In Cardio Diagnostic Imaging, Inc. v. Farmers Insurance Exchange, Case No. B239145 (Dec. 18, 2012; certified for publication), the Second Division of the California Court of Appeal affirmed the lower court’s ruling that an exclusion in a first-party property insurance policy precluding coverage for damages caused directly or indirectly by “water that backs up or overflows from a sewer, drain or sump” was unambiguous and barred coverage for flood damage to the insured’s property caused by a malfunctioning toilet that overflowed due to a blockage in a connecting sewer line.
On appeal, the insured (“Cardio”) made three arguments as to why the exclusion should not preclude coverage for the damage to its property. First, Cardio argued that the phrase “backs up or overflows from” meant that water must come out of the sewer or drain and does not include water unable to proceed down an interior drain. Second, Cardio argued that the exclusion should be limited to water damage from large-scale disasters because it was listed among other exclusions precluding coverage for damage caused by such disasters. Third, Cardio argued that the exclusion did not apply because the damage was caused by water overflowing out of a toilet as opposed to water overflowing out of a drain.
The Appellate Court disagreed, finding the inclusion of the word “or ” in the exclusion critical to the interpretation of the exclusion. Applying the fundamental principle that policy language must be construed so as to give effect to every term, the Appellate Court concluded that the exclusion unambiguously applied both to water which “backs up,” and to water that “overflows from” a sewer or drain. Additionally, the Court rejected Cardio’s argument that the exclusion’s placement among other exclusions related to large-scale disasters warranted limiting its application to those types of events because the wording of the exclusion was not so limited. Finally, the Court rejected Cardio’s attempt to negate the exclusion because the overflow resulted from a toilet and not a “drain,” finding the distinction immaterial given that the toilet was connected to a drain.