New Jersey Appellate Division Affirms Summary Judgment for Insurer in Coverage Dispute by Landlord Seeking Additional Coverage for Property Damage Caused by a Sewer Backup in A Tenant’s Restaurant

In Salih v. Ohio Security Insurance Co., the New Jersey Superior Court, Appellate Division, considered a coverage dispute between a landlord and its insurer involving a demand from the landlord for additional coverage under the lost business income provision of the policy for property damage caused by a sewage backup. The court affirmed the trial court’s award of summary judgment to the insurer, holding that the unambiguous language of the business income provision of the policy and a custom endorsement did not provide additional coverage over the sublimit set forth in the endorsement.

The landlord argued that the business income provision provided coverage for loss of business income sustained as a result of a necessary suspension of operations during the period of restoration where the suspension was caused by a covered cause of loss. The cause of loss form excluded coverage for “water that backs up or overflows from a sewer, drain, or sump,” but extended coverage for water damage as a result of “an accidental discharge or leakage of water … as the direct result of a breaking apart of cracking of a plumbing, heating, air conditioning, or other system or appliance … that is located on the described premises and contains water or steam.” The landlord contended that because the damage resulted from an “accidental discharge” of water from a blockage in the plumbing system within the property, rather than a sewer back-up originating outside of the property, the sublimit in the custom endorsement did not apply, and the landlord was entitled to additional coverage for lost business income.

The Appellate Division disagreed with the landlord’s position. It analyzed the language of the policy and custom endorsement The policy originally stated that “[defendant] will not pay for loss or damage caused directly or indirectly” by “water that backs up or overflows from a sewer, drain, or sump.” The Water Exclusion Endorsement specifically excluded coverage for “[w]ater that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump, or related equipment.” However, this exclusionary language was “deleted and replaced” by the custom endorsement, which added limited water damage coverage for sewer backups. The court held that the endorsement clearly and unambiguously extended water damage coverage for sewer backups subject to a specific sublimit, and excluded loss for business income or extra expenses. The Court therefore affirmed the trial court’s order granting summary judgment for the insurer and found that the insured was not entitled to any additional coverage over the sublimit set forth in the endorsement.

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