Is Water Damage Caused by a Burst Water Main Covered?

Edward Eshoo | Property Insurance Coverage Law Blog | December 7, 2017

An Illinois homeowner recently contacted me regarding an insurer’s denial of a water damage claim. The facts were: An underground pipe which was part of a municipal water supply system (“the water main”) burst and water was released from the water main. The pressure from the water cracked the street pavement and water flowed onto the pavement, travelled across the pavement, and then down the sloped driveway leading into the garage of the insured dwelling. Ultimately, the water flowed into the lower level of the home, damaging building materials and personal property.

The insurer denied the claim based on a policy exclusion for loss caused by water damage. The sources of excluded water the insurer pointed to were:

  1. “flood”
  2. “surface water” and
  3. “water below the surface of the ground”

All were undefined terms in the policy.

In my opinion, the denial was erroneous, and the water damage should be covered for the following reasons.

First, the plain and ordinary meaning of the term “flood” is “a rising and overflowing of a body of water that covers land not usually under water.”1 The flood exclusion does not apply because the water did not escape from a body of water.

Second, the plain and ordinary meaning of the term “surface water” is “water derived from natural precipitation that flows over or accumulates on the ground without forming a definite body of water or following a defined watercourse.”2 While it flowed on and along the street pavement, the water did not accumulate from a natural source, such as rainwater or runoff from a storm. Rather, it originated from an artificial or man-made source, an underground water main, rendering the “surface water” exclusion inapplicable.3 In that regard, the water damage exclusion in the policy did not state it applied regardless of the source of the excluded water; or, regardless whether the excluded source of water was caused by an act of nature or otherwise caused, distinguishing it from other insurer “water damage” exclusions utilized in the property insurance industry.4

Finally, absent such language described above, courts have interpreted the term “water below the surface of the ground” to have the general meaning of “subterranean waters” i.e., underground bodies or streams of water flowing in known and defined or ascertainable channels or courses, and waters which ooze, seep, or percolate through the earth, or which flow in unknown or undefined channels, both categories of which are waters of natural origin.5 Since it does not include water from an artificial source like a water main, the “water below the surface of the ground” exclusion is not a bar to recovery.6
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1 Park Ridge Presbyterian Church v. Am. States Ins. Co., 2014 WL 4637433, *5 (N.D. Ill. Sept. 17, 2014).
2 Smith v. Union Auto. Indem. Co., 323 Ill.App.3d 741, 749 (2001).
3 See Ebbing v. State Farm Fire & Cas. Co., 1 S.W.3d 459 (Ark. App. 1999); Popkin v. Sec. Mut. Ins. Co. of N. Y., 367 N.Y.S.2d 492 (N.Y. App. Div. 1975); Ferndale Dev. Co., Inc. v. Great Am. Ins. Co., 527 P.2d 939 (Colo. App. 1974).
4 See ISO Endorsement CP 10 31 08 08. Although this Endorsement gives an example to which the “otherwise caused” language applies – a dam, levee, seawall, or other water boundary or containment system failing in whole or in part – it would not apply to a burst or ruptured water main, which is a pipe or conduit for conveying water, as opposed to a water boundary or water containment system.
5 See Adrian Assocs., General Contractors v. Nat’l Sur. Corp., 638 S.W.2d 138 (Tex. App.1982).
6 But see Carver v. Allstate Ins. Co., 76 S.W.3d 901 (Ark. App. 2001) (policy excluded loss caused by “[w]ater or any other substance on or below the surface of the ground, regardless of its source,” reflecting an intent to exclude damage from both natural and artificial water sources).

Production of Pre-Denial Claim File Compelled

Tred R. Eyerly | Insurance Law Hawaii | November 20, 2017

The appellate court found that the claims file that existed before the insurer’s denial was discoverable. Cascade Builders Corp. v. Rugar, 2017 N.Y. App. Div. LEXIS 7357 (N.Y. App. Div.. Oct. 19, 2017).

