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).

Water Damage Loss Time Limits and Hidden Damage—What Do Insurers Promise to Departments of Insurance?

Chip Merlin | Property Insurance Coverage Law Blog | June 26, 2017

I spoke about water damage loss at the National Association of Public Insurance Adjusters Annual Convention last week. One issue I discussed was the time limits of water damage. A recent post, Avoiding Denials of Water Damage Claims Based on “Long Term Damage Exclusions” also discussed the issue.

Following my presentation, Lorinda Mikesell, the Vice President of the Texas Association of Public Adjusters, asked whether such time frames are effective when water damage is hidden.. Lorinda said that at least one insurer promised to cover water damage despite the time limitation if the loss was hidden, and she sent me the following Texas Department of Insurance Order which stated:

“USAA has indicated how it intends to adjust a covered water claim if mold is present on the damaged covered property. USAA has represented to the Department that even though its Homeowners policy and Condominium Unit Owners policy excludes loss caused by or consisting of mold, mold is necessarily removed or treated in the process of repairing damage resulting from a covered water loss. Mold that is present upon water damaged materials will be removed in the course of repairing the covered water loss. Expenses which are related solely to the existence of mold are the only expense which would not be covered in the course of repair of a covered water damage claim. In addition, notwithstanding the exclusion for constant repeated seepage or leakage of water or steam over a period of weeks, months, or years, USAA agrees to cover the cost of reasonable and necessary repair of direct physical damage to the dwelling or property caused by a covered water loss that is hidden or undetected and the associated direct physical damage consisting of mold, fungi, or other microbial damage to the dwelling or property, provided the insured reports the loss within thirty days of the date the damage was or should have been detected. This would not cover the cost of remediation, testing, loss of use, or debris removal. Remediation means to treat, contain, remove, or dispose of mold, fungi, or other microbes beyond that which is required to repair or replace the covered property physically damaged by water or steam.”

(Emphasis added)

I often say that I learn more when speaking at conferences than an audience may learn from my presentation. I was not aware of this “promise” by USAA, and I am thinking of how we may ask insurers in discovery for similar filings with Departments of Insurance that explain the language used in policies. I wonder if USAA has this promise explained in writing to their claims adjusters.

Court Denies Insurers’ Motions for Summary Judgment Under All Risk Policies

Tred R. Everly | Insurance Law Hawaii | May 22, 2017

The federal district court found that the insurers could not escape coverage by summary judgment under their all risk policies. Eagle Harbour Condo Ass’n v. Allstate Ins. Co., 2017 U.S. Dist. LEXIS 54761 (W.D. Wash. April 10, 2017).

Eagle Harbour Condominium Association sued several of its insurers who denied coverage for hidden water damage. Various insurers provided coverage from 1988 to 2015.

The Association asserted that wind-driven rain and inadequate construction allowed water to penetrate the buildings’ sheathing and framing, causing decades of deterioration and decay, until the damage was exposed to view in August 2014. The insurers claimed that the loss resulted from poor decisions in constructing and inadequately maintaining a stucco building in the wet and windy Pacific Northwest. The Association argued that the policies did not explicitly exclude damage caused by wind-driven rain, so there was coverage.

The Association identified four possible efficient proximate causes for its loss: inadequate construction, wind-driven rain, repeated seepage of water, and rot or deterioration. The insurers argued that it was unnecessary to analyze the loss under the efficient proximate cause because no covered peril could have caused the loss. The policies did not cover inadequate construction, wear and tear, rot or deterioration, or repeated seepage of water. The Association countered that wind-driven rain was a distinct and fortuitous peril that none of the policies excluded.

The court noted that if the predominant cause of the loss was a question of material fact – such as when multiple perils combined to cause insured’s damage and at least one but not all were covered – the question of which peril constituted the proximate cause was left to the fact finder.

The policies excluded “repeated seepage of water.” They also excluded specific losses sustained by weather, so long as the weather event worked with an act of law, earth movement, power failure, and other specifically listed events. Rain, not acting with the listed exclusions, was therefore covered, so long as it did not leak into the property for over 14 days in duration.

Deterioration did not engulf the perils of weather and repeated water seepage either. The policy excluded coverage for deterioration, but not for weather and repeated water seepage.

The insurers also argued that wind-driven rain was not a fortuitous peril on Bainbridge Island, where rain was common. Therefore, the losses it produced were uncovered. But whether the Association knew hidden damage from wind-driven rain would occur was a question for the jury.

Consequently, the insurers’ motions for summary judgment were denied.

Avoiding Denials of Water Damage Claims Based on “Long Term Damage Exclusions”

Kevin Pollock | Property Insurance Coverage Law Blog | May 30, 2017

We have all seen it – an insured has a water damage claim; the insurance policy has an exclusion for long term water damage occurring over a period of weeks, months, years (or even 14 days); and the insurer’s expert claims the damage is clearly long term. In these situations, insureds need their own expert to prove that the damage is not long term to have any chance of prevailing.

In Wheeler v. Allstate Insurance Company,1 the 10th Circuit Court of Appeals recently provided an alternative approach to evaluate these claims to provide insureds with a methodology to trigger coverage where some (but not all) of the damage may not clearly be long term damage.

In Wheeler, the insured’s cabin suffered water damage after a leak in a sink initially went undetected. After the insured submitted his claim to the insurance company, it was denied because its expert determined that the damage arose from seepage over time. The Allstate policy contained an exclusion for long term damage. Under Exclusion 3 of the Policy, Allstate disclaimed responsibility for damage “consisting of or caused by … [s]eepage, meaning continuous or repeated seepage or leakage over a period of weeks, months, or years, of water … from, within or around any plumbing fixtures, including … sinks.”

