Broken Water Main Damage: Flood or Not Flood Under Homeowner’s Insurance Policy?

Paul LaSalle | Property Insurance Coverage Law Blog | May 9, 2019

In a recent court opinion,1 the New Jersey Appellate Division interpreted a homeowner’s insurance policy’s water damage exclusion and determined whether damage from a broken municipal water main under a public street was covered under the policy. In that case, a homeowner brought an action against his insurer for breach of contract after the insurer disclaimed coverage on the basis that damage to his real and personal property resulting from a broken water main was excluded under the policy as flood, surface and ground water intrusion.

The homeowner’s insurance policy at issue in that case provided all risk coverage for damage to the dwelling and other structures and named peril coverage for damage to personal property. The insurance policy’s form excluded losses caused by water damage, which was modified in reach by a “Water Back-Up and Sump Pump Discharge or Overflow” endorsement. The water damage exclusion included: “(1) Flood, surface water, waves …[the] overflow of any body of water … including storm surge” (Exclusion 1); and “(3) Water below the surface of the ground, including water which exerts pressure on, or seeps, leaks or flows through a building … or other structure” (Exclusion 3).

The insurance company claimed that Exclusion 1 applied because the water that caused the damage to the homeowner’s home was a “flood or surface water.” The insurance company also claimed that Exclusion 3 applied because below-ground water “exerted pressure on, … seeped, leaked or flowed through a building, sidewalk … driveway…or other structure.” The court disagreed.

The court initially noted that the insurance policy did not exclude all losses resulting from water, and that unless the kind of water that caused the damage to the homeowner’s dwelling satisfied one of the identified forms of water, the water damage exclusion did not apply. With respect to “flood” as defined in Exclusion 1, the court ruled that flood does not clearly encompass water released from a broken water main. In ruling so, the court noted that the insurance company’s Notice Regarding Flood Damage Coverage (which the insurance company invoked to define flood because the term was undefined by the water exclusion) provided that a “flood” “is a general and temporary condition of partial or complete inundation of normally dry areas.” Therefore, even if it was assumed that the homeowner’s driveway, a “normally dry land area,” was partially or completely inundated because of the broken water main, and that inundation caused damage to the dwelling, the condition was not a “general” one, i.e., a water condition that was “not limited in scope, area, or application.” In other words, in order for the water condition to be considered a flood, it must affect a wide area and precludes the isolated water condition that specifically damaged the homeowner’s property.

The court commented that its definition of a flood was consistent with the view of other jurisdictions that have found that a flood “connotes a great inundation or deluge affecting a broad area, and not the kind of localized water damage that a water-main break causes.” The court further provided this line of thought is clearly connected to the position that “the principal defining characteristic of a flood is not that it is a natural phenomenon – it may arise from human actions – but that it involves the overflow of a body of water”—and a water main is not a body of water.

With respect to the insurance company’s claim that the broken water main damage was excluded as “surface water” in Exclusion 1, the court concluded that the term “surface water” was ambiguous.2 Nevertheless, the court found the water main break’s water did not qualify as surface water under both definitions of the term. Therefore, water from a water main break is not, unambiguously, surface water.

Moreover, the court rejected the insurance company’s claim that Exclusion 3 prevented the homeowner’s recovery because the water that damaged the home was no longer “below the surface of the ground” when it reached the property; it was above ground. The court found that by its plain meaning, Exclusion 3 does not address damage caused by above-ground water. Furthermore, water below the surface of a public street adjoining an insured’s property is neither mentioned, nor implied by Exclusion 3.

Finally, it bears noting that while the court reversed the trial court’s determination that the broken water main damage was barred by the water damage exclusion, the court affirmed the trial court’s order that the insured had not established that his personal property claim satisfied a named peril. While the court commented that the only named peril that would appear to apply would be coverage for personal property by the “accidental discharge or overflow of water…,” and that provision does not extend if the discharge occurred off the “residence premises,” the court would leave the coverage determination to the trial court because the provision had not been addressed by the parties.
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1 Sosa v. Massachusetts Bay Ins. Co., No. A-5349-16T3, 2019 WL 1780983 (N.J. Super. Ct. App. Div. Apr. 24, 2019).
2 The insurance policy did not define “surface water” and the court found there were two competing but plausible meanings of the term. Surface water has been defined by the New Jersey Administrative Code to possess a permanent nature, akin to a body of water (such as water in lakes, ponds, streams, etc.). Alternatively, a prior opinion of a New Jersey court found surface waters “are those which fall on the land from the skies or arise in springs” and embrace waters derived from falling rain and melting snow, whether on the ground or on the roofs of buildings thereon.

