United States District Court, District of New Jersey
February 10, 1999
ASSURANCE COMPANY OF AMERICA, INC., A NEW YORK CORPORATION, PLAINTIFF,
JAY-MAR, INC., D/B/A ABSECON HOME CENTER, A NEW JERSEY CORPORATION, DEFENDANT/THIRD-PARTY PLAINTIFF, V. JOHNSTON INSURANCE AGENCY, INC., THIRD-PARTY DEFENDANT.
The opinion of the court was delivered by: Brotman, District Judge.
Presently before the Court is the motion of plaintiff Assurance
Company of America, Inc. ("Assurance") and the cross-motion of
third-party defendant Johnston Insurance Agency, Inc.
("Johnston") for summary judgment pursuant to Fed. R.Civ.P. 56.
I. FACTUAL AND PROCEDURAL BACKGROUND
In 1990, Jay-Mar, Inc. ("Jay-Mar"), d/b/a Absecon Home Center,
with its principals Jay and Marilyn Weisman, purchased the
premises located at 401 White Horse Pike and opened a True Value
Hardware Store. The premises is located at the intersection of
Route 30 (Whitehorse
Pike) and Route 9 in Absecon, New Jersey. Through the insurance
brokering services of Johnston Insurance Agency, Inc.
("Johnston"), Jay-Mar purchased an insurance policy from
Assurance effective from January 27, 1997 through January 27,
Due to heavy rains on August 21, 1997, water entered the
Jay-Mar premises from the ground level, causing substantial
damage. According to Jay-Mar's liability expert, Charles J.
Penza, P.E., the rainstorm which damaged the Jay-Mar premises was
classified as twice the magnitude of a "one in a hundred year"
Jay-Mar reported its loss to Johnston, thereby requesting
coverage from Assurance. Jay-Mar believed that the damage its
property sustained was due to the backup or overflow of rainwater
from nearby storm sewers, a cause of loss covered by its
insurance policy. Believing that the damage was caused by surface
water flooding, a cause of loss not covered by Jay-Mar's
insurance policy, Assurance denied Jay-Mar's claim for coverage.
On September 30, 1997, Assurance filed this action against
Jay-Mar seeking a declaratory judgment that it was not liable for
Jay-Mar's loss. On December 18, 1997, Jay-Mar filed an answer, a
counterclaim against Assurance, and a third-party complaint
against Johnston. On February 1, 1999, Assurance filed a motion
for summary judgment and Johnston filed a cross-motion for
A. STANDARD FOR SUMMARY JUDGMENT
The standard for granting a motion for summary judgment is a
stringent one, but it is not insurmountable. Fed.R.Civ.P. 56
provides that summary judgment may be granted only when materials
of record "show that there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a
matter of law." Serbin v. Bora Corp., 96 F.3d 66, 69 n. 2 (3d
Cir. 1996). In deciding whether there is a disputed issue of
material fact, the court must grant all reasonable inferences
from the evidence to the non-moving party. The threshold inquiry
is whether there are "any genuine factual issues that properly
can be resolved only by a finder of fact because they may
reasonably be resolved in favor of either party." Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91
L.Ed.2d 202 (1986).
Supreme Court decisions mandate that a summary judgment motion
must be granted unless the party opposing the motion "provides
evidence `such that a reasonable jury could return a verdict for
the nonmoving party.'" Lawrence v. National Westminster Bank New
Jersey, 98 F.3d 61, 65 (3d Cir. 1996) (quoting Anderson, 477
U.S. at 248, 106 S.Ct. 2505). Once the moving party has carried
its burden of establishing the absence of a genuine issue of
material fact, "its opponent must do more than simply show that
there is some metaphysical doubt as to material facts."
Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The non-moving
party must "make a showing sufficient to establish the existence
of [every] element essential to that party's case, and on which
that party will bear the burden of proof at trial." Serbin, 96
F.3d at 69 n. 2 (quoting Celotex Corp. v. Catrett,
477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)); see also
Quiroga v. Hasbro, Inc., 934 F.2d 497, 500 (3d Cir. 1991)
(declaring that non-movant may not "rest upon mere allegations,
general denials, or . . . vague statements"). Thus, if the
non-movant's evidence is merely "colorable" or is "not
significantly probative," the court may grant summary judgment.
Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505.
B. ASSURANCE'S LIABILITY FOR JAY-MAR'S LOSS
1. The Insurance Policy
The insurance policy at issue in this case contains the
following exclusion provisions:
II. COVERED CAUSES OF LOSS
RISKS OF DIRECT PHYSICAL LOSS OR DAMAGE unless the
loss or damage is excluded or limited as described
1. We will not pay for loss or damage caused
directly or indirectly by any of the following.
Such loss or damage is excluded regardless of any
other cause or event that contributes
concurrently or in any sequence to the loss.
g. Water -
(1)(a) Flood, surface water, waves, tides, tidal
waves, overflow of any body of water, or their
spray, all whether driven by wind or not;
(d) Water that backs up or overflows from a
sewer, drain or sump but only if Back-Up of
Sewers and Drains is show as "Excluded" in the
Lisovicz Cert., Exh. C. Both parties agree that Back-Up of Sewers
and Drains is not excluded in the policy's Declarations.
Therefore, loss caused by such backup is covered by the policy.
2. Interpreting the Insurance Policy
New Jersey courts adhere to the following guidelines when
interpreting insurance policies:
In interpreting insurance contracts the basic rule
is to determine the intention of the parties from the
language of the policy, giving effect to all of its
parts so as to accord a reasonable meaning to its
terms. When the terms of the policy are clear and
unambiguous the court must enforce the contract as it
finds it; the court cannot make a better contract for
the parties than they themselves made. Rules of
construction favoring the insured cannot be employed
to disregard the clear intent of the policy language.
However when an ambiguity exists, it must be
resolved against the insurer. If the controlling
language will support two meanings, one favorable
to the insurer and the other to the insured, the
interpretation favoring coverage should be applied.
Accordingly, such contracts are to be interpreted
in a manner that recognizes the reasonable
expectation of the insured. Coverage clauses should
be interpreted liberally, whereas those of
exclusion should be strictly construed. Even if a
particular phrase or term is capable of being
interpreted in the manner sought by the insurer,
where another interpretation favorable to the
insured reasonably can be made that construction
must be applied.
Stone v. Royal Ins. Co., 211 N.J. Super. 246
511 A.2d 717
, 718-19 (App. Div. 1986) (citations and internal quotation
marks omitted). Assurance claims that the policy it issued
Jay-Mar is unambiguous: it does not cover loss due to flood or
surface water regardless of whether the flooding and surface
water occur concurrently or sequentially with a covered cause of
loss like sewer or drain backup. Jay-Mar does not appear to
dispute the contract's clarity.*fn1
Instead, it objects to
enforcement of the contract on public policy grounds and disputes
the actual cause of its loss.
3. Public Policy Objection to the Insurance Policy's
Jay-Mar's public policy objection arises out of the language
where an included cause of loss*fn2 occurs "concurrently or in
any sequence to the [excluded cause of] loss." Although the New
Jersey Supreme Court has not yet determined whether the
occurrence of an excluded cause of loss simultaneously or
sequentially with an included cause of loss bars an insured from
recovery, New Jersey's lower courts have addressed both
situations. In Brindley v. Firemen's Ins. Co. of Newark, the
court determined that "[l]oss due to the effect of causes both
within and outside the coverage, operating conjointly, is
generally considered not recoverable." Brindley v. Firemen's
Ins. Co. of Newark, 35 N.J. Super. 1, 5, 113 A.2d 53, 56
(App. Div. 1955). Only when a factfinder can determine "without
resort to sheer conjecture" which part of the damage was due to
the included cause of loss can the insured recover. Id.; see
also Newman v. Great Am. Ins. Co., 86 N.J. Super. 391, 403,
207 A.2d 167, 175 (App. Div. 1965) (following Brindley). Where
included and excluded causes of loss occur concurrently, it
appears that New Jersey's lower courts have not been predisposed
to find coverage. The Court cannot assume that New Jersey's
highest court would find otherwise. Therefore, the Court rejects
Jay-Mar's argument that the part of the insurance policy
provision excluding from coverage losses occasioned by
simultaneously occurring included and excluded causes violates
the state's public policy.
