Mind the Gap
Understand the exclusions regarding freezing, mold, floods and backups
Some of the most common—yet confusing—types of homeowners insurance losses stem from claims involving water. For inexperienced agents this can be overwhelming; however, you’ll find that you can master this in no time at all if you break this subject into different categories.
So why was his claim denied and our client’s wasn’t? Believe it or not, it came down to how their water backup endorsements read.
By now you know that when a pipe bursts, the homeowners policy will respond by covering the resulting damage (but not the pipe itself). However, how does the policy respond to other water-related situations?
The issues
The unendorsed ISO HO 00 03 and HO 00 05 forms address water in several areas throughout the policy. Both contain straightforward exclusions and, of course, coverage carve-backs.
The first water-related exclusion that is found in the 05 11 edition of both policies pertains to the “freezing of a plumbing, heating, air conditioning or automatic fire protective sprinkler system or of a household appliance, or by discharge, leakage, or overflow within the system or appliance caused by freezing.”
Whew. Did you get all of that? The good news is that a carve-back immediately follows!
In short, neither policy will cover the freezing of a system that uses water unless heat is maintained in the building or the systems have had the water supply shut off to them and they have been drained.
Next, both forms contain additional exclusions that pertain to freezing. Namely, they won’t cover losses stemming from freezing, thawing, pressure or weight of water or ice (whether driven by wind or not) to items such as fences, pavement, patios, swimming pools, structures supporting part of a building, retaining walls, piers, wharfs, or docks.
Soon thereafter we venture into an area that recently caused an issue for an acquaintance of mine: mold, fungus or wet rot. Both homeowners forms state that losses caused by these perils are excluded unless the resulting damage is “hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure.” In addition, in order to be covered, the mold, fungus or wet rot situation must be caused by the accidental discharge or overflow of water or steam from within:
(a) A plumbing, heating, air conditioning or automatic fire protective sprinkler system, or a household appliance, on the “residence premises”: or
(b) A storm drain, or water, steam or sewer pipes, off the “residence premises.”
The exclusion ends by stating that sump pumps, roof drains, gutters, and downspouts do not meet the definition of “plumbing systems” or “household equipment.”
Now that we have those out of the way, let’s explore the major water-related exclusion found in both forms under the “Water” heading of the “Section I – Exclusions” section.
The forms state they do not insure for loss caused directly or indirectly by any of the following:
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.
This paragraph is your standard flood exclusion. We’ll touch upon this a little later.
Next is the paragraph that excludes losses pertaining to water backup:
Water which:
(1) Backs up through sewers or drains; or
Overflows or is otherwise discharged from a sump, sump pump or related equipment.
The third paragraph in this particular section pertains to what is known in the industry as “hydrostatic pressure.” Again, we will touch upon this a little later, but this one can prove to be tricky.
Water below the surface of the ground, including water which exerts pressure on, or seeps, leaks or flows through a building, sidewalk, driveway, patio, foundation, swimming pool or other structure.
Last, the exclusion addresses waterborne material carried or moved by any of the types of water scenarios previously mentioned.
Why it matters
When you boil it down, each of these exclusions brings up three important questions for agents to consider:
Do you understand the exclusions in the forms?
Are you asking your clients and prospects the right questions to find out if they have exposures that can be affected by these exclusions?
When needed, do you know how to provide coverage that eliminates these exclusions?
As always, familiarizing yourself with the policy enhancements and endorsements that are offered by your insurance carriers is critical. In addition, take time to learn what your competitors are offering. I’ve found over the years that some of the water-related coverage provided by captive agents is quite skimpy compared with the coverage offered by our agency’s carriers.
Knowing this information—and properly utilizing it based upon your clients’ needs—can give you a big leg up over your competition.
How to fix the problem
Let’s examine each of the potential solutions in the same order that the exclusions were presented:
Freezing—Unfortunately, there isn’t a remedy to address these exclusions, other than to make sure your clients know that heat should be maintained in their homes and buildings. Or, if they are turning the heat off, make sure they shut off the water supply and drain their systems of water. Last, for any of your clients who have swimming pools, make sure they drain them before cold weather arrives.
I haven’t seen any buy-back options for this exposure but of course check with your insurance companies to confirm.
Mold, Fungus, or Wet Rot—Remember my acquaintance who had an issue with this area? Both he (who isn’t a client of our agency) and his neighbor (who is a client of our agency) had identical situations, as both had mold growing in their basements that went undetected for quite some time. Both purchased variants of the HO 04 27 Limited Fungi, Wet or Dry Rot, or Bacteria Coverage endorsement that was offered by their respective insurance companies. His claim wasn’t covered; our client’s claim was.
In both cases, the mold endorsements they purchased broadened coverage so that the reference to plumbing, HVAC systems, sprinkler systems, and household appliances was eliminated. Their forms also stated that the resulting damage still had to be unknown and hidden to the insureds—but obviously that wasn’t an issue here.
So why was his claim denied and our client’s wasn’t? Believe it or not, it came down to how their water backup endorsements read. Remember the earlier term “hydrostatic pressure”? That was the difference.
The ISO HO 04 27 specifically states that the fungi, wet rot, or bacteria coverage that is provided by the endorsement “only applies when such loss or costs are a result of a Peril Insured Against that occurs during the policy period.” Both endorsements in question had similar language on them. However, the one policy didn’t have the following language on its water backup endorsement:
(1) “We” will pay for direct “physical loss” to Covered Property caused by or resulting from water or waterborne material:
(c) Below the surface of the ground, including water or waterborne materials which exert pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure.
In both cases, the adjusters found that the mold was caused by water that had seeped through the basement foundation. Our client had this hydrostatic pressure language in her policy and her claim was covered as a result.
Now, to get back on track, let’s look at the final two remaining exclusions:
Flood—Obviously this can be addressed with a flood insurance policy through the NFIP or a similar program. However, be careful not to overcommit to the coverage form. Read the definition of “flood” and make sure your client understands what is considered a “flood” and what isn’t. There are certainly surface water runoff situations that are not covered by either a homeowners policy or a flood policy!
Water Backup—Almost every insurance company offers some version of ISO’s HO 04 95 “Limited Water Back-Up and Sump Discharge or Overflow Coverage” endorsement. This is the classic endorsement that covers sump pump failures and the damage that such failures cause. This is an easy remedy for any of your clients who have finished basements and/or contents stored in their basements.
In summary
Water-related claims are some of the most avoidable types of losses when you learn to ask the right questions of your clients and, in turn, pair them up with the appropriate insurance coverage. For example, you won’t have to be in the industry long before you see the value of selling water backup coverage to clients who think they’ll never need it. Once they do need it, they will be truly grateful and you’ll have secured your place in their mind as a trusted advisor!
The author
Marc McNulty, CIC, CRM, is vice president of insurance operations 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 at marcmcnulty@uhlagency.com
