The water exclusion in a business property policy can be difficult to navigate through. While some of these exclusions can be added back to the policy by paying additional premiums, it’s important to understand how they can affect your business financially. The following information is going to be a little technical, but knowing the case law behind the exclusions helps in understanding how insurance companies will respond with these types of claims.
A. Water Exclusion
The water exclusion has long been in use, with little or no change, and courts usually have found it clear and unambiguous. One common version of the water exclusion states, “We will not pay for loss or damage caused directly or indirectly by … Water. (1) Flood, surface water, waves, tides, tidal waves, overflow of any body of water, or their spray, all whether driven by wind or not.”
1. Surface Water
The policy usually does not define “surface water.” However, under the widely accepted definition, “surface water” means: “water which is derived from falling rain or melting snow, or which rises to the surface in springs, and is diffused over the surface of the ground, while it remains in such diffused state, and which follows no defined course or channel, which does not gather into or form a natural body of water, and which is lost by evaporation, percolation, or natural drainage.”
It is not always easy to determine if facts fit within the exclusion for surface water. A North Dakota court in State Fire and Tornado Fund of N.D. Ins. Dep’t v. North Dakota State Univ., upheld the exclusion where water from a heavy rainstorm entered a tunnel from a sports stadium and then entered the insured’s plant and building at the other end of the tunnel. The water being “altered … by paved surfaces, buildings, or other structures” and “being artificially channeled underground” still maintained its character as surface water and the loss was excluded. On the other hand, a Georgia court, in Selective Way Ins. Co. v. Litigation Tech., Inc., weighed similar facts and found the exclusion inapplicable. There, rain water flowed into a 13-foot-deep pit which the City had dug under a road adjacent to the insured building. As the rain water rose in the pit, it entered an uncapped pipe, flowed through the pipe under the street and sidewalk and into the basement of the building. The court concluded that the water “is no longer diffused, is no longer on the surface of the ground, has gathered into a body, and has followed a defined course through the pipe and into the building.” The exclusion did not apply.
The flood portion of the water exclusion was litigated in the many claims involving the 2005 Hurricane Katrina – whether the storm surges and water flowing through failed levees constituted a “flood” in the exclusion and whether the damages were caused by flood or a covered peril such as windstorm. One dictionary definition of flood is “an overflowing of water in an area normally dry; inundation; deluge.” In a pre-Katrina case, Valley Forge Ins. Co. v. Hicks, Thomas & Lilienstarn, L.L.P., a Texas court enforced the flood exclusion where a tropical storm caused a bayou to overflow and water rushed into a convention center through its basement wall into a parking garage into a pedestrian tunnel and into a bank building where the insured tenant’s premises became damaged. The exclusion was applied to bar coverage because the water “flowed onward, as flood and surface water is wont to do, obeying the law of gravity and flowing into man-made underground structures.” The flood exclusion reflects that the property insurance industry has not wanted to insure property against flood and hence Congress enacted the federal flood insurance program in 1968.
The groundwater portion of the water exclusion states, “We will not pay for loss or damage caused directly or indirectly by … Water. … (4) Water seeping under the ground surface pressing on, or flowing or seeping through: (a) Foundations, walls, floors or paved surfaces.” The Sixth Circuit in AKG Holdings, Inc. v. Essex Ins. Co., considered whether this exclusion barred coverage for damage to an empty, in-ground, swimming pool that raised out of the ground over the winter. The court ruled the damage was excluded because the groundwater pressing on the pool caused at least part of the buoyancy that led to the eruption of the pool from the concrete deck and because a “floor” or “paved surface” in the exclusion can be applied respectively to the bottom or interior surface of the swimming pool.
A different water exclusion comes into play in the property policy’s coverage for collapse. Collapse coverage is barred for “loss or damage caused by or resulting from . . . wear and tear, . . . decay, deterioration, . . . continuous or repeated seepage or leakage of water that occurs over a period of 14 days, . . . faulty, inadequate or defective maintenance.” In one case, the roof collapsed as a result of lack of maintenance and water seepage, which caused decay and weakened the wood structures. As such, the causes of the roof collapse fit squarely within the seepage/leakage exclusion of the policy.
Another form of water exclusion is addressed to rain. As stated, the policy “will not pay for loss of or damage to . . . the interior of any building or structure caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driven by wind or not . . . .” A loss attributed to rainwater which enters the building through the roof is barred by this exclusion, according to a Nebraska court in Einspahr v. United Fire & Cas. Co.: it is a “tortured reading” of the exclusion to argue that once rain water enters a building it loses its nature as rain.[xviii] Damage to a basement flooded by a severe rainstorm is barred by the exclusion, the damage having been caused by or resulted from rain.