The policy also provided an exception to the water damage exclusion where the damage was caused by the sudden and accidental escape of water from a plumbing system.

The trial court concluded the insured’s damages were excluded under Exclusion 3 and did not construe the exception to the exclusion or analyze its application to the facts presented.

On appeal, although the insured conceded that long term water damage was excluded, he argued: (1) that there was a dispute over whether all of the damage was long term, and (2) that he should be able to recover for the water damage that was sudden and accidental.

The Court of Appeals agreed with the insured because it felt that:

[I]f Mr. Wheeler can prove the damages he is seeking were caused within the first 13 days of the release, then the damages fall outside Exclusion 3 and inside the Exception to [the] Exclusion. In that situation, the damages would be covered under the Policy and Allstate would have breached the Policy by denying coverage. Viewing the evidence in the light most favorable to Mr. Wheeler, a reasonable jury could find that the short- and long-term damages are, in fact, separable. Accordingly, we conclude there is a genuine dispute of material fact that should have precluded the trial court’s grant of summary judgment on the breach of contract claim.

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1 Wheeler v. Allstate Ins. Co., No. 15-4159, 2017 WL 1827843 (10th Cir. May 4, 2017).

Summary Judgment May Be Appropriate When Insured Fails to Take Reasonable Measures to Prevent Property Damage

Michael Henry | Property Insurance Law Observer | August 4, 2016

Many first party property insurance policies exclude claims for water damage that occurs when the insured premises is left vacant or unoccupied, unless the insured has used reasonable care to prevent such losses. In litigation challenging the denial of such claims, whether or not the insured’s actions in preventing property damage were reasonable is generally treated as a question of fact to be decided by a jury. However, when the facts are not disputed, and there are no credibility issues presented, a court may grant summary judgment on behalf of the insurer upholding the denial.

Such a result recently occurred in a Pennsylvania case involving substantial losses as a result of water damage from burst pipes. Micalis Pazianas, M.D., et al. v. Allstate Insurance Company, Civil Action No. 16-2018, 2016 W.L. 387, 8185 (E.D. Pa. 07/18/2016). In Pazianas, the insured, Micalis Pazianas, left his insured home in Pennsylvania for England on October 10, 2014, and returned on February 5, 2015 finding water damage in excess of $50,000. Before leaving his home in October, Pazianas did not shut off the water supply or drain the water from the system or appliances. He set the thermostat at 55° F, but its manual directed the replacement of batteries once a year or before leaving home for more than a month. Pazianas did not do so, nor had he replaced them in more than a year. Pazianas thought he would return to the property in December, but he remained in England through January of 2015.

He asked his daughter to check on the property periodically, but in December she said that she could not do so because she was pregnant.  Pazianas did not ask anyone else to check on the property, even when he realized that he would not return home in December 2014.

Upon his return on February 5, 2015, the heat was off, the thermostat screen was blank, and water was flowing from the ceilings in the laundry and living rooms.  His plumber told him that the water damage was caused by pipes freezing and bursting. Allstate’s experts found that the furnace was controlled by the battery-powered digital thermostat. Gas bills showed minor usage in October of 2014, with less usage in November through January. The engineer concluded that the heating system did not work and the pipes had frozen and burst.

Similarly, water bills established no usage in November or December of 2014, but that 103,800 gallons in January and 164,000 gallons in February were used, despite the water being turned off on February 5, 2015.

The Allstate homeowners policy excluded coverage for losses caused by freezing of plumbing . . . systems or leakage or overflow . . . caused by freezing, when the building is vacant and unoccupied, unless the insured used reasonable care to:  (a) maintain heat in the building structure; or (b) shut off the water supply and drain the system and appliances.

In Pazianas, the court converted Allstate’s motion for a judgment on the pleadings to one for summary judgment, because the policy, two separate causation expert reports, and Dr. Pazianas’s examination under oath were attached as exhibits to Allstate’s motion. Pazianas argued that Allstate’s motion should be denied because there were genuine issues of material fact as to whether he had used reasonable care since he set the thermostat at 55° before he left and asked his daughter to check on the property, only intending to be gone for two months.

The court granted summary judgment to Allstate. The court held that since Pazianas admitted that he did not shut off the water supply and drain the appliances before departing, the court only needed to consider if he used reasonable care to maintain heat in the property while it was vacant during his trip to England. Citing Maternia v. Pennsylvania R.R. Co., 56 A.2d 233, 235 (Pa. 1948), the court stated that reasonableness is an objective standard reflecting the degree of care a person of ordinary intelligence and prudence would commonly exercise under similar circumstances. Additionally, the court held that an insured cannot delegate the duty to maintain heat in the property simply by agreement with a third party, citing Dougherty v. Allstate Prop. & Cas. Ins. Co., __ F. Supp. 3d __, 2016 W.L. 2593848, *9 (E.D. Pa. 2016).

Thus, even accepting Pazianas’s allegations as true and granting him the benefit of all reasonable inferences, the court held that no reasonable juror could find that he used reasonable care to maintain heat in the property during its vacancy. Pazianas, 2016 W.L. 3878185, *4.

The decision highlights the need for insurers to obtain as much documentation as possible during the course of a water damage investigation, including water, heating, and electrical bills.  Additionally, obtaining the thermostat instruction manual proved important as it helped establish that the insured’s failure to replace batteries in the thermostat before an extended absence from his home was unreasonable.

Finally, this case demonstrates that bills and other documents obtained during a detailed claim investigation, as well as examination under oath testimony may not only provide reasonable support for a claim denial, but may also provide the basis for an early resolution of a lawsuit challenging the denial, and thus avoid extensive and expensive discovery practice.