The Supreme Court of Ohio ruled in favor of an insurer who had denied an insured's claim based on the water backup exclusion. The case is AKC, Inc. v. United Specialty Ins. Co., 187 N.E.3d 501 (Ohio 2021).
A sewer backed up and caused damage to a nightclub in Ohio. The nightclub owner hired an outside company, AKC, Inc., to clean up the damages. The owner also submitted a claim under its commercial property policy with United Specialty. The claim was denied based on an exclusion for water damage caused by a sewer backup. After the denial, the nightclub owner assigned its rights to AKC.
AKC subsequently sued United Specialty for breach of contract. United Specialty moved for summary judgment based on the water backup exclusion. The trial court ruled in favor of United Specialty. AKC appealed, arguing the exclusion was ambiguous. The district appellate court reversed and found coverage based on the alleged ambiguity. United Specialty appealed.
AKC argued there was a distinct difference between water and sewage that allowed for coverage. Since the water backup exclusion in the United Specialty policy did not draw this distinction, it was ambiguous and should therefore be construed in favor of AKC.
According to the Supreme Court of Ohio, AKC was taking the policy too literally. The water backup exclusion precluded coverage for any "loss or damage caused directly or indirectly by water that backs up or overflows from a sewer, drain or sump." Any water that backs up from a sewer would, by its very nature, contain sewage.
The justices acknowledged that policy exclusions are read narrowly to exclude only the losses that are clearly excluded, the reading cannot dismiss the clear intentions of an exclusion. The water backup exclusion was meant to bar coverage for any damages occasioned by "water that backs up or overflows from a sewer, drain or sump." (emphasis added).
The other and more pressing problem with the district court's ruling was the alleged ambiguity found in the lack of distinction between regular water and sewage water. The key question concerned not the presence or lack of specific language, but whether the exclusion in the policy applied to a water backup that brought sewage into the insured premises. The court agreed with AKC that United Specialty could have included more specific language to distinguish regular water from sewage water, but the lack of this specific language did not change the intent of the exclusion: to bar coverage for damages due to water that entered the property from a sewer backup. In awarding coverage to AKC, the district court had impermissibly shoehorned ambiguity into the policy where there was none.
The district court ruling in favor of AKC was reversed, and the trial court's verdict in favor of United Specialty was reinstated.
Editor's Note: Exclusions for water and sewer backups are common in commercial and personal property policies. However, as the Supreme Court of Ohio pointed out, endorsements are available to insureds that "effectively remove the water-backup exclusion from the policy" and grant coverage to insureds for losses typically excluded due to water or sewer backups. In this case, since the nightclub owner had not purchased such an endorsement to go with his commercial property policy, the protection it would have offered was unavailable to AKC.
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