The insured commercial property had a water main break beneath the slab. The carrier is excluding the damage citing the language in the CP 10 32 08 08 water exclusion form. Specifically, they are relying on the language that excludes "water under the ground surface . . ." that flows through the floors etc. FC&S has addressed this issue several times over the years and has always taken the position, in the absence of other policy language, that water below the ground is meant to exclude subterranean water, not water from a broken pipe. And certainly not in a situation where, as with this policy, the pipe is specifically included as covered property. I have seen water from a pipe properly excluded when the language in the policy specifically said something like "regardless of the source of the water" which made the intent clear that they wanted to exclude both water from underground pipes as well as subterranean water.
The Water Exclusion Endorsement CP 10 32 08 08 does not have language that says "regardless of source." However, the endorsement does say that the "exclusion applies regardless of whether any of the above, in Paragraphs 1. Through 5. [various listed exclusions such as mudslides, etc.] is caused by an act of nature or otherwise." The endorsement then gives an example of if a dam or levee fails.
The "caused by" language seems very distinguishable from the "regardless of the source" language. Regardless of source is clear that if the source of the water is a pipe it is excluded. The "caused by" language does not address the source at all. It only addresses the cause of loss. So, if the excluded water, such as a flood, is caused by rain or by a failed dam, it is still excluded. It would seem that if the water damage to the building is caused by a failed pipe releasing water from a plumbing system, not subterranean water, that loss would be covered because the cause of loss is irrelevant. Any cause will serve to exclude the water that is meant to be excluded in the endorsement. But, the cause of loss cannot exclude water the type of water that is not otherwise excluded in the endorsement. For example, if a fire suppression sprinkler broke and released water in a building, this endorsement would not exclude that water damage, regardless of the cause of loss, because that water is not excluded. Other language in the policy may apply, but not this endorsement. In our case, when we look solely at the type of water being excluded, we are back to the "water under the ground surface," language which is referring to subterranean water and thus the water from a broken pipe should be covered as it is not subterranean water at all but water from within a plumbing system. Please give me your opinion.
Michigan Subscriber
I have researched the original ISO circular that introduced this water exclusion endorsement, and your analysis is accurate. The endorsement was created after cases arising out of Hurricane Katrina that found ambiguity in the term 'flood', as it was not defined in the policies. ISO based their decision to create the endorsement off of several court cases, but what follows are relevant excerpts of findings in the Louisiana Supreme Court, in Sher v. Lafayette Ins. Co., No. 07-C-2441 (consolidated with No. 07-C-2443), 2008 WL 928486 (La. Apr.08, 2008), which reversed a lower court's ruling that found the word "flood" ambiguous in the water exclusion of a commercial all-risk policy covering a five-unit apartment building:
..The plain, ordinary and generally prevailing meaning of the word "flood" is the overflow of a body of water causing a large amount of water to cover an area that is usually dry. This definition does not depend on locality, culture, or even national origin – the entire English speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry land. Contrary to the court of appeal's reasoning, this definition does not change or depend on whether the event is a natural disaster or a man-made one – in either case, a large amount of water covers an area that is usually dry. The plain, ordinary and generally prevailing meaning is all inclusive. Further, of the examples of high water contained in the exclusion and described by the court of appeal as "natural disasters", only one, tides, is exclusively natural – waves, tidal waves, and the overflow of water may be either natural or man-made, [FN2] as may be "floods"….
[FN2. Waves may be caused by high wind, boats, or even cars driven in high water. Tidal waves are caused by seismic events, such as earthquakes, underwater landslides (which may be natural or man-made), or underground nuclear testing. Water may overflow its natural boundaries because of seasonal rising of the water level, damming, levee breakage, or other natural and man-made causes.]
In ISO's introduction of the endorsement, the intent of the endorsement, at least in part, is to provide language reinforcing the scope of the water exclusion regardless of the cause, that is, water damage caused by an act of nature or otherwise caused. Specific mention is made of various boundary or containment systems such as dams and levees to further highlight this point.
Thus, you are correct in that the "caused by" language does not address the source at all. It only addresses the cause of loss. So, if the excluded water, such as a flood, is caused by rain or by a failed dam, it is still excluded. It would seem that if the water damage to the building is caused by a failed pipe releasing water from a plumbing system, not subterranean water, that loss would be covered because the cause of loss is irrelevant.
I have also attached the ISO Notice to Policyholders which was available to be attached to all policies when the endorsement was first added.
Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.