Last time we visited on October 8, we were gripped by the fascinating 2nd Circuit holding in National Railroad Passenger Corp. (AMTRAK) v. Aspen Specialty Ins. Co., et al, No. 15-2358-cv, ___Fed. Appx.___ (2nd Circuit September 7, 2016). Let’s keep the story going. What happened next?
As we left our Amtrak heroes and heroines, they were trying desperately to bypass the $125 million flood sub-limit sinkholes which were found on a paper trail in the all risk policies. The Railroad needed that coverage to repair the fury and damage created by that witch, Super Storm Sandy. Her powers were such that she flooded the underground rail tunnels beneath the East and Hudson Rivers, leaving detritus, corrosion and destruction in her wake. Along with a whole lotta watta. H2O that is.
The 2nd Circuit rejected Amtrak’s creative claim that the $125 million flood sub-limit in a number of policies did not apply to ensuing losses. Instead, Amtrak argued, those ensuing losses should be covered up to $675 million because the “flood” sub-limit did not apply. The All Great and Powerful 2nd Circuit denied those claims. Try again, it said.
Our plucky protagonist Amtrak did. Amtrak pointed out that there was a DICC (Demolition and Increased Cost of Coverage) clause in the primary policy which should apply here. Most commercial property policies include an Ordinance or Law Exclusion. This clause takes away coverage for loss, damage or additional expenses caused directly or indirectly by the enforcement of any ordinance or law, or requiring demolition of any property. Amtrak purchased back this coverage in the DICC clause for coverage up to $125 million.
The insurers counter attacked. They argued that the demolition clause would not apply to any tunnel replacement required by FRA or ADA regulations, nor would it cover any equipment indirectly damaged by the flood. The trial court agreed. It granted judgment summarily to the insurers.
On appeal, the 2nd Circuit vacated this ruling. The Circuit found that such holding was premature. Amtrak had not submitted its repair plans to the FRA as of yet. The DICC clause did not have a time limit. Id., slip op at 3. Thus, if the FRA did require Amtrak in the future to replace the undamaged portions of its tunnels and equipment as a tangential response to the flood and in order to meet an ordinance or law, then the DICC clause could still cover these losses even at this late date. Id.
If you are keeping a coverage score: Amtrak was down two, but now is up one.
Amtrak had one last arrow in its coverage quiver. Amtrak argued that the DICC clause for $125 million could be stacked on top of the flood sub-limit of $125 million. This meant that the separate DICC clause would add another layer of money, providing potentially up to $250 million worth of coverage for the Sandy damage and repair. The insurers counter-attacked by arguing that the clause was capped at $125 million, and that it could not be stacked. Both clauses were related to the flood, they said; thus the flood sub-limit of $125 million, and only the flood sub-limit, applied. Amtrak got it once and done.
The 2nd Circuit punted on this issue. It found that the parties had not fully briefed it. The Court then remanded the issue to the district court to determine whether the two types of coverage could be stacked. The Court also noted that this issue might be somewhat precious to the excess insurers since it is their money that would kick in beyond the $125 million primary layer.
For us count-keepers on the skirmishes: Amtrak down two, up one, and a tie. Our heroes and heroines have to trudge back to the trial court to see if they can obtain coverage beyond the $125 flood sub-limit.
TAKE AWAY RULE
I wish I could be more legally profound here. But the truth is that flood coverage is usually capped at a sum certain which is less than the total policy limits, and its coverage is usually limited by scope too. Insurers may be in the business of insuring all risks, which includes catastrophic losses like earthquakes and floods, but it simply cannot provide huge limits in this respect. Insurers, as part of their business models, need to be able to (relatively) predict their losses. This is how they set premiums. Catastrophic losses caused by Mother Nature are inherently unpredictable. To balance these competing interests insurers will cap this coverage to a sum that is manageable on payout. Or policyholders can pay more for additional coverage by endorsement. But we rarely do.
Who thinks that we are going to suffer a 500 year flood loss? Not I said the Wizard. Not I.