Water exclusion clause in property insurance forms, Pt. 2

By Christine Barlow

FC&S Online


Throughout the years, courts have tended to find some basis for limiting the scope of the underground water exclusion in an attempt to resolve the apparent conflict between it and the named peril of accidental discharge from plumbing systems. The accidental discharge peril covers accidental discharge or leakage from the breaking or cracking of any part of a system or appliance containing water or steam. Although many court decisions have established that coverage under the accidental plumbing discharge peril applies only to damage arising from the insured's own plumbing system, the current homeowners edition leaves this issue open to question, as will be seen later.

It should be noted that the cases discussed here involve losses of a sudden and accidental nature. When damages result from a slow leak or build-up of water over a period of time, many property forms provide insurers with some protection by excluding loss from continuous or repeated seepage or leakage. For example, the ISO commercial property forms exclude coverage for loss or damage caused by "continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more."

In Fine v. Underwriters at Lloyd's of London, 239 F.2d 362 (3rd Cir. 1956), water leaked from the plumbing system in an adjoining building and seeped through the walls of the insured's building. The court held that the exclusion of seepage applied, even though the water originated from a leak in a plumbing system. A later Pennsylvania court decision taking the Fine case as its precedent is Kozlowski v. Penn Mutual Insurance Co., 441 A.2d 388 (Pa. Super. 1982).

When a water main curb valve on a neighbor's property burst, water from the leak seeped into the insured's basement. Although the no-coverage ruling of the court was based upon its finding that the homeowners accidental plumbing discharge peril applies only to the insured's own plumbing system, the court went on to a more general consideration of the underground water exclusion in relation to the accidental discharge peril. "Giving effect to all of [the policy] provisions," the court said, "we hold that where... the cause of the discharge or overflow of water is in the insured's own plumbing system, the [underground water] exclusion does not apply; but that if the cause is outside that system, then the exclusion is applicable."

In a unique case that combined aspects of underground water with accidental discharge, damage caused by underground water was covered because it flowed into and was discharged from an appliance of the insured. In Stone v. Royal Ins. Co., 511 A.2d 717 (N.J. Super. 1986), the insured had a portable sump pump in a sump pit in the basement of his home; its purpose, to remove subsurface water when it reached the level of the sump pit. A water damage loss occurred when the hose of the pump -- connected to a drain in the basement -- ruptured.

The insurer denied the claim, stating that the loss was due to underground water and was thereby excluded. The trial court concurred. On appeal, however, a New Jersey superior court concluded that the sump pump, being portable and plugging into a standard wall outlet, was "no less an appliance than a dehumidifier or a washing machine." Considered in that fashion, coverage from the accidental discharge peril could apply to the water damage caused by the underground water released from the sump pump's ruptured hose.

However, current wording in the ISO homeowners forms, wherein the accidental discharge peril is revised to state that a "plumbing system or household appliance does not include a sump, sump pump or related equipment," would seem to preclude coverage in all but a few instances. Even when an additional modification in the water exclusion is examined -- this one removing coverage for water which overflows from a sump (defined as a pit or reservoir) -- there is still potential coverage under the homeowner's policy for accidental discharge or overflow losses that result from rupture of a sump pump hose.

As regards leakage from plumbing systems located below the surface of the ground, the following cases illustrate that courts have generally found coverage under the accidental discharge peril rather than applying the underground water exclusion.

One case, Cantanucci v. Reliance Ins. Co., 364 N.Y.S.2d 890 (1974), involved damage to a foundation wall from a ruptured underground sewer line that caused the foundation to sag and crack. The policy covered loss by accidental discharge of water from within a plumbing system but excluded loss by water below the surface of the ground. The court agreed with the insured that the sewer line was a part of the plumbing system but felt the water exclusion precluded coverage. On appeal, however, the decision was reversed. The appellate court reasoned that by rejecting coverage the insurer is in effect insuring a leak from a plumbing system above ground but excluding coverage for a leak below the ground. Had such a distinction been intended, the court said, the insurer could have used specific language to that effect.

