The New York Court of Appeals has recently addressed the often vexing issue of whether there is insurance coverage for water damage to a residential property. In Platek v Town of Hamburg, 2015 NY Slip Op 01483 (Feb. 19, 2015), the plaintiffs’ home was damaged after a subsurface water main pipe abutting their property ruptured, causing water to flood into their finished basement. Plaintiffs immediately made a claim under their homeowners’ insurance policy issued by Defendant, Allstate Indemnity Company (“Allstate”). The policy excluded damage caused by water, listed as items 1 through 4 in the policy, but contained an exclusion which stated,
We do cover sudden and accidental direct physical loss caused by fire, explosion or theft resulting through items 1 through 4… (emphasis added in the original opinion).
Allstate denied coverage to Plaintiffs’ property damage claim based on item 4 of the policy’s water loss exclusion.
Following Allstate’s denial, Plaintiffs commenced a breach of contract action in Supreme Court. Plaintiffs moved for summary judgment and asked the Supreme Court to declare that their policy covered their loss. Plaintiffs pointed to an exception to the exclusion relied upon by Allstate, which stated that Allstate provided coverage for “accidental direct physical loss covered by… explosions” and caused by water on or below the surface of the ground. In support of their motion, Plaintiffs’ expert (an engineer) stated that the damage to the Plaintiffs’ home was “caused by an explosion resulting from internally pressurized water suddenly and accidentally bursting from the underground pipe.”
Allstate opposed Plaintiffs’ motion, and cross-moved for summary judgment on the ground that the policy did not cover Plaintiffs’ claim. Allstate argued that the policy excluded damage from water loss and that the exception on which Plaintiffs relied did not apply because, under that exception’s wording, any “loss caused by … explosion” must “result from” the explosion. In the case at bar, however, any explosion “occurred earlier, outside the residence premises, when the water main broke.”
Plaintiffs argued that an “explosion” had resulted from “water…below the surface of the ground” – the result of too much water pressure in the underground pipe – and that they were entitled to coverage for the ensuing “sudden and accidental direct physical loss to their property.” Allstate countered that the sudden and accidental direct physical loss exception was an “ensuing loss” provision, meaning that any initial loss to the insureds’ property caused by water on or below the surface of the ground would be excluded, if an explosion resulted from that initial loss, but any secondary or ensuing loss caused by the explosion would be covered.
The Supreme Court granted Plaintiffs’ motion, and denied Allstate’s cross-motion, declaring that Plaintiffs’ loss was covered under the policy. Allstate appealed, and the Fourth Department, with two dissenting opinions, found that since both parties’ interpretation of the exclusion was reasonable, the policy language was ambiguous and should be construed against the drafting party and in favor of the insureds.
The Court of Appeals, by Judge Read, agreed with the dissenting justices of the Fourth Department, and reversed. The Court followed three basic principles to guide their analysis of the issue. First, they acknowledged that the language of the policy would determine a dispute over coverage, and that the policy must be construed “in a way that affords a fair meaning to all of the language employed by the parties in the contract and leaves no provision without force and effect.” Second, the Court acknowledged that “[where] the existence of coverage depends entirely on the applicability of [an] exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied.” And third, when a property insurance policy contains an exclusion with an exception for ensuing loss, courts must assure “that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk.”
In this case, the homeowners’ loss occurred when water from a burst water main flowed onto their property, flooding the basement of their home. Accordingly, their loss falls within the water loss exclusion.
In deciding whether the loss under that exclusion falls into the sudden and accidental exception, the court ultimately agreed with Allstate that the exception was properly characterized as an ensuing loss provision, providing coverage when damage is caused by a covered peril which arises as a result of an excluded peril.
Since an ensuing loss “at least requires a new loss to property that is of a kind not excluded by the policy… it [does not] resurrect coverage for an excluded peril.” Interpreting a policy exclusion for water loss, and applying an exception (here, an ensuing loss provision) to effective obtain coverage for a loss that was meant to be excluded, subverts the intent of the parties and forces the insurer to cover a loss it clearly meant to exclude. The Court refused to interpret an ensuing loss provision to provide coverage for an otherwise affirmatively excluded claim.
Thus, at the end of the day, Plaintiffs’ claims were denied, Allstate’s cross motion for summary judgment was granted, and no insurance was provided. As is often the case with claims involving water losses, exclusions, and exceptions to exclusions, the policy’s meaning was murky and the ultimate result was far from obvious.