Dig a Little Deeper
By Bruce Hicks, CPCU, CLU
HOLD YOUR NOSE
Flooding is an age-old property event that affects personal and commercial insureds
The Court Decisions column is a popular feature in Rough Notes magazine, in part because the courtroom is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from Rough Notes Company’s digital solutions. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions or offer broader perspectives.
The case involves a business that ended up being in the wrong location at the wrong time. Accessories, Ltd., was covered under a commercial general liability (CGL) policy when the firm’s facility was flooded by sewage. The sewage backed up from a nearby blocked sewer line.
Briefly, a municipal board employee received a call from a citizen who reported hearing “gurgling” within their basement drain. The employee traveled to an area of sewer line that had a history of blockage. That section was cleared but, shortly afterward, the employee was notified of blockage in a different section of sewer line, which was in front of Accessories. The clogged pipeline there was also cleared, but not in time to prevent damage to the business.
Properly examining the insurer’s rationale for rejecting the claim could have brought (the owners) to the same realization as the insurer and the appellate court: that coverage was not available.
When Accessories’ owners filed a claim, their insurer rebuffed the request, so a lawsuit followed. The dispute revolved around whether the CGL policy’s exclusionary wording legitimately applied to the loss. Specifically, the CGL barred losses due to water, including water that backs up or overflows from a sewer, drain, or sump.
A trial court found in favor of Accessories, but the insurer prevailed after an appeal.
This is an age-old issue in property insurance, whether personal or commercial. Flooding tends to be a catastrophic event since it often involves widespread damage to property. Over many years, policy language has been modified in a painful, incremental manner.
Disputes over water damage have always been plentiful since losses are usually severe. Exclusions have had to expand descriptions because the stakes were usually high, acting as a huge incentive to attack wording for any possible weakness that could secure coverage.
A frequent source of change in policy language is the filing of lawsuits. The goal for insurers is to eliminate having to deal with flood since the peril is handled by separate, usually public (federally sponsored), coverage. Language modifications have been plentiful, such as the following:
- Adding definitions of flood, rather than relying on common understanding
- Expanding definitions to include various sources such as surface, run-off, seeping, underground pressure, etc.
- Refining definitions such as use of grammar or connecting words
- Introducing additional circumstances such as water backup, overflow, or hydrostatic pressure
- Changing how exclusions apply such as adding reference to concurrent causes, or causation involving winds or waterborne materials
Lawsuits are similar to nature in that they both abhor vacuums. They rush in, often violently, to fill gaps. Of course, regarding insurance, the vacuum is an absence of either awareness or diligence.
Consider Accessories’ owner’s level of awareness. The municipal employee’s first act on learning of a pipeline situation was to immediately visit a known problem spot, then a problem immediately occurred nearby.
Property owners should know of obvious situations that may be a threat. Securing flood protection could have been an option. Being practical about lawsuits is another issue.
Accessories ended up with two significant expenses: having to deal with sewage damage and paying litigation costs. Properly examining the insurer’s rationale for rejecting the claim could have brought them to the same realization as the insurer and the appellate court: that coverage was not available.
Reliance on insurance to assist with losses includes recognizing limitations, seeking additional sources of coverage, and avoiding other costs by frankly evaluating post-loss positions.
Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educational Products Division, at The Rough Notes Company, Inc. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and currently serves on its International Interest Group Committee.