SDV Insights

A recent decision by a federal court helps clear the path to coverage for property owners this hurricane season. The Court deemed one property policy’s flood exclusion inapplicable to bar coverage for water damage from backed-up drainage and overflow caused by excessive rainfall. The case, styled 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)), involved a familiar dispute between the insured and insurer following damage to covered property after a named storm’s heavy rainfall.

Here, G.E.M.S. Partners LLC (“Insured”) obtained a commercial property policy from AmGUARD Insurance Company (“AmGUARD”) to cover three neighboring buildings in Union, New Jersey. In September 2021, intense rainfall from Hurricane Ida overwhelmed the local infrastructure and sewer system, leading to water leakage from plumbing fixtures at the insured property. To secure coverage under its AmGUARD policy, the Insured wisely relied on its “Water Back-Up and Sump Overflow Endorsement” (“Back-Up/Overflow Endorsement”). Under this endorsement, AmGUARD promised to “pay for ... damage ... caused by ... water ... which backs up through or overflows or is otherwise discharged from a sewer.”¹  Indeed, a plumber that inspected the buildings following Hurricane Ida described the root cause of the water damage as a “back up” of “sewer ... water.”²

After concluding its investigation of the claim, AmGUARD issued a declination of coverage, asserting that notwithstanding the policy’s Back-Up/Overflow Endorsement, coverage for the claim was nevertheless barred by the policy’s flood exclusion (“Flood Exclusion”). AmGUARD maintained that “any backup of sewer water was caused, at least in part, by the rain that lashed Union during the hurricane and then overwhelmed the city’s drainage system.”³  The Flood Exclusion, whose exact syntax proved consequential to the District Court’s ultimate decision, stated:

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.⁴

The most material element of the Flood Exclusion was its express definition of “flood.” A plain reading of this definition, according to the District Court, implied that “flood” means “the overflow of … a bod[y] of water,” which is separate and distinct from an overflow from a sewer system, which followed Hurricane Ida. The District Court determined that an overflow from a sewer system is not a “body of water,”⁵  under the plain meaning of that phrase, thereby removing this loss from the scope of the Flood Exclusion.

Pushing back on that interpretation of “flood,” AmGUARD relied on Villamil v. Sentinel Ins. Co., Ltd., 365 F.Supp.3d 418 (D.N.J. 2018), arguing the District Court interpreted policy language that was “practically verbatim” to the Flood Exclusion and should thus come to the same conclusion here . However, the District Court distinguished the language of the flood exclusion in Villamil from the Flood Exclusion in the Insured’s policy. In the Villamil policy, “flood” was defined to “include the accumulation of surface water, ... [or the] overflow of streams or other bodies of water[.]”⁶  The court reasoned that under this more expansive definition of “flood,” at least two distinct types of activity could be classified as a “flood” for purposes of activating the flood exclusion: an "overflow of... bodies of water," and also "the accumulation of surface water,"⁷  the latter of which could include the buildup of rainwater in something like a sewer system. 

The Court explained that this more expansive definition of “flood” present in Villamil was not included in the AmGUARD policy. Therefore, the District Court ruled that an overflow of a sewer back up system, which is not a body of water, could not be classified as a “flood” such that the policy’s Flood Exclusion did not apply.

Accordingly, policyholders must take special note of the definition of “flood” in their property insurance policies. As is evident from the nuanced differences in the definitions in this case and in Villamil, not all Flood Exclusions are created equally.

For more information, please contact Kelly A. Johnson (kjohnson@sdvlaw.com) or Damian S. Barquin (dbarquin@sdvlaw.com).

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¹G.E.M.S. Partners LLC v. AmGUARD Ins. Co., — F.Supp. 3d —, , 2024 WL 3568932, at *1 (D.N.J. July 29, 2024).
²Id.
³Id.
⁴Id.
⁵Id. at *3.
⁶Villamil v. Sentinel Ins. Co., Ltd., 365 F.Supp.3d 418, 420 (D.N.J. 2018).
⁷Id. at 426-27.