself is caused, directly or indirectly, in whole or in part, by any flood. Flood means the overflow of surface water, waves, tides, tidal waves, streams, or other bodies of water, or their spray, all whether driven by wind or not.

AmGUARD’s motion for summary judgment required the court to decide  whether overflow from the sewer system constituted a “flood” triggering the exclusion. A plumber who inspected the buildings after the storm described the water loss as a “back up” of “sewer . . . water.” In the absence of any controlling New Jersey state law cases, the G.E.M.S. court predicted “the New Jersey Supreme Court would hold that for purposes of the Flood Exclusion here, ‘flood’ means ‘the overflow of . . . a bod[y] of water,’” which is distinct from overflow from a sewer system.

In reaching this conclusion, the court first considered dictionary definitions of “flood,” which focused on the overflow of a body of water. The court then noted that “flood” was generally understood in insurance policies (citing authorities) as “overflow of a body of water” and cited New Jersey contract principles applicable to insurance policies that require policy interpretation “to keep in step with the broader consensus view as to the meaning of a given insurance contract term.”

Next, the court applied these definitions of flood to the flood exclusion itself and noted that the exclusion equated “flood” with “an overflow,” which “implies a boundary – water pushes ‘over’ it, and then ‘flow[s]’ beyond it.” The court concluded: “This is why it is natural to say that a pond or stream overflows – each is a body of water. And that is why it is less natural to say that falling rain overflows.” The court also noted that the phrase “surface water, waves, tides, tidal waves, [and] streams” referred to “bodies of water” while the definition of flood was “the overflow of . . . bodies of water.” Finally, the G.E.M.S. court considered prior New Jersey case law interpreting the phrase “surface water” as a “permanent body of water that sits on the land – like a lake or river.”

In denying AmGUARD’s motion for summary judgment, the G.E.M.S. court concluded the New Jersey Supreme Court would hold that “surface water” means overflow from an “on-the-surface body of water” and not a rain event that “backs up through or overflows or is otherwise discharged from a sewer.” The G.E.M.S decision highlights the importance of framing causation at the outset of a claim to establish coverage, as well as the importance of working with experienced coverage counsel who can assist in interpreting policy language to articulate a covered – and not excluded – cause of loss.

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Anna Hamel also contributed to this article.