- The damage caused by inundation of water in the tunnels was subject to the policies' $125 million flood sublimit;

- The corrosion of Amtrak's equipment after Amtrak pumped out the seawater was not an “ensuing loss” and, therefore, also was subject to the flood sublimit; and

- Amtrak had not shown it was entitled to coverage under the demolition and increased cost of construction (“DICC”) clause in its insurance policies.

Amtrak appealed to the Second Circuit.

Amtrak conceded that the Sandy damage fell within one policy's definition of flood because that definition explicitly included “sea surge” and “wind driven water,” but it argued that in the absence of those words, the wind-driven tidal surge caused by Sandy did not fall within the other definitions.

The Policies

The majority of the policies defined:

flood

as:

a rising and overflowing of a body of water onto normally dry land.

A minority of the policies defined it as:

[A] temporary condition of partial or complete inundation of normally dry land from (1) the overflow of inland or tidal waters outside the normal watercourse or natural boundaries; (2) the overflow, release, rising, back-up, runoff or surge of surface water; or (3) [t]he unusual or rapid accumulation or runoff of surface water from any sour[ce].

The third definition, which appeared in only one policy was:

surface water, flood waters, waves, tide or tidal waters, sea surge, tsunami, the release of water, the rising, overflowing or breaking of defenses of natural or manmade bodies of water, or wind driven water, regardless of any other cause or [e]vent contributing concurrently or in any other sequence of loss.

The ensuing loss clause of Amtrak's policy provided that:

Even if the peril of flood … is the predominant cause of loss or damage, any ensuing loss or damage not otherwise excluded herein shall not be subject to any sublimits.

The DICC clause in Amtrak's policy provided:

In the event of loss or damage under this policy that causes the enforcement of any law, ordinance, governmental directive or standard regulating the construction, repair, use, or occupancy of property, this Company shall be liable for:

(1) the cost of demolishing the undamaged property including the cost of clearing the site;

(2) the proportion that the value of the undamaged part of the property bore to the value of the entire property prior to loss;

(3) increased cost of repair or reconstruction of the damaged and undamaged property on the same or another site, limited to the cost that would have been incurred in order to comply with the minimum requirements of such law or ordinance regulating the repair or reconstruction of the damaged property on the same site. . . . 

The Second Circuit first ruled that the inundation of seawater resulting from Sandy's storm surge was a “flood” within the meaning of all three of the policies' definitions of “flood.”

It said that the first two definitions of “flood” were “sufficiently broad” to include an inundation of seawater driven by storm surge or a wind storm under their plain meaning, and the third definition explicitly included “sea surge” and “wind driven water” in its definition of flood.

Thus, the circuit court held, damage in Amtrak's tunnels was subject to the $125 million flood sublimit, and it affirmed the district court's grant of summary judgment for the insurers on this issue.

The Second Circuit then addressed the district court's decision regarding the ensuing loss clause in Amtrak's policy and Amtrak's contention that the corrosion of its metal equipment had been caused by a “chloride attack” arising from the combination of seawater residue with oxygen in the air and, thus, was an “ensuing loss” that was not subject to the flood sublimit. The circuit court was not persuaded by Amtrak's argument that the “chloride attack” was a covered peril separate from the flood because the accelerated corrosion began only after Amtrak had pumped the seawater out of the tunnels, meaning that the corrosion was not contemporaneous with the flood.

It found that Amtrak's proposed interpretation of the ensuing loss clause was so broad that it “would contravene the [flood sublimit's] purpose, as expressed in unambiguous language.” In the circuit court's view, the corrosion of Amtrak's metal equipment could “not meaningfully be separated from water damage” that was plainly subject to the flood sublimit, nor could it be attributed to a distinct “covered peril” arising from the original, sublimited peril (the flood).

Thus, it ruled, the corrosion resulting from the “chloride attack” after the flood was not an “ensuing loss.” Damage due to that corrosion also was subject to the $125 million flood sublimit, the circuit court held.

The Second Circuit reached a somewhat different result with respect to the district court's decision regarding the policy's DICC clause. The circuit court decided that the district court had erred by prematurely granting summary judgment for the insurers on the DICC clause issue by holding that the flood had not caused the enforcement of any law and that Amtrak had not shown that such enforcement was likely in the future.

According to the Second Circuit, because Amtrak had not yet submitted its repair plans to the Federal Railroad Administration (“FRA”), it did not yet know what changes to undamaged portions of the tunnels the FRA might require it to make. Moreover, the circuit court pointed out, regulations accompanying the Americans with Disabilities Act (“ADA”) could mandate certain repairs to undamaged portions of the tunnels. A directive from the FRA or a requirement of the ADA might obligate Amtrak to make changes to undamaged portions of the tunnels in the future, the circuit court noted.

In the event that the FRA were to require Amtrak to replace undamaged portions of its tunnels – and in the event a covered peril caused the FRA to issue such a directive – Amtrak should be able to file a claim with its insurers seeking DICC coverage, the circuit court ruled. Therefore, it vacated the district court's ruling with respect to the DICC clause.

The case is National Railroad Passenger Corp. v. Aspen Specialty Ins. Co., No. 15-2358-cv (2d Cir. Aug. 31, 2016). Attorneys involved include: For appellant: PAUL SMITH, Jenner & Block, LLP, Washington, DC (Rhonda D. Orin, Daniel J. Healy, Marshall Gilinsky, Anderson Kill, LLP, Washington, DC; Jessica Ring Amunson, Matthew L. Jacobs, Joshua M. Parker, Jenner & Block LLP, Washington, DC; Caroline M. DeCell, Jenner & Block, LLP, New York, NY, on the brief); for appellees: DOUGLAS HALLWARD-DRIEMEIER, Ropes & Gray LLP, Washington, DC (Matthew M. Burke, Ropes & Gray LLP, Boston, MA, on the brief); COSTANTINO SURIANO, Mound Cotton Wollan & Greengrass LLP.

Learn more: Amtrak's Stunning Superstorm Sandy Setback: The Court's Rationale.