Cascade Builders was the general contractor for the homeowners. In May 2011, Cascade subcontracted with John Rugar to perform certain exterior power washing on the residence. The contract between Cascade and Rugar required Rugar to indemnify and hold Cascade harmless for any work performed by Rugar and to obtain coverage naming Cascade as an additional insured. Rugar procured the required CGL policy from Utica First Insurance Company.

While pressure washing the residence, Rugar used a cleaning solution that allegedly caused damage to the exterior of the residence. Cascade submitted a demand to Utica for damages sustained. Utica denied coverage for both Cascade and Rugar. Cascade’s carrier subsequently paid the homeowners $600,000 for the damage sustained to the exterior of the residence. The homeowners released Cascade from any further liability and assigned their right to bring suit against Utica and Rugar.

Cascade sued Utica and Rugar, alleging  negligence by Rugar and breach of contract by Utica. Cascade requested Utica’s pre-denial claim file. Utica provided a portion of the claim file and a privilege log. Cascade then demanded production of the entire pre-denial claim file. Utica and Rugar moved for a protective order prohibiting disclosure of the documents in the privilege log because it listed materials prepared in anticipation of litigation. Rugar also sought a protective order.

The trial court denied the motions and ordered Utica to provide Cascade with the entire pre-denial claims file. On reconsideration, however, the court granted Rugar’s motion for a protective order.

The appellate division reversed. The payment or rejection of claims was a part of the regular business of an insurance company. Reports which aided the insurer in the process of deciding whether to pay or reject a claim were made in the regular course of business. Therefore, reports prepared by insurance investigators, adjusters, or attorneys before the decision was made to pay or reject a claim were not privileged and were discoverable.

Here, all the documents set forth in the subject privileged log were prepared prior to Utica’s May 9, 2012 disclaimer of coverage. Since Utica failed to establish that the withheld documents were prepared solely in anticipation of litigation, the burden did not shift to Cascade to demonstrate an undue hardship justifying disclosure of the pre-denial claim.

Some Decisions Policyholders Can Be Thankful for this Year

Bryan J. Coffey | Pillsbury Winthrop Shaw Pittman LLP | November 27, 2017

It’s that time of the year when Americans gather together, enjoy a feast, and fall asleep in front of the TV. But before the tryptophan kicks in, we also like to give thanks for the good things that have happened in the past year. Corporate policyholders can share in the tradition, as this year has produced a number of court decisions that favored insureds and protected their coverage expectations. Here are a few of the cases we are most thankful for:

This case out of the South Carolina Supreme Court gave generously to policyholders in a number of ways this year (giving us the opportunity to post in this blog again and again and again). The case involved defective construction claims against a developer. The developer’s insurer, Harleysville, provided a defense under a vague reservation of rights letter. After the underlying plaintiffs were awarded verdicts against the developer, Harleysville sued to avoid covering the judgments. The court ruled against Harleysville on four issues:

  1. Harleysville’s vague, general reservation of rights letter did not effectively reserve its rights to contest coverage under the terms and exclusions in the policy;
  2. Where the underlying verdicts did not apportion the damages between covered and uncovered losses, the insurer bore the burden of proving amounts allocable to uncovered losses. Where the insurer failed to meet that burden, it had to cover the entire verdict;
  3. Punitive damages awarded in the verdicts were found to be covered under Harleysville’s policy; and
  4. The owners’ association, which was asserting the dissolved developer’s coverage rights in the case, had standing to challenge the insurer’s reservation of rights letter.

Harleysville is a case that just keeps on giving.

The duty to provide a defense, or reimburse defense costs, is one of the most important features of liability insurance. You could say it’s the stuffing, where indemnity is the turkey. The Delaware Superior Court emphasized that obligation in Verizon to the tune of $48 million in defense costs that the insurer had refused to pay. This decision was important because it rejected the insurer’s attempt to define the vague term “securities claim” narrowly to avoid its obligation to pay defense costs. More broadly, the court upheld the pro-policyholder interpretative doctrine of contra proferentem, rejecting the insurer’s argument that the doctrine should not apply where the insured is a large, sophisticated corporation. Applying the doctrine, the court held that unless it can be shown that the insured had a hand in drafting the policy language, ambiguous terms should be interpreted against the insurer. A more detailed analysis of the decision by this firm can be found here.