Collapse Coverage: Second Circuit Holds That Cracking Walls Do Not Constitute “Collapse”

Dina R. Richman | Property Insurance Law Observer | May 6, 2019

Most homeowners’ policies – and property insurance policies in general – contain a limited coverage extension for “collapse.”  The interpretation of that collapse coverage has been litigated around the country for decades, with different jurisdictions reaching considerably different results.  The latest of these decisions, Valls v. Allstate Insurance Company, No. 17-3495-cv (2d Cir. 2019), comes out of the Second Circuit, deciding the case under Connecticut law.  The case presented a single substantive question: does the “collapse” provision afford coverage for basement walls which had significant cracking but remain standing?  Both the district court (D. Conn.) and the Second Circuit Court of Appeal concluded that it does not.

In Valls, the plaintiffs owned a home in Connecticut which was insured by Allstate.  The Allstate policy excluded “collapse,” but then contained a collapse coverage extension, which provided:

We will cover:

a) the entire collapse of a covered building structure;

b) the entire collapse of part of a covered building structure; and

c) direct physical loss to covered property caused by (a) or (b) above.

For coverage to apply, the collapse of a building structure specified in (a) or (b) above must be a sudden and accidental direct physical loss caused by one or more of the following: . . .

b) hidden decay of the building structure; . . .

f) defective methods or materials used in construction, repair, remodeling or renovation.

Collapse does not include settling, cracking, shrinking, bulging or expansion

The Valls noticed several horizontal and vertical cracks in their basement walls, but the walls remained standing.  The Valls made a claim to Allstate, arguing that the damage should be covered under the collapse provision.  Allstate denied coverage, and the Valls filed suit.  The district court granted Allstate’s motion to dismiss, concluding that the collapse coverage did not apply.  The Valls appealed, and the Second Circuit Court of Appeal affirmed the district court’s decision, finding that mere cracking did not constitute “collapse.”

In reaching this conclusion, the Second Circuit looked at the policy’s requirements that the collapse be “sudden and accidental” and that it be an “entire collapse.”  First, the Court noted that the erosion and cracking of the basement walls had occurred gradually, and therefore was not “sudden and accidental.”  Second, the Court found that even if the cracking had been sudden, it would still not be covered because the damage could not be deemed an “entire collapse.”  Although the Policy did not define “entire collapse,” it expressly excluded “settling, cracking, shrinking, bulging or expansion.”  Accordingly, there was no coverage for the loss.

By determining that cracking is not an “entire collapse,” the Second Circuit joins several other states who have reached similar conclusions.  For instance, in Higgins v. Connecticut Fire Ins.Co., 163 Colo. 292 (1967), the Supreme Court of Colorado held that the cracking and upheaval in a floor could not be considered a “collapse.”  Similarly, in Doheny W. Homeowners Ass’n v. Am. Guar. & Liab. Ins. Co., 60 Cal.App.4th 400 (Cal.Ct.App. 1997), the California Court of Appeal held that although “imminent” collapse may be covered, it does not include mere cracking or settlement.

Other states have reached the opposite conclusion.  In Jenkins v. United States Fire Ins. Co., 185 Kan. 665 (1959), the Kansas Supreme Court held that the “collapse” provision included the “settling, falling, cracking, bulging or breaking of the insured building…in such manner as to materially impair the basis structure or substantial integrity of the building[.]”

In response to cases such as Jenkins insurers began including the limitations in the collapse provision – such as requiring complete collapse and excluding cracking and settling.  Many courts which have addressed the limitations in the collapse provision end up concluding that the provision does not provide coverage for settling and cracking.  See, e.g. Krug v. Milles’ Mut. Ins. Ass’n of Ill., 209 Kan. 111 (1972) (distinguishing Jenkins due to different policy language).  And yet other courts continue to apply a very broad application of “collapse” even with the added limitations.  For instance, in American Concept Ins. Co. v. Jones, 935 F.Supp. 1220 (D. Utah 1996), a district court in Utah held that the term “collapse” was ambiguous, and that settling and cracking could still be “collapse” despite the fact that the policy stated that collapse did not include settling or cracking.

The Second Circuit’s Valls opinion is now part of a sizeable body of case law from around the country interpreting the “collapse” coverage in property insurance policies.  Without a doubt, as the policy language evolves, litigation over the breadth and meaning of “collapse” coverage will also continue.