In Hartford Accident and Indemnity Co. v. Phelps, 294 So. 2d 362 (Fla. App. 1974), damage resulted from an underground leak in a water pipe under the concrete slab floor of the insured's house. This claim involved a homeowners "open perils" policy and a Florida appeals court determined that the loss was covered as an accidental discharge from within a plumbing system rather than excluded as below-surface water or settling.

In a similar case, the Mississippi Supreme Court found coverage for damage to the floors and walls of a house caused by water escaping from a pipe beneath the terrazzo floor. Here again, the policy was open perils homeowners, and the court held that the water exclusion clause was limited to natural underground water and did not apply to below-surface plumbing systems. The case is The New Hampshire Ins. Co. v. Robertson, 352 So. 2d 1307 (Miss. 1977).

And in the case of Gatti v. The Hanover Ins. Co., 601 F. Supp. 210 (D.C. Pa. 1985), a large amount of water leaked into the ground from the underground pipes of an apartment complex after it passed through the insured's water meter. The insured submitted a claim against its special business owner's policy for loss totaling $39,523.44, the amount necessary to repair the pipes and pay the cost and interest charges to the city of Philadelphia for the water used.

The insurer attempted to deny the claim based on the following points: (1) pecuniary detriment is not the same as physical loss; (2) water is not personal property of the insured; and (3) water below the surface of the ground emanating outside the insured's own system is excluded. The court rejected the insurer's contentions stating first that if property damage includes loss of use, then the physical loss of the water in this case certainly also includes damages from its loss of use. Further, the water itself became the property of the insured when it passed through the water meter on the insured's premises and fit the definition of personal property of the business owner's policy in that it was used for the "service of the building."

And finally, once the water passed through the water meter, it entered the insured's own plumbing system. Since the leakage was in the insured's own plumbing system, the loss was not reached by the underground water exclusion.

Note that "water" has since been added to the list of excluded property on ISO commercial property forms and homeowners policies.

Natural versus artificial

A number of court decisions regarding the water exclusion are significant because of the distinction made between damage caused by water occurring in a natural state and that caused by water directed by accidental or artificial means. Many courts conclude that the exclusion is intended to preclude coverage only for loss caused by natural circumstances, not by artificial means. For example, in Ferndale Development Co., Inc. v. Great American Ins. Co., 527 P.2d 939 (Colo. App. 1974), damage was caused by water from a bursting water main. The insurer declined coverage on the basis of that part of the exclusion relating to flood, surface water, etc.

The court rejected this reasoning and concluded that the terms flood and surface water, as used in this policy, do not include water escaping from a burst water main. This case was used by the insureds in Kane, discussed previously, as a reason to provide coverage. However, as noted, the judge distinguished between a flood as being a large-scale overflow from a body of water and the escape of water from a man-made object.

Slightly different reasoning was used by the Texas court of appeals in Adrian Associates General Contractors v. National Surety Corp., 638 S.W.2d 138 (Tex. App. 1982). An underground water main owned by a municipality ruptured causing water to migrate underground and undermine a concrete slab Adrian Associates had poured as the foundation for a warehouse. The slab settled to the extent that it had to be pulled out and replaced. Settlement of a foundation was excluded but not if the settlement was caused by an insured peril.

The court reasoned that the water exclusion was broken into three parts. The first part excluded flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not; and water that derives from natural sources. The second part excluded water that backs up from a sewer or drain and water that derives from an artificial source. The third part excludes water under the ground surface pressing on, or flowing or seeping through various parts of a building without specifying its derivation.

The insurance company agreed that the policy was "designed to exclude certain water of natural origin and certain water of artificial origin" in the first two parts. It followed, according to the court, that since the third part did not specify the origin of the water, it was ambiguous and should be interpreted in favor of the insured. "Although the insurance company contends that the exclusion applies to all water whatever the source, we conclude that if it was intended to do so, then the insurance company would have said so."