All State Interior Demolition Inc. v. Scottsdale Insurance Company and McMillin Management Services v. Financial Pacific Insurance Company

Thanksgiving dinner is always better with more guests. Additional Insured endorsements in policies extend the invitation to more parties that may require a seat at the table of insurance protection. This is especially important in the construction context, where developers and general contractors rely on numerous subcontractors’ insurance policies to protect them from liability arising from those subcontractors’ work. These two decisions rejected insurers’ attempts to narrow the application of additional insured endorsements.

In All State Interior, previously highlighted here, a New York County trial court interpreted an endorsement broadly, granting additional insured status to companies that didn’t technically contract with the subcontractor, and who weren’t named in the endorsement. The court, in essence, incorporated the terms of the contract between All State and the subcontractor into the endorsement to trigger additional insured coverage for the project owner, site lessor, and construction manager as All State’s “partners, directors, officers, employees, agents and representatives.”

In McMillin, the insurer’s policy granted additional insured status to McMillin, the general contractor of a project, for “liability arising out of [the subcontractor’s] ongoing operations,” and excluded additional insured status for the insured’s completed operations. The insurer denied defense coverage on the basis that the subcontractor had finished working on the project. The California Court of Appeal disagreed, stating that the endorsement’s phrase “arising out of” is broader than “during,” and so the liability did not have to arise while the insured was still working on the project.

When it’s time for dessert, allocating the available pie to make sure everyone gets what they deserve can be tricky. This year, Missouri joined the ranks of “all sums” states that maximize coverage for policyholders with long-tail claims stretching over several years. The “all sums” method of allocation allows an insured to allocate all of its damages from long-tail losses to a single year of coverage. This ruling by the Missouri Court of Appeals was based on the plain language of the policies, which promise to indemnify the insured for all sums the insured is legally obligated to pay for occurrences during the policy period. The court also ruled that all triggered primary policies across a period of years need not be exhausted before excess policies in the period selected by the policyholder can be triggered. The court ruled that only the primary policy in one year needs to be exhausted before that year’s excess policies are triggered. For a more thorough analysis of this case, click here.

Rather than brave the stampedes of Black Friday, one can get good deals on holiday gifts on Cyber Monday. But to protect against cyber thieves, make sure your insurance coverage will protect you. In this case, the U.S. District Court for the Southern District of New York interpreted the computer fraud provision of a crime policy to do just that. Policyholder Medidata was the victim of fraud when someone tricked its employees into wiring money overseas, using spoofed emails that looked like they came from the company’s president. Medidata’s insurer denied its claim, stating that the computer fraud clause of the crime coverage required actual hacking into and manipulation of Medidata’s computer system. But the court sided with Medidata, ruling that the spoofing of emails violated the integrity of the insured’s computer system enough to trigger coverage, and actual entry by hackers was not required by the policy language or by precedent.

Montana Supreme Court Holds that a Waiver of Consequential Damages and a Partial Limitation of Liability in a Design Contract are not Contrary to Montana Law

Emily D. Anderson | Constructlaw | November 30, 2017

Zirkelbach Constr., Inc. v. DOWL, LLC, 2017 Mont. Lexis 591 (Mont., Sept. 26, 2017)

In interpreting a state statute which makes contractual limitations on a party’s liability unenforceable in certain instances, the Supreme Court of Montana recently upheld the validity of a contract provision in a professional services agreement between a general contractor and a designer in which the parties waived consequential damages against each other and limited the liability of the designer to $50,000.00.

Zirkelbach Constr., Inc. (“Zirkelbach”) and DOWL, LLC (“DOWL”) entered into a professional services agreement (the “Agreement”), whereby DOWL agreed to provide design work to Zirkelbach, a general contractor, for the construction of a FedEx Ground facility in Billings, Montana.  The original contract price was $122,967, but was adjusted to approximately $665,000 after the parties made several addenda to the Agreement to account for additional services.