“That Particular Part” – Yet More

David Smith | Policyholder Perspective | April 30, 2019

Massachusetts Appeals Court Gets It Right – Mostly

Hot on the heels of the Federal Tenth Circuit Court of Appeals’ decision in MTI, Inc. v. Employers Insurance Company of Wausau, __ F.3d __, 2019 WL 321423 (10th Cir. 2019) (about which I wrote earlier this month), the Appeals Court of Massachusetts also found that the phrase “that particular part” as used in exclusions j(5) and j(6) in the CGL policy must be applied narrowly. In All America Ins. Co. v. Lampasona Concrete Corp., 95 Mass. App. Ct. 79 (2019), the court held that damage caused to an underlying vapor barrier and a tile and carpet finish applied on top of the concrete floor slab poured by Lampasona was not excluded from coverage by the j(6) exclusion in the Lampasona’s policy. The court found that Lampasona did not install the vapor barrier or the tile/carpet, so they were not “that particular part” on which Lampasona was working.

The underlying trial court had held that the three elements of the floor (the vapor barrier, the concrete and the tile/carpet finish) were integral and inseparable parts of the flooring system. Thus, the court held that damage caused by Lampasona’s pouring of the concrete slab (which pierced the vapor barrier which consequently let moisture pass through the concrete and damage the finish) was all to the same work product.

The appellate court did not disagree that the flooring could be described as a single system. It did, however, rule that such a description was irrelevant to coverage. Lampasona did not install the vapor barrier or the tiles or carpet, and thus those elements were not the “particular part” of the property that Lampasona worked on. Therefore, the exclusion did not apply to the costs of repairing the damage to those elements of the floor.

In some ways, this is a better reasoned opinion than that of MTI, Inc. The MTI court found the exclusion to be ambiguous, and thus construed it against the insurer. In Lampasona, the court found that, although the contractor’s work was closely connected with other parts of the overall project, the exclusion by its own terms did not apply to work not performed by the insured. The vapor barrier and the floor tiles and carpet were not “that particular part” of the property on which the insured performed work.

The one point the Massachusetts court got wrong was dicta in which it distinguished certain cases cited by the insurer on the ground that they dealt with coverage for general contractors, not subcontractors. This comment gives the impression that CGL coverage for subcontractors is somehow different than it is for general contractors. However, insurance industry materials have been clear for a very longtime that, in these circumstances, general contractors and subcontractors were to be provided the same coverage – the exclusion only applies to the property upon which the general contractor or subcontractor were actually working.

We have noticed an unfortunate trend in these cases. Many attorneys don’t seem to offer evidence of the insurance industry’s intent regarding the scope of this coverage. At least in California, industry materials regarding the meaning of insurance policy terms is admissible under California Civil Code §1645. As I have described in earlier posts [1] [2] [3], there is ample evidence of the insurance industry’s intent to provide broad coverage in this area by using the phrase “that particular part” to narrow exclusions j(5) and j(6).

Will The Additional Insured Endorsement Actually Cover The Claim?

Kenneth Gorenberg | Barnes & Thornburg LLP | April 25, 2019

Imagine this scenario. Your company hires a contractor to do some repair or renovation work. The contract requires the contractor to have commercial general liability insurance and make your company an additional insured under that policy. The contractor does so. Someone is injured on the jobsite and sues your company. You tender the case to the contractor’s insurer. Will that insurer defend and, if necessary, settle the case for your company?

Depending on further facts and the governing state law, this question may be more complicated than you hoped. Two new cases, one from Illinois and one from the state of Washington, illustrate.

In the Illinois case, Core Construction Svcs. of Illinois, Inc. v. Zurich Am. Ins. Co., general contractor Core Construction hired Schindler Elevator as a subcontractor to perform work on escalators, curiously at a facility owned by State Farm.

The contract between Core and Schindler required Schindler to name Core and State Farm as additional insureds on Schindler’s policy with Zurich. Schindler did so. The policy contained a standard endorsement providing additional insured coverage for liability for injury or damage “caused, in whole or in part,” by Schindler’s acts or omissions in the performance of its ongoing operations for Core or State Farm.

One of Schindler’s employees was injured while working on an escalator. He sued Core and State Farm, alleging they were negligent in permitting unfettered access to the jobsite, which resulted in him coming into contact with 1,700 pounds of equipment.

Core tendered the case to Zurich, which refused to defend because there was no allegation that Schindler was negligent. The Illinois court said that is neither surprising nor determinative, because workers compensation immunity prevented the plaintiff from suing his employer, Schindler. Because the accident occurred while the plaintiff was working on an escalator, the court found it was possible that Schindler was negligent. The court therefore held that Zurich had the duty to defend Core.

