A district court's order in favor of an insurance company that denied a New York chocolate candy maker's Hurricane Sandy-related claim was reversed by the U.S. Court of Appeals for the Second Circuit on Tuesday.

Queens-based Madelaine Chocolate Novelties claimed it suffered $40 million in property damage and $13.5 million in income and other loss related to the 2012 “superstorm.” Great Northern Insurance company refused to pay on the claim because storm surge damage was excluded from coverage in the chocolate company's policy.

The policy explicitly stated a flood exclusion provision that was the basis for Great Northern's denial of coverage. However, the policy also included a separate windstorm endorsement, as well as an anti-concurrent causation attached to it, that Madelaine argued should encompass losses caused by storm surge, a wind-driven peril.

U.S. District Judge Raymond Dearie of the Eastern District of New York, adopting a magistrate's report and recommendations, granted summary judgment to Great Northern over what the court said was the unambiguous exclusion of storm surge damage coverage from the policy.

The district court presented its reasoning in two parts, both of which arrived at the wrong conclusion, according to the panel, which was composed of Circuit Judges José Cabranes and Barrington Parker, with U.S. District Judge Kiyo Matsumoto of the Eastern District of New York.

First, the district court's reliance on nonprocedural opinions from the Second Circuit was inappropriately applied because neither explicitly added to the definition of a covered peril, unlike the Great Northern policy, where the windstorm endorsement's anti-concurrent causation clause is applied to the entirety of the policy.

Second, the district court relied on Fifth Circuit cases related to a number of insurance suits brought in the wake of Hurricane Katrina in 2007. These, too, were distinguishable from Madelaine's policy. As none of the Katrina cases featured the kind of policywide inclusion of windstorm event, coverage can't be nullified by other events at the same time, the panel found those cases to be of limited relevance.

On remand, the court ordered that the policy's windstorm endorsement clause must be assessed as potentially being in conflict with, or creating ambiguity in, the flood exclusion. Discovery may need to be allowed, the panel said, while instructing the district court of “well-established precedents requiring exclusions to be set out in 'clear and unmistakable language' and to be accorded a 'strict and narrow construction.'”

“Any ambiguities in the Policy must be construed in favor of the insured,” the panel stated.

Madelaine's legal team was led by Jones Day partner Edward Joyce. Great Northern was led by O'Melveny & Myers partner Jonathan Hacker. Neither responded to request for comment.