The Agreement contained a provision (the “limitation of liability clause”) – which the parties did not renegotiate when they modified the Agreement through addenda – in which the parties agreed to waive against each other “any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, or resulting from, or in any way related to the Project,” and also agreed that DOWL’s total liability to Zirkelbach under the Agreement “shall be limited to $50,000.”

After Zirkelbach brought suit against DOWL asserting claims of negligence and breach of contract in the amount of $1,218,197.93 for problems allegedly caused directly by DOWL’s design plans, DOWL filed a motion for partial summary judgment arguing that DOWL could not be liable to Zirkelbach in any amount exceeding $50,000 due to the limitation of liability clause. The District Court granted DOWL’s motion and Zirkelbach appealed.

On appeal, Zirkelbach argued that the limitation of liability clause was unenforceable as against public policy under Section 28-2-702, MCA, which provides:

All contracts that have for their object, directly or indirectly, to exempt anyone from responsibility for the person’s own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law.

The Supreme Court disagreed.  In holding that the limitation of liability clause was valid under § 28-2-702, the Supreme Court emphasized the importance of the freedom of parties to mutually agree to the terms governing their private conduct, provided those terms do not conflict with public laws, and emphasized that Zirkelbach and DOWL were two experienced, sophisticated business entities with equal bargaining power.  The Court relied on case law in both Montana and California, which has an identical statute, in concluding that “it would be difficult to imagine a situation where a contract between relatively equal business entitles would be able to meet the required characteristics of a transaction that implicated public interest.”

Additionally, the Court noted that the limitation of liability clause only capped damages and did not exempt DOWL from all liability under the Agreement, as the Court had previously held that § 28-2-702, is not violated when business entities contractually limit liability, but do not eliminate liability entirely, or when a limitation of liability applies only to a narrow type of damages, but not all damages.  DOWL remained exposed to liability on the negligence claim asserted by Zirkelbach and for $50,000 under the Agreement.

Finally, the Court rejected Zirkelbach’s argument that the $50,000 limitation of liability indirectly exculpated DOWL from liability because it was a nominal amount compared to DOWL’s total adjusted fee.  The Court pointed out that the limitation was a much larger percentage of DOWL’s fee before the parties modified the Agreement to add additional services by addenda, and stressed that it would not “allow Zirkelbach to avoid a term of the contract simply because it [had] become more burdensome due to its own failure to renegotiate.”  Each time the Agreement was modified, Zirkelbach had an opportunity to renegotiate the cap on liability, but did not.

Accordingly, the Supreme Court affirmed the grant of summary judgment in DOWL’s favor.

Does a ‘Nationwide Coverage’ Clause Mean the Insurer Can Be Sued In Any Court?

Steven A. Meyerowitz | Property Casualty 360° | November 16, 2017

It all depends on whether the insurer’s contact is close enough.

It’s no secret that each party to a lawsuit wants to win and that part of trial strategy is filing suit in a court that the plaintiff thinks is most likely to provide a favorable outcome. A countermove by defendants may be asking the court to transfer the case to a different venue, one that may be more favorable to their side. But before the court can hear the case, there has to be some connection or contact that gives the court jurisdiction to hear the case. What happens when an insurance policy applies to claims across the United States but it’s not clear how much contact the insurer has with the location in which the suit was filed?

Recently, one federal district court in California has ruled that it did not have personal jurisdiction over an insurance company despite a nationwide coverage clause in the insurance policy issued by the insurer.

The case

CDC San Francisco LLC entered into a contract with Webcor Construction, L.P., for construction of the InterContinental San Francisco Hotel.

Webcor contracted with Architectural Glass and Aluminum Co., Inc. (AGA) for the design, construction, and installation of a curtain wall glazing system to consist of an interconnected system of blue glass forming the building’s entire exterior.

AGA subcontracted with Midwest Curtainwalls to design, engineer, and fabricate the aluminum curtain wall frames.

