An Exception to an Exclusion: Always Read the Policy

J. Ryan Fowler | Property Insurance Coverage Law Blog | April 9, 2018

I commonly get asked coverage questions that relate to a commercial client’s claim for damages. My response is always the same, “send me the policy and I will take a look.” I know this sounds obvious but with the multitude of policies out there it is impossible to relate a policy to a factual situation without first reading the policy.

A recent ruling from the United States District Court of North Dakota points out why this is so important. The court in Spring Glen Apartments LLP v. Arch Specialty Insurance Company, ruled that an exception to an exclusion lead to coverage for the insured.1

The facts of the case were predominantly undisputed. A forty-year-old water pipe approximately seven feet below the complex burst due to wear and tear causing property damage and a loss of business income. The insurance company denied coverage due to an exclusion which read in part:

We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

The specific exclusion cited to deny coverage was the “water exclusion” which excluded coverage in part for:

Water under the ground surface pressing on, or flowing or seeping through: (a) Foundations, walls, floors or paved surfaces; (b) Basements, whether paved or not; or (c) Doors, windows or other openings.

At this point in the opinion it sure looks like the insurance company is correct and there is no coverage for the pipe that burst under the complex. The court goes on to talk about another exclusion, the “wear and tear exclusion.” The wear and tear exclusion stated “loss or damage caused by or resulting from wear and tear” is not covered. The policy goes on to say that:

but if an excluded cause of loss [listed in this subsection] results in a ‘specified cause of loss’…we will pay for the loss or damage cause by that ‘specified cause of loss.’

The Definitions section of the policy states “specified cause of loss” is defined, in part, as “water damage” and “water damage” is defined as:

(1)Accidental discharge or leakage of water…as the direct result of the breaking apart or cracking of a plumbing, heating, air conditioning or other system or appliance…that is located on the described premises…and (2) accidental discharge or leaking of water…as the direct result of the breaking part or cracking of a water or sewer pipe that is located off the described premises and is part of a municipal potable water supply system…if the breakage or cracking is cause by wear and tear.

The definitions section then explains:

But water damage does not include loss or damage otherwise excluded under the terms of the Water Exclusion…to the extent that accidental discharge or leakage of water falls within the criteria set forth [above]…such water is not subject to the provisions of the Water Exclusion which preclude coverage for surface water or water under the surface of the ground.

The court went on to conclude that the cracked pipe is a covered cause of loss under the policy. Holding that once you read the policy, “Wear and tear” is one of the causes of loss that is excluded from coverage under the policy. The exclusion, however, states that if wear and tear “results in a ‘specified cause of loss’. . . [insured will cover] the loss or damage caused by that ‘specified cause of loss.’” The policy defined “specified causes of loss,” in part, as “water damage.” Water damage is then defined, in part, as “[a]ccidental discharge or leakage of water. . . as the direct result of the. . . cracking of a water or sewer pipe that is located off the described premises. . . if the breakage or cracking is caused by wear and tear.” The leaking water leading to the damage in this case was due to the circumstances explicitly provided for in the water damage definition. Therefore, the water was “not subject to the provisions of the Water Exclusion.” The court thus concluded that the policy unambiguously provided coverage for damage caused in a situation such as this one and imposed liability on insurer.

So, at the end of the day the simple answer was yes there is coverage for the damage, but it took a careful reading of the policy, the exclusions, an exception to an exclusion, and a rereading of the definitions to get there. As an insured or insurer, it is always important to Read the policy.
1 Spring Glen Apartments LLP v. Arch Specialty Ins. Co., No. 3:17-cv-00028 (D. N.D. April 2, 2018).

Do You Really Need a Court to Tell You What the Insurance Policy Covers? Litigating Insurance Coverage Issues? When and How to Turn to the Courts (Part 1)

A. David Fawal | BizLitNews Blog | March 2, 2018

No one should know what an insurance policy covers better than the insurer itself.  After all, the insurer wrote the policy, right? Yet there are times when coverage questions arise that even the drafter of the policy cannot answer – and on those occasions, a need for court guidance may arise.  This blog is part one of a brief discussion of the options that exist when coverage questions arise, although specific procedures vary by state.

As an initial matter, and stating what should be the obvious, if there is no coverage, there is no coverage.  And there is no duty to defend if there is no coverage.  If the facts and policy language support denial, don’t be afraid to deny.  However, what if the coverage question is not clear cut? Or what if some claims are covered and others may not be? Court involvement may be appropriate in such instances.

One method allowed in some states for addressing coverage issues is intervention. This usually arises where coverage issues exist after an insured has been sued.  Often, the complaint will assert covered and non-covered claims against the insured.  The insurer can tender a defense pursuant to a reservation of rights letter, and hire separate coverage counsel to intervene in the lawsuit. The argument for intervention is that it promotes judicial economy, minimizes the possibility of multiple actions and inconsistent verdicts, and does not prejudice the rights of the original parties.  Some states do not allow insurers to use this process, while others allow it through permissive intervention, when one or more of the claims asserted against the insured may not be covered under the pertinent policy. Of course, use of “permissive intervention” means the trial judge has discretion to deny the insurer’s request to intervene.

Under one type of intervention, the insurer can request special verdict forms or special interrogatories to determine the basis for the jury’s verdict (in the event of a verdict against the insured). An intervening insurer can also request to participate in discovery and attend depositions to obtain information that may be pertinent to the coverage questions. However, the jury should never hear about the existence of insurance or the presence of the insurer or its counsel.

