The Storm After the Storm

By Eric R. Brown, Esq.*

It has now been more than 18 months since Hurricane Sandy made landfall in New Jersey, but the litigation related to that storm is just getting started. With any event that brings such damage, there is always a concern that judges may look to expand the bounds of coverage in favor of insureds. The two recent cases of Beekman v. Excelsior Ins. Co., 2014 U.S. Dist. LEXIS 21864 (D. N.J. Feb. 21, 2014) and AFP 104 Corp. v. Columbia Cas. Co., 2014 U.S. Dist. LEXIS 24216 (D. N.J. Feb. 26, 2014), although limited in their scope, may suggest that expansion has begun.

The Beekman lawsuit alleges that the insurance company improperly adjusted the insured’s homeowner’s claim and misrepresented the cause, scope and costs of repairs to the home; the generic type of claims typically alleged where the insurer has paid for some but not all of the insured’s asserted damages. The lawsuit alleged breach of contract, breach of the implied covenant of good faith and fair dealing, violations of the New Jersey Consumer Fraud Act, and claims for punitive damages and attorney fees.

On an initial motion to dismiss, the court dismissed the count for good faith and fair dealing, and the claims for punitive damages and attorney fees, but permitted the Consumer Fraud Act claim to proceed. The court allowed the plaintiff to proceed with the Consumer Fraud Act claim based upon dicta from a Third Circuit decision: Weiss v. First Unum Life Ins. Co., 482 F.3d 254 (3d Cir. 2007). The Weiss case actually addressed preemption of state law claims by ERISA in a class action lawsuit involving life insurance. However, the Third Circuit had also concluded that New Jersey courts would allow consumer fraud claims to proceed where the insured alleged a scheme to defraud insureds of their benefits. Therefore, the Beekman court allowed the consumer fraud claim to proceed.

The Beekman court’s decision to allow the consumer fraud claim to proceed was a deviation from how other federal courts had interpreted Weiss in the context of lawsuits involving the handling of an individual insured’s insurance claim. Other federal courts had concluded that New Jersey does not allow an insured to pursue a consumer fraud claim arising out of the denial of insurance benefits. Those decisions indicated that an insured cannot convert a mere breach of contract claim into an extra-contractual claim simply by alleging the conduct leading to the denial was “fraudulent.”

The AFP 104 Corp. case involved the application of a “named storm” endorsement, which increased the policy’s deductible to $1 million per occurrence. The policy’s definition of “named storm” explained that a named storm “ends when the National Weather Service officially declares the named tropical storm or hurricane permanently downgraded to a tropical depression.” Because the insured’s claim was below $1 million, if the named storm endorsement applied, there was no coverage available.

The insurer filed a motion to dismiss, asserting that, because the National Weather Service never downgraded Sandy to a tropical depression, the endorsement should apply and preclude coverage. The court, however, found the argument premature. Because a motion to dismiss is based upon the allegations in the complaint, and the complaint alleged that upon landfall, Sandy was characterized as a post-tropical storm, the plaintiff had pleaded a claim sufficient to survive a motion to dismiss. Therefore, the plaintiff was allowed to proceed with its claim.

Both of these decisions seem somewhat minor as both involve initial motions to dismiss. On a motion to dismiss, the court must take the allegations as true in order to see if the plaintiff has even stated a potential cause of action that could succeed. That being said, both of these decisions allow claims to proceed that have no basis, forcing insurers to face needless increased costs and potential risks.

The consumer fraud claim in Beekman potentially permits treble damages and attorneys’ fees that otherwise are not recoverable in a first-party insurance claim. By allowing that claim to proceed past an initial dispositive motion, the costs of litigation the potential exposure are increased, to the point where it may make a perfectly legitimate coverage dispute untenable from an insurer’s cost-of-litigation perspective.

Meanwhile, the AFP 104 Corp. decision allows the insured to create a factual dispute on an issue of which the court should have taken judicial notice. The National Weather Service’s treatment of Sandy as a named storm was not an issue that should have been subject to a factual dispute. If the insured had alleged that the sky was green, the court could have taken judicial notice to the contrary. The National Weather Service’s characterization of the storm is a matter of public record. By permitting the plaintiff’s factual allegation to control that issue, the court allowed litigation costs to be driven up over something that should not have been the subject of a difference of opinion.

In each of these cases, the courts have allowed claims that may not have been permitted to survive if they were not associated with such a devastating storm. We anticipate many more issues relating to Hurricane Sandy, including issues involving concurrent flood and wind causation, flooding related to the backup of sewers and drains, and business income loss due to power outages will soon arise. We need to be mindful of how the courts are interpreting other storm-related issues because, at this point, we are at the very beginning of the storm after the storm.

*Eric is a shareholder in our Cherry Hill, New Jersey office who can be reached at 856.414.6014 or erbrown@mdwcg.com.

Defense Digest, Vol. 20, No. 2, June 2014

Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Copyright © 2014 Marshall Dennehey Warner Coleman & Goggin, all rights reserved. This article may not be reprinted without the express written permission of our firm.