In Jones v. Columbia Mut., 700 S.W.2d 187 (Mo. App. 1985), the insured's pipes froze and broke, releasing water that damaged not only the interior of the house but also the foundation and carport. The insurer agreed to pay for the interior water damage but refused payment for the damage done by the water that went underground.

The trial court agreed with the insurer, but a Missouri court of appeals reversed the decision after examining the exclusions regarding water damage and the coverage provided by the freezing of plumbing peril. The court felt that "the only reasonable way left to reconcile [the water damage exclusion] with the peril of freezing of a plumbing system is to find that they mean that any water damage directly resulting from such freezing is covered, and that [the underground water exclusion] applies only to damage resulting from natural water, or perhaps other sources." This case also illustrates that a similar conflict exists between the underground water exclusion and the named peril of freezing of a plumbing system as exists between that exclusion and the accidental discharge peril, discussed earlier.

Water versus ice

An additional distinction has been made in some courts between water in its natural liquid state and water that has been frozen into solid ice. In Nationwide Ins. Co. v. Warren, 675 S.W.2d 402 (1984), the insured suffered damage to a warehouse floor caused by ice and a frost heave. The appeals court invoked the rule of ejusdem generis (a general term that is found to be ambiguous should be interpreted in light of the specific terms preceding [or following] it), reasoning that because ice does not flow, seep, or leak, it is not of the same general class as water.

The court further said, "Ice and water...are not the same thing. It was not water in a natural, liquid state which caused the damage to the warehouse; it was ice, creating pressure, which caused the damage. The exclusion makes no reference to ice, although it could easily have done so."

In Ercolani v. Excelsior Ins. Co., 830 F.2d 31 (3d Cir. 1987), the foundation of Ercolani's home yielded to hydrostatic pressure from underground water that had frozen during extremely cold weather. The court found that coverage for the subsequent collapse of the house was not barred by the water exclusion because the normal hydrostatic pressure of water against the foundation was increased by the expansion of the ice as the ground water froze.

The court cited Warren and referred to the American College Dictionary definition of "water" as "1. The liquid which in a more or less impure state constitutes rain, oceans, lakes, rivers, etc., and which in pure state is a transparent, odorless, tasteless liquid, a compound of hydrogen and oxygen, H2O, freezing at 32 degrees F. or 0 degrees C." The court added, "Applying the water damage exclusion to water in its liquid state and not to its expanded frozen state gives effect, it seems to us, to the `objectively reasonable expectations' of an insured."

Water exclusion endorsement

In 2008 ISO filed a new water exclusion endorsement, for use with the commercial property coverage part and the standard property policy. ISO considered issues raised in litigation following Hurricane Katrina surrounding the definition of flood when it created the endorsement.

In In re Katrina Canal Breaches Litigation, 466 F. Supp. 2d 729 (E.D.La. 2006), the court said that the language in an ISO homeowners policy's water exclusion was unclear in regards to whether a flood was limited to a naturally occurring event, but the decision was overturned in In re Katrina Canal Breaches Litigation, 495 F.3d 191 (5th Circ. 2007).

In this case, the court said, "The flood control measures, i.e., levees, that man had put in place to prevent the canal's floodwaters from reaching the city failed. The result was an enormous and devastating inundation of water into the city, damaging the plaintiffs' property. This event was a "flood" within that terms' generally prevailing meaning as used in the common parlance, and our interpretation of the exclusions ends there. The flood is unambiguously excluded from coverage under the plaintiffs' all-risk policies, and the district court's conclusion to the contrary was erroneous."

The endorsement states that the listed water losses are excluded "regardless of whether any [of the causes of loss] is caused by an act of nature or is otherwise caused." An example of a dam or levee breaking and failing to contain water is included to illustrate a situation to which the exclusion applies. The form also adds tsunami and storm surge to the list of excluded causes of loss to reinforce the exclusion of such events.

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