For the second time in two months, the Massachusetts Supreme Judicial Court was called upon to decide whether or not property damage was covered when the damage resulted from a combination of a covered peril and an excluded peril. Once again, the court upheld the policy’s enforceable anti-concurrent causation language, finding that coverage was precluded.
In Surabian Realty Co. v. NGM Insurance Company, No. SJC-11060, 2012 Mass. LEXIS 654 (Mass. July 12, 2012), Surabian Realty Co. owned and operated a three story office building in Massachusetts. A drain was located in the parking lot approximately twenty feet from the building. In June 2009, heavy rains fell in the area around the property. Shortly after the storm began, water stopped flowing down the parking lot drain. It was later determined that the drain had become clogged with debris. As a result, the heavy rains collected in the parking lot and seeped under the door of the building, flooding its lower level, resulting in interior building damage.
The building was insured under an all-risk business owners policy issued by the defendant insurer. The policy contained a water exclusion which precluded coverage for, among other things, damage caused directly or indirectly by surface water regardless of any other cause or event that contributed concurrently or in any sequence to the loss. However, Surabian had purchased an endorsement to the policy, which modified the policy’s water exclusion, by adding back in a limited amount of coverage for loss or damage caused by water that backs up or overflows from a sewer, drain or sump (hereinafter “water and backup endorsement”). As is typical, this coverage was subject to a sublimit of $25,000.
After investigating the cause of the damage, the insurer denied the claim on the grounds that the building damage resulted at least in part from surface water, which was excluded by the policy.
In response, Surabian filed a lawsuit which included claims for breach of contract, breach of implied covenant of good faith and fair dealing, and unfair or deceptive practices in violation of Mass. Gen. Laws c. 93A and 176D. The complaint also sought declaratory relief. The parties filed cross-motions for summary judgment concerning all counts in the complaint. The trial court granted the insurer’s motion for summary judgment, finding that the damage was caused, at least in part, by surface water. The trial court noted that while the damage was also partially caused by water that had backed up from a drain, the anti-concurrent causation language that preceded the surface water exclusion precluded coverage for damage caused by surface water, regardless of any other cause or event that contributes concurrently or in any sequence to the loss. The Supreme Judicial Court granted Surabian’s application for direct appellate review, and the case was paired for argument along with the Boazova v. Safety Insurance Company, case (Docket No. SJC-10908, 2012 Mass. LEXIS 462 (Mass. May 29, 2012)). See June 6, 2012 blog posting on this case.
The Supreme Judicial Court affirmed the trial court’s decision, holding that the insurer’s denial of coverage was based on a correct interpretation of its insurance policy, therefore, the judge properly granted summary judgment in favor of the insurer on all of Surabian’s claims, including those under G.L. c. 93A and 176D. To reach its decision, the court thoroughly analyzed the language of both the surface water exclusion and the water and sewer back up endorsement. With regard to the surface water exclusion, the court concluded as follows:
- Mass. courts have already construed the surface water exclusion language, finding that “surface water” is defined as “waters from rain, melting snow, springs, or seepage, or floods that lie or flow on the surface of the earth and naturally spread over the ground but do not form part of a natural watercourse or lake”.
- Rain that collects on a paved surface, such as a parking lot, retains its character as surface water.
- Rainwater that collects on the ground is considered surface water even when, but for an obstruction, the water would have entered a drainage system.
The court further noted, while Massachusetts courts have not previously defined the phrase “water that backs up or overflows from a sewer, drain or sump,” courts in other jurisdictions have concluded that it refers to “damage caused by water that has entered a drain and then is subsequently forced out from or through that drain.” While there is some dispute in those jurisdictions over whether the phrase “backs up…from a sewer” requires a reversal of water flow or merely a diversion within a blocked system, the Supreme Judicial Court noted that the cases were consistent that “water must have occupied the pipe or drain before it caused the damage.”
Construing both the surface water exclusion and water and back up endorsement together, the court concluded that the policy, as amended by the endorsement, excluded damage caused by flood waters that spread over the surface of the ground without having entered a drain, but covered damage caused by water that backed up after entering a drain. Taking into account the undisputed facts of the case, Surabian’s damage resulted from a combination of water that backed up after entering the parking lot drain and water that, as a result of the blockage, never entered the drain and remaining surface water. Since the damage resulted from the combination of a covered peril and an excluded peril, the surface water exclusion’s anti-concurrent causation preamble applied, precluding coverage under the policy.
Moreover, the court was not persuaded by Surabian’s argument that the insurer’s interpretation of the surface water exclusion rendered the coverage endorsement illusory. In that regard, the court noted as follows:
- The endorsement provides coverage for water damage resulting from the backup of an interior drain at the property, except where excluded.
- Coverage potentially would likewise be triggered when an exterior sewer or drain backs up due to a burst water main.
- The court concluded that a policy is not illusory simply because it contains a broad exclusion, so long as it provides coverage for some losses.
As is evident from the above, as well as my Boazova blog post, Massachusetts courts continue to strongly uphold anti-concurrent causation provisions found in insurance policies. However, there are a few jurisdictions that have found these types of provisions to be unenforceable in some circumstances based upon public policy principles. Therefore, it is always important to consult with counsel and research the law of the applicable jurisdiction, as the law can vary from one jurisdiction to another.