Among the many thorny insurance issues arising from Superstorm Sandy is whether “flood” or “water” exclusions, often found in standard-form commercial and personal lines policies, bar coverage for certain water-related losses. Although property might appear to have suffered damage following a storm event involving a “flood” of “water,” it is important for policyholders to closely review their insurance policies, because not all “floods” and so-called “flood exclusions,” are the same.
In some circumstances, policyholders facing water-related losses may find their damages are the result of storm events that are not excluded from coverage. Understanding the distinctions between different storm events and their results, combined with a careful reading of insurance terms, provisions and exclusions may make the difference between coverage and no coverage for substantial claims.
Insurance companies sometimes attempt to avoid coverage for the “flood” hazard by including water damage exclusions in homeowners and commercial property policies. Often using policy language drafted by the Insurance Services Office, Inc. (ISO), the typical “water” exclusion provides that the insurance company will not pay for loss or damage caused directly or indirectly by any of the following: (1) flood, surface water, waves, tides, tidal waves, overflow of any body of water or their spray, all whether driven by wind or not; (2) mudslide or mudflow; (3) water that backs up or overflows from a sewer, drain or sump; or (4) water under the ground surface pressing on or flowing or seeping through foundations, walls, floors or paved surfaces; basements, whether paved or not; or doors, windows or other openings.
All of these conditions apply whether naturally occurring or due to man-made or other artificial causes [CP 10-30-04 02]. These losses or damages are also excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
To shed light on what the insurance companies intended to exclude when writing the exclusion, one must turn to and focus on the policy language. Looking to that language, the standard water exclusion specifically includes the term “flood.”
A flood is generally defined as the partial or complete inundation of dry land; however, not all floods are the same. Some “floods” are caused by torrential rains (such as with Hurricane Irene in 2011); others by overflowing streams (including, when levees or dams give way); and still others by wind and changes in barometric pressure (i.e., “storm surge”).
From the standard policy language, therefore, it is unclear whether insurance companies sought to exclude damages resulting from all types of “floods,” or damages from the specific types of water-related risks that are listed in the water exclusion. Whether “storm surge” in particular falls within such water exclusions may be critical to Sandy claims because the presence of “water” in many places resulted from “storm surge” and not necessarily only the other specifically listed risks in the exclusion.
Recent ISO amendments to its water exclusion provide valuable insight concerning what insurance companies sought to exclude. Following Hurricane Katrina, the ISO revised its standard water exclusion. The key changes can be found in subpart 1, a new subpart 5, and the language that previously followed subpart 4 and now follows subpart 5, which is as follows:
Subpart 1. Flood, surface water, waves (including tidal wave and tsunami), tides, tidal water, overflow of any body of water or spray from any of these, all whether or not driven by wind (including storm surge).
Subpart 5. Waterborne material carried or otherwise moved by any of the water referred to in Paragraphs 1, 3 or 4, or material carried or otherwise moved by mudslide or mudflow.
This exclusion applies regardless of whether any of the above, in Paragraphs 1 through 5, is caused by an act of nature or is otherwise caused. An example of a situation to which this exclusion applies is the situation where a dam, levee, seawall or other boundary or containment system fails in whole or in part, for any reason, to contain the water. [CP 10 32 08 08 (emphasis added).]
The ISO also wrote a standardized “Water Exclusion Endorsement Advisory Notice to Policyholders.” The notice states that: “[t]he revised exclusion contains language reinforcing the scope of the water exclusion, and explicitly states that such exclusion applies regardless of whether the water damage is caused or exacerbated by an act of nature or a man-made event.” Specific mention is made of various boundary or containment systems such as dams and levees to further highlight this point. Further, express references to tsunami, storm surge and waterborne material are also added to the exclusion. [BCP 0010 09 11 (emphasis added).]
Express references in the new exclusion to “storm surge” and “tsunami” suggest that those types of “floods” were not originally intended to be excluded by the water exclusion. At a minimum, that the ISO found it necessary revise the water exclusion to supposedly “reinforce” its scope demonstrates that the standard-form water exclusion is ambiguous, as clarification or “reinforcement” would be unnecessary if the language were clear to begin with. Importantly, while some policies have adopted these amendments, many others have not. Policies that have not adopted the ISO amendments to the water damage exclusion may not exclude damage resulting from storm surge, levees breaking or similar events.
Superstorm Sandy visited incredible damage and disruptions on large swaths of the New York metropolitan error, from damage to buildings, lost inventory and lengthy service interruptions. Policyholders are now dealing with their insurance companies to help recover for these losses. Although insurance companies may reflexively take the position that storm damage is the result of a “flood,” closer scrutiny of policy provisions and the facts may lead to a different conclusion.
As with any insurance claim, policyholders should read their policies very closely, be diligent in pursuing, documenting and quantifying claims, and prepare to push back against improper coverage determinations. By taking those steps, policyholders stand a better chance of obtaining the valuable insurance coverage they purchased to assist them when disaster struck.
Sherilyn Pastor, Esq., Ira Gottlieb, Esq., and Nicholas Insua, Esq., are partners with McCarter & English, LLP’s Insurance Coverage & General Litigation Group. Ms. Pastor is the Practice Group Leader and a member of the firm’s Executive Committee. Mr. Gottlieb is the practice group leader of the firm’s Environment & Energy Practice Group. Ms. Pastor, Mr. Gottlieb and Mr. Insua counsel policyholders on a wide range of issues and have recovered billions of dollars, by settlement or judgment, on behalf of policyholder clients. The authors would like to thank Alexandra McElwee, an associate in the Insurance Coverage Group, for her assistance in preparing this article. This article is for informational purposes only and no reader should act based on this article without seeking appropriate professional advice.