The part of the insurance policy provision which refers to
sequential causes of loss gives the Court more pause. As with
concurrent causes of loss, the New Jersey Supreme Court has not
addressed this issue. New Jersey's lower courts, however, have
determined that an insured deserves coverage where the included
cause of loss is either the first or last step in the chain of
causation which leads to the loss. See Franklin Packaging Co. v.
Cal. Union Ins. Co., 171 N.J. Super. 188, 191, 408 A.2d 448, 449
(App. Div. 1979) (quoting 5 Appleman, Insurance Law and Practice §
3083 at 309-311 (1970) for the proposition that "recovery may be
allowed where the insured risk was the last step in the chain of
causation set in motion by an uninsured peril, or [w]here the
insured risk itself set into operation a chain of causation in
which the last step may have been an excepted risk."); Stone v.
Royal Ins. Co., 211 N.J. Super. 246, 251, 511 A.2d 717, 720
(App. Div. 1986) (following Franklin Packaging); Ariston
Airline & Catering Supply Co., Inc. v. Forbes,
211 N.J. Super. 472, 487, 511 A.2d 1278, 1286-87 (Law Div. 1986) (following
Franklin Packaging). This is broader coverage than that
provided by the courts in a number of other states. Those courts
have held that where the insured risk is the first step in the
chain of causation which leads to a loss, the loss is covered;
this is known as the "efficient proximate cause" doctrine. See
Schroeder v. State Farm Fire and Cas. Co., 770 F. Supp. 558, 561
(D.Nev. 1991) (explaining the "efficient proximate clause"
doctrine). Despite the New Jersey lower courts' favorable
treatment of insureds who suffer sequential causes of loss, no
New Jersey court has addressed whether an exclusion provision
dealing with sequential causes of loss like the one at issue in
the present case violates the state's public policy. Therefore,
the Court must look outside this jurisdiction for guidance.
Sequential loss provisions have been held to violate public
policy — specifically, the "efficient proximate cause" doctrine —
in both California and Washington. See Howell v. State Farm Fire
and Cas. Co., 218 Cal.App.3d 1446, 1456, 267 Cal.Rptr. 708,
714-15 (1990); Safeco Ins. Co. of Am. v. Hirschmann,
112 Wn.2d 621, 627, 773 P.2d 413, 416 (1989). The grounds on which
these courts based their decisions, however, are inapplicable to
the present case. In Howell, the California appellate
court found that it would violate the state Insurance Code to
permit a property insurer to deny coverage when an insured peril
was the "efficient proximate cause" of the loss. Howell, 218
Cal.App.3d at 1456, 267 Cal.Rptr. at 714. In Safeco, the
Washington Supreme Court based its determination on the fact that
the state's highest court had previously adopted the "efficient
proximate cause" doctrine and had also previously determined that
insurers could not circumvent the doctrine by including language
to that effect in their policies. See Safeco, 112 Wn.2d at
624, 773 P.2d at 414. In New Jersey, there is no statutory
requirement that insurers provide coverage in accordance with the
"efficient proximate cause" doctrine, nor has the New Jersey
Supreme Court adopted the doctrine and determined that insurers
cannot contract around it. These cases, therefore, do not
persuade the Court that the New Jersey Supreme Court would find a
violation of public policy where parties to an insurance contract
agree to exclude coverage for losses occasioned by a sequence of
causes, some of which are included and some of which are not.
