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Insurance Policy Games: You Say Rain Damage, We Say Surface Water

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By Gabriella Khorasanee, JD on August 15, 2013 6:23 PM

Matthew and Sondra Knowles ("the Knowleses") owned a mixed-use five-story rental property in Massachusetts. In 2008, they weathered a tropical storm that resulted in excess rain water pooling on the roof of the building, which in turn resulted in property damage because water leaked through two glass skylights.

Nova Casualty Company ("Nova"), the Knowleses' insurance provider denied the insurance claims citing "rain limitation" and "faulty workmanship" provisions. The Knowleses ended up having to vacate the building and couldn't afford repairs. As a result of the long vacancy, the building was vandalized and robbed of its copper piping, which led to even more water damage. Due to the lost income from the rental property, the Knowleses defaulted on their mortgage, and Fidelity Co-operative Bank ("Fidelity") foreclosed.

Framing the Issues

Fidelity filed a claim against Nova on behalf of itself and the Knowleses, seeking a declaration that the damages resulting from physical losses and loss of income were covered by the insurance policy. Fidelity further sued for breach of contract, negligence and for violation of the Massachusetts consumer protection statute.

The U.S. District Court for the District of Massachusetts granted Nova's motion for summary judgment on all five claims, and Fidelity appealed. The central issue was the distinction between "rain" and "surface" water. The court first noted that any ambiguity in the insurance policy would be construed against the insurer. Next, it looked at the language of the policy which explicitly excluded damages incurred as a result of water. However, in policy amendments, that provision was deleted.

Proximate Cause Analysis

After reviewing the language of the contract, the court conducted an "efficient cause" or proximate cause analysis of the damage. Since the flooding resulted from the inadequate water drain (not found to be defective because of workmanship), and not as a result of rain, the court found that the water damage should be defined as resulting from surface water. Therefore, the court found that the district court was in error for framing the issue as one of rain, and the rain exemption provision. Finding that the damage was covered by the insurance policy, the First Circuit remanded for further proceedings based on its analysis.

Post-Katrina/Sandy Era

Though at first glance this case may seem run-of-the-mill, it must be looked at through a post-Sandy lens.

With the unfortunate increase in tropical storms and other natural disasters, there are sure to be many more claims like this making their way through the judicial system. If anything, this case can serve as a reminder that any ambiguity in policies will be construed against the insurer. Insurers will want to make sure that the language in their policies are clear, and those seeking insurance would do well to read the fine print to know exactly what's covered.

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