Water Damage and All-Risk Insurance Coverage
December 23, 2013
An action in diversity was filed against the insurer, alleging breach of an all-risk insurance policy. This case is Fidelity Co-op. Bank v. Nova Cas. Co., 726 F.3d 31 (1st Cir. 2013).
The Knowles owned a five-story mixed-use rental property that was about 100 years old. The building had a flat, rubber-covered roof that had been installed by the previous owner one to two years before the Knowles bought the building. The drainage system on the roof consisted of a single drain located at the center of the roof covered by a strainer.
The building was mortgaged with Fidelity Co-Operative Bank and insured by Nova Casualty Company under an all-risk policy. A tropical storm brought heavy rains to the area, which resulted in the accumulation of a significant amount of water on the roof of the covered building. This high volume of water overwhelmed the rooftop drain, causing the water to pool on the roof and eventually leak through the skylights. The water caused substantial damage to the interior of the building, resulting in the closure of the entire building and the loss of rental income for the Knowles.
The Knowles filed a claim with Nova, but the insurer denied coverage based on the rain limitation exclusion and the faulty workmanship exclusion. After the claim was denied, the building was vandalized and much of its copper piping was cut out, causing further damage to the property. The Knowles filed a claim for this damage, but the insurer denied that claim also based on the vacancy exclusion. Due to these losses the Knowles defaulted on the mortgage, and Fidelity took title to the property.
Fidelity then filed its claim against Nova, but the district court granted summary judgment to Nova. This appeal followed.
On appeal, Fidelity asked the court of appeals to make sharp distinctions among rain, water damage caused by rain, and water damage caused by surface water. The bank wanted the court to narrowly construe the rain limitation exclusion to only exclude coverage for damage whose efficient proximate cause was rainfall. Fidelity argued that since the efficient proximate cause in this case was not the direct entry of rainfall into the building but was rather the blocked or inadequate roof drain, the damage was not caused by rain and so, did not fall within the rain limitation exclusion. Fidelity also argued that if the water on the roof was in fact surface water, it was no longer rain, and the rain limitation could not bar coverage. Nova of course rejected this argument.
The appeals court noted that while Nova argued that damage to the interior of the building was caused by rain, it could not agree. The court said that Nova's own experts determined that the blocked or inadequate roof drain caused the water to accumulate on the flat roof and the water damage thus occurred because the rainwater had backed up on the roof and ponded, meaning that the roof in effect flooded. The court found that when the blocked or inadequate drain was overwhelmed by the rainstorm, it set in motion a train of events lacking the intervention of any forces or the activation of a new source to cause the interior water damage. The failure of the drain must properly be deemed the efficient proximate cause of the damage, not the rain. The blocked or inadequate roof drain was a covered loss under the terms of the all-risk policy. Accordingly, the court ruled, it was error for the district court to conclude that the interior damage was caused by rain and was thus excluded from coverage under the rain limitation provision.
The circuit court then turned to the issue of surface water. Under Massachusetts law, “surface water” has been defined as waters from rain, melting snow, springs, or floods that lie or flow on the surface of the earth and naturally spread over the ground but do not form a part of a natural watercourse or lake. Also, the court found that the Supreme Judicial Court confirmed that damages resulting from water that flooded into properties after accumulating on artificial surfaces does not lose its character as surface water merely because it flowed along the artificial surface and seeped into or continued to flow onto the property.
After examining the policy language, the court stated that the policy does provide coverage for flooding caused by the unusual or rapid accumulation or runoff of surface waters from any source. Therefore, the water damage resulting from entry of the surface water into the interior of the building was explicitly covered.
The ruling of the district court was reversed and the case was remanded to that court for further proceedings in accordance with this opinion.
Editor's Note: The U.S. Court of Appeals, First Circuit, rules in this instance that failure of the roof drain that caused water to accumulate on a roof was the efficient proximate cause of damage to the interior of the building when the water got into the building. Therefore, the all-risk policy covered this property damage claim.
The court also held that water damage resulting from entry of surface water into the building from the inundated roof was covered under the policy.