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It has now been over six months since Superstorm Sandy ripped through New Jersey. But the state’s businesses and their insurers continue to grapple with coverage issues. Primary among them, of course, is the flood exclusion contained in many commercial property insurance policies; causation is the key sub-issue. The threshold inquiry is whether the damage was caused exclusively caused by flooding or was the result of another contributing cause which, in the case of Sandy, could have been have been the wind or the storm surge, among others. If there are such “concurrent causes” what happens when one is a covered risk and the other is not?

There appear to be two main causation approaches that courts use when both a covered and an excluded peril contribute to the loss. One approach will find coverage when at least one of the perils is covered under the policy, regardless of whether the covered peril is the dominant cause of loss, so long as it is not de minimus. The other, which New Jersey courts have employed, will only find coverage if the covered peril was the "proximate" or "dominant" cause of the loss. A court will thus identify the predominant cause of the loss and then determine whether that cause is a covered or excluded risk. If covered, the loss will be covered. If excluded, the whole claim may be excluded or there may be an allocation of the quantum of damage caused by each peril. The insurer’s liability will be limited to the damage caused by the covered risk.

Many first-party property policies, however, contain anti-concurrent causation (“ACC”) clauses.  A typical ACC clause will provide as follows: “We do not insure for loss caused directly or indirectly by any of the following [e.g. flood, earthquake]. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.” Now, a policyholder might attempt to avoid the reach of the ACC clause by identifying specific areas of damage as being solely caused by non-excluded perils. In such a case, however, proof problems could be daunting, requiring the engagement of an engineer or other consultant. In terms of confronting the ACC clause head-on, the spectrum of arguments could include failure of the insurance contract to comport with the reasonable expectations of the insured or unenforceability as a matter of public policy. But these can be difficult arguments to make, especially in the context of commercial (as opposed to homeowner) property and business interruption claims.

Moreover, the lower courts in New Jersey have been predisposed to enforce such exclusions by insurers where they are clear and unambiguous. Thus, a policyholder that has made Sandy-related property damage or business interruption claims against policies that contain flood exclusions could see those claims precluded by the ACC clause unless a case can be made for construction against the insurer on grounds of ambiguity. Of course, the New Jersey Supreme Court has not yet directly addressed the issue, so insurers and insureds are urged to “stay tuned”.