The conundrum of “water-related or “water damage”
Anyone who is new to commercial insurance
can quickly get tripped up by water-related claims.
By Marc McNulty, CIC, CRM
Anyone who is new to commercial insurance can quickly get tripped up by water-related claims. The CP 10 30 09 17 (Causes of Loss – Special Form) excludes a range of water-related situations but in turn provides coverage for “water damage,” which is a defined term within the form. Identical language can be found within the BP 00 03 08 24 (Businessowners Coverage Form).
Before we dive too deeply into this, let’s clear the mud (or perhaps mudflow or waterborne material in the case of these forms) to determine on a high level what’s covered and what isn’t.
These forms both contain the following exclusion:
Water
(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);
(2) Mudslide or mudflow;
(3) Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment;
(4) Water under the ground surface pressing on, or flowing or seeping through: (a) Foundations, walls, floors or paved surfaces; (b) Basements, whether paved or not; or (c) Doors, windows or other openings; or
(5) Waterborne material carried or otherwise moved by any of the water referred to in Paragraph (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.
The forms then give back coverage for “water damage, other liquids, powder or molten material damage.” As we noted earlier, “water damage” is a defined term within the form (although it slightly varies between the two forms).
The BP 00 03 08 24 defines “water damage” as follows:
(1) Accidental discharge or leakage of water or steam as the direct result of the breaking apart or cracking of any part of a system or appliance (other than a sump system including its related equipment and parts) containing water or steam; and
(2) Accidental discharge or leakage of water or waterborne material as the direct result of the breaking apart or cracking of a water or sewer pipe caused by wear and tear, when the pipe is located off the described premises and is connected to or is part of a potable water supply system or sanitary sewer system, operated by a public or private utility service provider pursuant to authority granted by the state or governmental subdivision where the described premises are located.
The form continues by clarifying that water damage “does not include loss or damage otherwise excluded under the terms of the Water Exclusion.”
The CP 10 30 09 17 form has slightly different language in paragraph 1. Instead of referring to a “system or appliance,” it reads “a plumbing, heating, air conditioning or other system or appliance.”
Side note—remember that both forms exclude coverage for “water damage” if the covered building has been vacant for more than 60 consecutive days prior to the loss or damage.
So, to simplify things as much as possible, if a pipe bursts, then the “water damage” carve-back will typically provide coverage. (Of course, this will depend on the exact details of the loss, but we’re assuming a simple-case scenario.) However, if the loss is caused by flood, water backup, or hydrostatic pressure (which is the fancy term for provision 4 in the water exclusion), then coverage will be excluded—unless added back by endorsement, of course.
Speaking of endorsements, make sure you understand what coverage is being provided any time you offer a water-related enhancement endorsement to an insured.
For instance, the BP 04 53 08 24 (Water Back-Up and Sump Overflow) endorsement that is available for the businessowners coverage form provides coverage for the following (up to the specified limit of insurance on the form):
- Water or waterborne material which backs up through or overflows or is otherwise discharged from a sewer or drain; or
- Water or waterborne material which overflows or is otherwise discharged from a sump, sump pump or related equipment, even if the overflow or discharge results from mechanical breakdown of a sump pump or its related equipment.
However, with respect to Paragraph A.2., we will not pay the cost of repairing or replacing a sump pump or its related equipment in the event of mechanical breakdown.
Notice what is missing? Coverage for flood, surface water, etc., as well as coverage for hydrostatic pressure. There are additional caveats within the form that exclude coverage if the insured fails to keep a sump pump or related equipment in good working order or fails to perform routine maintenance to keep sewers or drains free from obstructions. Losses caused by sump pump failure caused by a power loss are also excluded.
This language isn’t unusual, as similar verbiage can be found in various carrier-proprietary property enhancement endorsements that broaden property coverage with additional bells and whistles.
However, let’s compare this to a proprietary form from a national carrier that offers specialty programs for a host of industries:
CAUSES OF LOSS – SPECIAL FORM, Additional Coverage – Water is added:
“Water” is included as a Covered Cause of Loss. We will not pay more than $30,000 in any one occurrence.
- “Water” means: (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: (a) Foundations, walls, floors or paved surfaces; (b) Basements, whether paved or not; or (c) Doors, windows or other openings.
This extension applies to all claim expenses including, but not limited to building, business personal property, personal property of others, business income and extra expense and debris removal. However, this extension does not apply to roof drainage systems, gutters, or downspouts.
While this form has the roof drainage exclusion and the $30,000 limit, it is most certainly broader in all other areas.
As we have seen in other instances over the years, coverage forms and ensuing endorsements can vary from one carrier to the next, so don’t assume that all forms are equal.
Make sure you understand what you are quoting and selling and—as boring as it may seem—read the policy forms!
The author
Marc McNulty, CIC, CRM, is a principal at The Uhl Agency in Dayton, Ohio, and has been with the agency since 2001. He divides his time among sales, marketing, technology and operational duties. You can reach Marc via email at marcmcnulty@uhlagency.com.