AGA purchased insulated glass units (IGUs) for the glazing system from their manufacturer, Viracon, Inc. Viracon purchased a sealant, polyisobutylene (PIB), used to manufacture the IGUs from Quanex I.G. Systems, Inc.

Viracon shipped the IGUs to Midwest, and Midwest fabricated the individual aluminum curtain wall units to be installed on the project by AGA.

CDC subsequently brought a construction defect case against Webcor, AGA, Midwest, Viracon and Quanex in a California state court (the SF Action). CDC alleged that the IGUs used to create the curtain walls for the project developed a film and discoloration due to use of incompatible materials. CDC sought to hold the defendants in the SF Action liable for the cost of replacing and repairing 6,400 IGUs.

The parties ultimately settled the action.

But wait! There’s more!

The litigation wasn’t over. Webcor and AGA filed an insurance coverage action in federal district court in California against National Union Fire Insurance of Pittsburgh, Pa., Old Republic General Insurance Corporation, Liberty Insurance Underwriters Inc., and Zurich American Insurance Company. Webcor and AGA alleged that Old Republic was AGA’s insurer, and that Webcor was an additional insured on the policies.

Old Republic then filed a third-party complaint against Acuity Mutual Insurance Company and Motorists Mutual Insurance Company. Old Republic claimed that it had paid defense costs for AGA and Webcor in the SF Action and incurred other costs of defense. Old Republic also alleged that the policy issued to Midwest, the material supplier, by Acuity required that Acuity defend Webcor and AGA as well. Old Republic asked for contribution from Acuity for the defense costs it had paid.

Acuity moved to dismiss Old Republic’s third-party complaint for lack of personal jurisdiction under the Federal Rules of Civil Procedure.

The district court’s decision

The district court granted Acuity’s motion, finding that Old Republic had not established a basis for personal jurisdiction over Acuity in the district court.

In its decision, the district court first ruled that general jurisdiction had not been established over Acuity. The district court reasoned that Acuity:

  • Was a Wisconsin insurance company with its principal place of business in Sheboygan, Wisconsin;
  • Conducted no business in California, was not licensed to do business in California, did not sell insurance in California and had no brokers or agents based in California; and
  • Did not accept insurance applications, collect premiums, or maintain any offices, bank accounts or employees in California.

The district court rejected Old Republic’s contention that Acuity’s filing of two prior, unrelated claims in litigation in California courts established general jurisdiction over it. The district court pointed out that the two other actions were (1) when Acuity filed a complaint-in-intervention on behalf of an involuntarily dissolved insured and (2) a small claims action. The “unrelated litigation,” the district court said, did “nothing to establish continuous and systematic activity in California by Acuity.”

The district court also ruled that Acuity’s online workers’ compensation claim form, which included language specific to claims in California, did not support general jurisdiction in California, given that the form was a standardized form produced by the Association for Cooperative Operations Research and Development (ACORD), was meant to be used by any insurance company, agent, or broker throughout the country, and included language specific to many states in addition to California.

Not enough contact

The district court then rejected the Old Republic argument that the district court had “specific jurisdiction” over Acuity based on a provision in Acuity’s policy stating that the policy applied to claims in the “coverage territory,” which included the entire United States and which, therefore, contractually bound Acuity to defend Midwest in California.

The district court ruled that the existence of a nationwide coverage provision in the Acuity policy, and an underlying lawsuit brought in California, did not constitute sufficient contact with California to support specific jurisdiction. The court pointed out that Acuity was an insurer licensed to do business in Ohio and had an Ohio agent who sold a policy to Midwest, an Ohio corporation with an Ohio principal place of business. “No part of Midwest’s application for insurance had any contact or involvement with California,” the district court said. The facts were insufficient to establish “purposeful availment” of a California forum by Acuity.

Given that the only contacts Acuity had with California appeared to be letters from Acuity’s counsel in Ohio sent to AGA’s counsel stating the reasons Acuity was declining tender under the policy, the district court also ruled that Acuity had no forum-related activities sufficient to support specific jurisdiction.

The case is Webcor Construction, LP v. Zurich American Ins. Co.