In some instances, the courts can go even further and allow the intervening insurer an alternate “bifurcated trial” procedure.  After the liability trial against the insured (again, assuming a verdict against the insured), the same jury then hears the coverage trial. Of course, the downside of a bifurcated trial for the insurer is the jury has already found for the plaintiff against the insured and awarded money.  That same jury may be highly inclined to then find coverage to insure the plaintiff gets paid.  Another negative of the bifurcated trial is that the jury is familiar with all of the parties and lawyers from the underlying liability trial.  Now in phase two of the bifurcated trial, the insurer and a new lawyer appear to contest coverage, and there is no relationship. Needless to say, agreeing to intervention for a bifurcated trial carries risks for the insurer, and if a court is inclined to proceed in that manner, an insurer should pass on intervention and instead consider filing a declaratory judgment action (DJ). Stayed tuned for part two where I will address the pros and cons of filing a DJ.

Certified Copy of the Policy…To the Best of Our Knowledge

Christina Phillips | Property Insurance Coverage Law Blog | February 3, 2018


When determining if there is coverage for a claim, the first document attorneys, homeowners, and adjusters will look at is the policy. We often instruct adjusters or homeowners to request a certified copy of the policy to make sure that we have a complete, accurate copy. In that regard, it is often presumed that if you are provided with a “Certified Copy” it is accurate and the policy in place at the time of the loss.

Recently, I was reviewing a policy and was intrigued to find the above stamp on the policy. Rather than certifying that a true and correct copy of the policy was attached, the stamp provided a slightly different attestation: true and certified “to the best of our knowledge.” A slight, but probably more accurate statement of what a certified copy of an insurance policy actually is.

Most times a certification is performed by someone in the underwriting department who is merely signing an attestation page that the policy is true and accurate. What amount of research goes into determining whether the certified policy is accurate is usually unknown by the policyholder. After all, the certification does not discuss the steps the underwriter went through to determine its accuracy. Even if the underwriting department spent to time to review and certify the policy’s contents, there is not guarantee the “certified copy” is the policy issued to the insured. Rather, it is more accurately, true and certified “to the best of our knowledge.”

Therefore, even if you receive a “Certified Copy” of the policy it is still a good practice to take the time to review the applicable declarations and/or forms schedule and compare it to the policy pages you are provided. Match up each of the policy forms to the declarations/form schedule to confirm that you do in fact have a complete and accurate copy of the policy—at least to the best of your knowledge.

Calculating Actual Cash Value, Part 18: Minnesota

Shane Smith | Property Insurance Coverage Law Blog | February 21, 2016

In Minnesota, The broad evidence rule determines “actual cash value.”1

In Wilcox v. State Farm Fire and Casualty Company,2 the Minnesota Supreme Court recently ruled that in the absence of specific language in a policy identifying a method of calculating actual cash value (“ACV”), the trier of fact must determine whether depreciation of embedded labor components “logically tend[ed] to the formation of a correct estimate of the loss.”

The Wilcoxes property was damaged by hail and they filed a claim against their insurer, State Farm Fire and Casualty Company (“State Farm”). State Farm provided the Wilcoxes with an estimate of the ACV of the damaged property. In the estimate, State Farm calculated the replacement costs of individual items (i.e. roof flashing, siding, fascia, gutters, and window screens). Then, State Farm subtracted the pre-loss depreciation of some, but not all, individual items. For example, State Farm depreciated the cost of removing and replacing certain materials, such as siding. State Farm, however, did not depreciate the cost of the new siding separately from the cost of the labor required to install the new siding on the home (the “embedded labor costs”). Rather, State Farm calculated the removal and replacement of the siding as a single cost, then depreciated the removal-and-replacement cost as a whole. The court referred to the cost of labor to repair or replace the damaged property as “embedded labor costs.”

The Wilcoxes alleged that State Farm breached the terms of their homeowners policy when calculating the ACV of the damaged property. Their policy did not define ACV or how it was to be calculated. The Wilcoxes argued that State Farm could not depreciate labor costs embedded in the cost of repairing or replacing damaged property.

The district court certified the following question to the Minnesota Supreme Court:

May an insurer, in determining the “actual cash value” of a covered loss under an indemnity insurance policy, depreciate the costs of labor when the term “actual cash value” is not defined in the policy?

The Minnesota Supreme Court reformulated the question as follows:

When a homeowner’s insurance policy does not define the term “actual cash value,” may the trier of fact consider labor-cost depreciation in determining the “actual cash value” of a covered loss when the estimated cost to repair or replace the damaged property includes both materials and embedded labor components?

The Minnesota Supreme Court answered…

To finish reading this article


Say What? A Policy That Does Not Cover Any Water Damage

Kenneth Kan | Property Insurance Coverage Law Blog | July 20, 2015

I look at insurance policies day in and day out—it’s just a part of my job. Every now and then, I come across something that makes my head spin or causes me to do a double take.

Readers of this blog have seen some of my posts where I implore homeowners to read their homeowner insurance policies and ask questions if there are terms or provisions they don’t understand. Well, most homeowners purchase policies for protection in case of fire and theft. Although water losses are the most common type of loss that result in claims, most homeowners are unaware that not all water losses are covered. That said, it is standard that a “sudden and accidental” escape of water from a plumbing system causing physical damage is covered. However, take a look at this water exclusion from this policy and also the definition of “water damage”:

If you are reading it as I am, here, even a “sudden and accidental” water loss under this policy is not covered! So, a homeowner with this policy cannot be compensated if a water line under the kitchen sink bursts and sprays water everywhere; or, if a hose to the washing machine suddenly breaks during a cycle and floods the house. Although homeowners as consumers can make their own decisions who insures their home or how much coverage they want, I believe that if a homeowner was made aware of an exclusion as expansive as the one above, he would really have to think hard about whether to accept that risk.

As always, educating the policyholder is vitally important and as a firm, through this blog, we try to make as much information available and share our knowledge.

via Say What? A Policy That Does Not Cover Any Water Damage : Property Insurance Coverage Law Blog.