In addition, the Court recognizes that most courts which have
addressed this issue have found that exclusionary language
designed to avoid the "efficient proximate cause" doctrine is
enforceable. See TNT Speed & Sport Center, Inc. v. Am. States
Ins. Co., 114 F.3d 731, 733 (8th Cir. 1997) (applying Missouri
law); Front Row Theatre, Inc. v. American Mfrs. Mut. Ins. Cos.,
18 F.3d 1343, 1347 (6th Cir. 1994) (applying Ohio law);
Schroeder, 770 F. Supp. at 561; State Farm Fire and Cas. Co. v.
Bongen, 925 P.2d 1042, 1045 (Alaska 1996); Millar v. State Farm
Fire and Cas. Co., 167 Ariz. 93, 97, 804 P.2d 822, 826
(Ariz.Ct.App. 1990); Kane v. Royal Ins. Co., 768 P.2d 678, 684
(Colo. 1989); Ramirez v. Am. Family Mut. Ins. Co.,
652 N.E.2d 511, 516 (Ind.Ct.App. 1995); Toumayan v. State Farm Gen. Ins.
Co., 970 S.W.2d 822, 826 (Mo.Ct.App. 1998); Kula v. State Farm
Fire and Cas. Co., 212 A.D.2d 16, 20-21, 628 N.Y.S.2d 988, 991
(1995); Alf v. State Farm Fire & Cas. Co., 850 P.2d 1272, 1277
(Utah 1993); State Farm Fire and Cas. Co. v. Paulson,
756 P.2d 764, 769 n. 2 (Wyo. 1988). Because the New Jersey Supreme Court
has not given this Court reason to believe otherwise, this Court
finds that New Jersey would follow the majority rule regarding
loss due to sequential causes: there is no violation of public
policy when parties to an insurance contract agree that there
will be no coverage for loss due to sequential causes even where
the first or the last cause is an included cause of loss.
Therefore, if Jay-Mar's loss was caused in any part by flood or
surface water, it may not recover from Assurance.
4. Factual Dispute Regarding the Cause of Jay-Mar's Loss
Not surprisingly, the parties dispute the cause of Jay-Mar's
loss. Jay-Mar argues that its loss resulted solely from the
backup of the sewers and drains. Its expert, Charles J. Penza,
P.E. of Charles J. Penza & Associates, writes that "the water
damage to [Jay-Mar's] property was the direct result of an over
capacity condition or partial blockage of drainage systems [. . .
s]ince the drainage systems were overloaded with a backup of the
storm sewer and caused the storm waters to backup and flood the
subject property." Lisovicz Cert., Exh. P at 6. Assurance argues
that flooding and surface waters were "the primary, if not sole
cause of Jay-Mar's damage." Assurance's Summary Judgment Brief at
14. Its expert, Morton H. Lerner of Douglas G. Peterson &
Associates, Inc., writes that "the flooding condition of the
interior and exterior of the Jay-Mar property occurred from the
accumulation of rainfall, limited storm water drainage disposal,
and the lack of construction of the building on an elevated
site." Lisovicz Cert., Exh. O at 11. According to Assurance's
expert, it was not the backup or overflow from the storm sewers
that caused Jay-Mar's loss but the limited rainwater disposal
sewers provided. The discrepancy between these expert reports
creates a genuine issue of material fact which must be decided by
the factfinder in this case.
For the foregoing reasons, the Court will deny both the summary
judgment motion filed by Assurance and the cross-motion filed by
Johnston. The Court will enter an appropriate order.
THIS MATTER having come before the Court on the motion of
plaintiff Assurance Company of America, Inc. ("Assurance") and
the cross-motion of third-party defendant Johnston Insurance
Agency, Inc. ("Johnston") for summary judgment pursuant to
Fed.R.Civ.P. 56; and
The Court having reviewed the submissions of the parties;
For the reasons set forth in the Court's opinion of this date;
IT IS on this 10th day of February, 1999 hereby
ORDERED that the motion of plaintiff Assurance and the
cross-motion of third-party defendant Johnston for summary
judgment are DENIED.