The Court of Appeals of Colorado ruled that summary judgment in a water damage case was inappropriate when there was a factual dispute about how the water had gotten into the insured's home. The case is Morley v. United Servs. Auto. Ass'n, 465 P.3d 71 (Colo. App. 2019).
The Morleys had a vacation home in Colorado with a flat roof. A summer hailstorm caused roof damage, and subsequent rain showers leaked through the roof and caused water damage to the home's interior. At the time, the Morleys had an all-risks property policy through United Services Automobile Association (USAA). An adjuster for USAA performed an inspection and found the Morleys needed a full roof replacement. USAA approved and paid this claim as well as an additional payment specifically for the Morley's to repair the interior damage.
During that time, the contractor making the repairs reported additional interior water damage. Those additional damages required tearing out and replacing the drywall, carpet, cabinets, and insulation. USAA denied this additional claim.
The Morleys sued USAA for breach of contract and bad faith. USAA filed a motion for summary judgment stating that, even if rain had been the culprit of the interior damage to the Morleys' house, the surface water exclusion in the policy precluded coverage; USAA had not referenced the surface water exclusion in their earlier denial. The Morleys argued that water leaking through a damaged roof wasn't surface water, or, if it was surface water, it ceased being surface water when diverted by the roof, and that, at any rate, the surface water exclusion was ambiguous and must be interpreted against USAA. The trial court sided with USAA and ruled the interior damage was the victim of surface water. The Morleys appealed.
What Is Surface Water?
The appellate court began by working out the meaning of surface water in the context of the Morleys' policy. They looked to an earlier case from the Colorado Supreme Court that had also addressed the meaning of surface water. In Heller v. Fire Insurance Exchange, 800 P.2d 1006 (Colo. 1990), water from melted snow was diverted onto the insured's property by large, man-made trenches before causing property damage. In the absence of a policy definition, the justices determined that surface water was "water from melted snow, falling rain, or rising springs, lying or flowing naturally on the earth's surface, not gathering into or forming any more definite body of water than a mere bog, swamp, slough, or marsh, and lost by percolation, evaporation, or natural drainage" (emphasis added).
Given this clear definition from the Colorado Supreme Court, the judges ruled that the meaning of surface water was clear and therefore could not be considered ambiguous. Therefore, the surface water exclusion was not ambiguous. With this definition in mind, the judges turned to interpreting this definition in the context of the Morleys' claim
Was It Surface Water?
The court noted it would be illogical to assume that water running off a roof or other man-made surface could not be considered surface water. On the other hand, water leaking through a damaged roof was not really "running off the roof" in the typical sense, so it was also illogical to say water leaking through the roof was automatically surface water.
In the Heller case described above, the Colorado Supreme Court stated that the runoff from the snow had been surface water at first because it was on the ground. However, when the water began running through the trenches, it was no longer surface water because the "trenches were defined channels that prevented percolation, evaporation, or natural drainage" (emphasis added). Therefore, since the water that caused property damage on the insured's property was not surface water, the surface water exclusion was inapplicable. Since the surface water exclusion didn't apply, the insured's claim was covered.
In the Morleys' case, the judges stated it had been "rainwater/hail penetrating the roof of the [Morleys'] home" that had precipitated the interior water damage. This statement, said the appellate court, was incongruous with how the lower court had called that same water "surface water" subject to the surface water exclusion. The Morleys argued the interior damage had been caused by rain leaking through their hail-damaged roof, but USAA maintained that, even if the Morleys were right, it was still entitled to summary judgment. The real question, then, was exactly how the water had entered the house in the first place. The court reasoned that a jury could find in favor of either party, which presented a dispute of material fact that could not be resolved by summary judgment.
The award of summary judgment by the trial court was reversed and the case sent back for consistent proceedings.
Editor's Note: In order for the surface water exclusion to apply, the water that caused the damage needs to be surface water. The key is not the source of the water, but what the water does prior to causing damage. In this case, the Morley's roof had already been damaged by hail, so it was reasonable to think the rain leaked into the house without sitting on the roof as surface water. On the other hand, USAA's assertion that the rain had sat on the roof before leaking into the house was equally plausible. Since each contention could be correct, whether the interior damage to the Morley's house had or had not been caused by surface water was a question for a jury to answer, not a judge.
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