Calif. Plumbs The Depths Of Water Damage Exclusions

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A recent decision by the California Court of Appeal confirms the willingness of courts in California to enforce exclusions for water damage in property policies, thus precluding coverage for the policyholders’ alleged water-related losses.

First-party property insurance policies, in both commercial and personal lines, typically contain a provision excluding losses caused by, among other things, water that backs up or overflows from a sewer or drain, water progressively seeping or leaking from a plumbing system or household appliance and water that flows or seeps through a building.

These exclusions are often at issue in property coverage litigation, particularly in disputes involving construction defects allegedly resulting in water intrusion, or the failure of components of the insured building’s plumbing or sewer systems. It is in these contexts that California courts have, in recent years, examined the application of exclusions for water damage.

Most recently, in Cardio Diagnostic Imaging Inc. v. Farmers Ins. Exchange,[1] the California Court of Appeal for the Second District affirmed summary judgment in favor of the insurer on the basis of an exclusion precluding coverage for damages resulting from water backing up or overflowing from a sewer or drain.

The case involved a claim for coverage for the damage to the insured’s floors and equipment when water overflowed from a toilet in an upper floor of the building as a result of a blockage in the sewer line some distance away from the toilet.

The court emphasized the importance of the actual language of the exclusion, a critical issue in every case in this area, by rejecting the policyholder’s attempt to focus only on the “backs up” portion of the exclusion and holding instead that the disjunctive language used (“backs up or overflows from”) also precludes coverage when water is unable to proceed down a drain and thus overflows.

The Court of Appeal’s focus on the language of the disputed policy provision is further shown by its holdings that the placement of the exclusion in the policy and extrinsic evidence such as advertisements are irrelevant when the language of the exclusion is unambiguous.

Other courts in California have, in recent years, similarly enforced the plain meaning of water damage exclusions, rejecting, as a matter of law, attempts by policyholders to create ambiguities or limit the scope of the exclusionary language.

In Freedman v. State Farm Ins. Co.,[2] where a contractor negligently drove a nail through a pipe, resulting, over time, in corrosion and extensive water damage, the Court of Appeal held that an exclusion for “continuous or repeated seepage or leakage of water” from a plumbing system barred coverage for the claimed losses, finding unpersuasive the insureds’ arguments that the terms “continuous” and “repeated” were ambiguous and that the exclusion applied only to normal deterioration of the system.

In Penn-America Ins. Co. v. Mike’s Tailoring,[3] reversing a judgment against the insurer, the Court of Appeal concluded that an exclusion for damage caused by “[w]ater that backs up from a sewer or drain” precluded coverage for the loss suffered by the insured when a clogged sewer line underneath its property caused raw sewage to flow into its basement.

The court found that the provision was facially unambiguous and rejected the policyholder’s contention that the exclusion applied only to water and did not extend to pollutants (sewage) carried by the water, as well as its argument that “sewer” meant only the public part of a sewer line, and thus, the exclusion did not apply when the blockage is within the insured premises.

In Sapiro v. Encompass Ins.,[4] the federal district court found that the damage to the insureds’ home, caused by the negligent work of a contractor that left a gap between the home’s flashing and stucco coating, which allowed water to infiltrate the home, was excluded from coverage by an exclusion for damage caused by “water which exerts pressure on, or seeps or leaks through a building,” even though the insureds sought to characterize their losses as “moisture” or “fungal” damages.

These decisions demonstrate that California courts stand ready to enforce water damage exclusions in property insurance policies according to their terms and are unlikely to entertain arguments seeking to artificially render those provisions ambiguous or to read into the exclusions additional limitations that are not set forth therein.

--By Jose Umbert, Zelle Hofmann Voelbel & Mason LLP

[1] 212 Cal.App.4th 69 (2012).

[2] 173 Cal.App.4th 957 (2009).

[3] 125 Cal.App.4th 884 (2005).

[4] 221 F.R.D. 513 (N.D. Cal. 2004).