In the Washington case, Mt. Hawley Ins. Co. v. Zurich Am. Ins. Co., Granite Market Place was the owner and JSH Properties was the manager of an office building in Seattle. They hired JTM Construction to repair the sidewalk outside the building. As required by the contract, JTM made Granite and JSH additional insureds, under essentially the same endorsement language as in the Illinois case and coincidentally with the same insurance company, Zurich.

Three days before the work was to begin, a pedestrian was injured when her foot became stuck in a hole in the sidewalk. She sued Granite, JSH and JTM.

Zurich refused to defend Granite and JSH, contending that they could not be additional insureds for a project that had not yet begun. Zurich did defend JTM, which won summary judgment against the plaintiff because JTM’s work had not begun. Granite and JSH eventually settled with the plaintiff and then sued for reimbursement from Zurich.

The Washington court held that Zurich did not have to reimburse the settlement, agreeing with Zurich that Granite and JSH were not covered because JTM’s work had not started. However, the court also held that Zurich had and breached the duty to defend Granite and JSH. That is because the original complaint alleged that JTM was responsible for the sidewalk, and the duty to defend is determined by the allegations rather than the ultimate outcome of a case.

These two new cases used different analytical approaches and reached different results from a New York case we discussed in an earlier post. In that case, the New York court found no coverage for an additional insured because the court construed the phrase “caused, in whole or in part, by” as requiring proximate rather than but-for causation.

Basically, the same policy language yielded three different results in three different courts using three different rationales to analyze three different sets of facts. That alone suggests caution whenever someone makes a broad assertion about how an additional insured endorsement will apply to a given hypothetical or real-life scenario. Moreover,

Imagine this scenario. Your company hires a contractor to do some repair or renovation work. The contract requires the contractor to have commercial general liability insurance and make your company an additional insured under that policy. The contractor does so. Someone is injured on the jobsite and sues your company. You tender the case to the contractor’s insurer. Will that insurer defend and, if necessary, settle the case for your company?

Depending on further facts and the governing state law, this question may be more complicated than you hoped. Two new cases, one from Illinois and one from the state of Washington, illustrate.

In the Illinois case, Core Construction Svcs. of Illinois, Inc. v. Zurich Am. Ins. Co., general contractor Core Construction hired Schindler Elevator as a subcontractor to perform work on escalators, curiously at a facility owned by State Farm.

The contract between Core and Schindler required Schindler to name Core and State Farm as additional insureds on Schindler’s policy with Zurich. Schindler did so. The policy contained a standard endorsement providing additional insured coverage for liability for injury or damage “caused, in whole or in part,” by Schindler’s acts or omissions in the performance of its ongoing operations for Core or State Farm.

One of Schindler’s employees was injured while working on an escalator. He sued Core and State Farm, alleging they were negligent in permitting unfettered access to the jobsite, which resulted in him coming into contact with 1,700 pounds of equipment.

Core tendered the case to Zurich, which refused to defend because there was no allegation that Schindler was negligent. The Illinois court said that is neither surprising nor determinative, because workers compensation immunity prevented the plaintiff from suing his employer, Schindler. Because the accident occurred while the plaintiff was working on an escalator, the court found it was possible that Schindler was negligent. The court therefore held that Zurich had the duty to defend Core.

In the Washington case, Mt. Hawley Ins. Co. v. Zurich Am. Ins. Co., Granite Market Place was the owner and JSH Properties was the manager of an office building in Seattle. They hired JTM Construction to repair the sidewalk outside the building. As required by the contract, JTM made Granite and JSH additional insureds, under essentially the same endorsement language as in the Illinois case and coincidentally with the same insurance company, Zurich.

Three days before the work was to begin, a pedestrian was injured when her foot became stuck in a hole in the sidewalk. She sued Granite, JSH and JTM.

Zurich refused to defend Granite and JSH, contending that they could not be additional insureds for a project that had not yet begun. Zurich did defend JTM, which won summary judgment against the plaintiff because JTM’s work had not begun. Granite and JSH eventually settled with the plaintiff and then sued for reimbursement from Zurich.

The Washington court held that Zurich did not have to reimburse the settlement, agreeing with Zurich that Granite and JSH were not covered because JTM’s work had not started. However, the court also held that Zurich had and breached the duty to defend Granite and JSH. That is because the original complaint alleged that JTM was responsible for the sidewalk, and the duty to defend is determined by the allegations rather than the ultimate outcome of a case.

These two new cases used different analytical approaches and reached different results from a New York case we discussed in an earlier post. In that case, the New York court found no coverage for an additional insured because the court construed the phrase “caused, in whole or in part, by” as requiring proximate rather than but-for causation.

Basically, the same policy language yielded three different results in three different courts using three different rationales to analyze three different sets of facts. That alone suggests caution whenever someone makes a broad assertion about how an additional insured endorsement will apply to a given hypothetical or real-life scenario. Moreover, there are dozens of so-called standard form additional insured endorsements, plus countless non-standard versions.

When purchasing insurance policies and when entering into contracts with insurance requirements, it’s important for businesses to think carefully about the endorsements actually available and how they might relate to the most likely risk scenarios. Understanding these nuances can help a business consider whether to challenge an insurance company if a potential loss occurs and the insurance company denies coverage.

When purchasing insurance policies and when entering into contracts with insurance requirements, it’s important for businesses to think carefully about the endorsements actually available and how they might relate to the most likely risk scenarios. Understanding these nuances can help a business consider whether to challenge an insurance company if a potential loss occurs and the insurance company denies coverage.

Assessing the “Reasonableness” of Notice

Christina Phillips | Property Insurance Coverage Law Blog | April 27, 2019

As any contributor on this blog will tell you, the first step in assessing any claim is to read the Policy. Policy language is ever evolving and changing, especially when it comes to notice requirements. The purpose of a notice requirement in an insurance policy is to enable the insurer to make a timely and thorough investigation.1 Many policies however contain language which provides that notice is to be provided “as soon as practicable,” “promptly,” “immediately” or “within a reasonable time.”

In States where there is not an automatic rebuttable presumption of prejudice in favor of the insurer,2 or where the time limit is expressly defined, i.e., within one year of the date of loss, courts will typically assess five factors in determining the reasonableness of notice under an insurance policy. The factors are:

  1. The specific language of the policy’s notice provision;
  2. the insured’s sophistication in commerce and insurance matters;
  3. the insured’s awareness of an event that may trigger insurance coverage;
  4. the insured’s diligence in ascertaining whether policy coverage is available; and
  5. prejudice to the insurer.3

While arising in the liability context, the Moje case provides a good analysis of the factors a court will look at in determining the reasonableness of the notice provided.

The court reminds us in Moje that slight differences in policy language can have a big impact on when notice needs to be provided. Policy language requiring “immediate” are typically construed strictly and interpreted as requiring notice to be provided “expeditiously.” Whereas language requiring notice “as soon as practicable” can often require a more fact intensive review of the remaining four factors noted above.4 Regardless of the specific language, the court does remind us that notice language is typically “mandatory.” And does not allow the insured to pick and choose between reporting minor and major events it may or may not want the insurer knowing about.5

In assessing the insured’s sophistication, the court will consider such factors as the insured’s history with insurance claims, what the insured had been specifically told about the policy’s requirements, whether the insured had any insurance training, and/or whether the insured had read the policy.

The third factor is the insured’s awareness of an event that may trigger insurance coverage. Was the insured aware of the injury? In the property context this can be a little more convoluted—for instance, hail damage. One such factor a court may look at is if an insured’s car was in the driveway at the time of the hail storm and became damaged, that fact might support that the insured should have been aware of an event which might trigger insurance coverage for his or her home.

Closely related is the fourth factor of the insured’s diligence in ascertaining whether policy coverage was available. Again, courts will look to whether the insured had made similar claims before, or if they read and reviewed the policies it believes may provide coverage.

Lastly, courts will evaluate whether the insurer was prejudiced by the notice provided. It is important to note that Illinois law considers prejudice as a factor in decision whether reasonable notice was given. In the property insurance context, the court may look at such factors as whether the insurer was able to conduct an investigation, or if the condition of the property changed substantially from the date of loss.

In determining whether the notice provided as “prompt,” “reasonable,” “practical” or the like, courts will typically consider all these factors in assessing the totality of the circumstances. In other words, no one factor trumps any other.6 Therefore, in a situation where there are questions about the promptness or the notice, one should undertake this same factor analysis to predict how a court may decide the issue.
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1 US Fidelity & Guarantee Co. v. Maren Engineering Corp., 82 Ill.App.3d 894 (1st Dist. 1980).
2 See generally Tri-Etch, Inc. v. Cincinnati Ins. Co., 909 N.E.2d 997 (Ind. 2009) (holding Indiana is one such state where prejudice is presumed).
3 Moje v. Federal Hockey League, LLC, 2019 WL 1399966 (N.D. Ill. March 28, 2019).
4 Id. at *6-7.
5 Id. at 6 citing State Auto Prop. and Cas. Ins. Co. v. Brumit Services, 877 F.3d 355, 358 (7th Cir. 2017).
6 Moje, 2019 WL 1399966 at *6.