In Fidelity Co-Operative Bank v. Nova Cas. Co., 726 F.3d 31 (1st Cir. 2013), the First Circuit addressed what can happen when a variety of inter-related perils converge to create one loss under a policy with numerous amendatory endorsements that differ substantially from the typical commercial property policy. The insured in this case suffered extensive water damage to the interior of their 100-year old, mixed-used, five-story rental property in Clinton, Massachusetts when tropical storm Hanna brought heavy rains to the area in September 2008. The severity of the rain overwhelmed the building’s one rooftop drain, causing the water to pool on the roof before, eventually, leaking through the two skylights on the roof. The insurer denied the claim, citing, in part, the “rain limitation” exclusion, because the water did not enter the building through damage to the roof.
The insured brought suit, and the case proceeded to cross-motions for summary judgment. The District Court for the District of Massachusetts granted the insurer’s motion in full, finding that the “rain limitation,” which excluded coverage for a loss to “[t]he interior of the building . . . caused by or resulting from rain, . . . whether driven by wind or not, unless [t]he building . . . first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain . . . enters,” applied to bar coverage under the policy because “the water pooled on the roof, thus becoming surface water [that was “caused by rain”] which entered the building through the eroded metal and glass skylights.” The court explained that the fact that “the water pooled due to a faulty or inadequate drain does not trump the surface water exclusion which bars coverage.”
On appeal, the First Circuit reversed, finding that the lower court’s ruling that the “rain limitation” exclusion applied was incorrect. The court first noted that the facts of this case were unusual because the insured’s policy contained an amendatory endorsement for flood coverage, meaning, therefore, that the policy covered “water damage caused by ‘surface water,’” while still excluding “water damage ‘caused by or resulting from rain.’”
Furthermore, the policy contained a separate amendatory endorsement that substantially modified the exclusion for “Water.” The initial, original policy contained a water exclusion, complete with an anti-concurrent lead-in, that excluded water “that backs up or overflows from a sewer, drain, or sump.” The court recognized that the original exclusion would likely have barred coverage for the claimed loss. However, the amendatory endorsement deleted the portion of the water exclusion that referred to water that backs up from a sewer.
Because the issue of coverage could not readily be solved through application of the anti-concurrent causation clause of the water exclusion, the court noted that “Massachusetts law as a default kicks in to require an efficient [proximate] cause analysis.” Under that analysis, the court found that the failure of the rooftop drain, not the rain, was the proximate cause of the loss, reasoning that “when the blocked or inadequate drain was overwhelmed by severe rainstorm, it set in motion a ‘train of events’ lacking the intervention of any forces or the activation of a new source to cause the interior water damage.”
Although the court could have stopped after finding that the failed drain (which was not an excluded cause of loss under the policy) was the efficient proximate cause of the loss, the court continued its analysis by addressing the lower “court’s determination that the water damage resulted from ‘surface water.’” Discussing two 2012 cases from the Massachusetts Supreme Judicial Court, the First Circuit noted that “damage resulting from water that flooded into properties after accumulating on artificial surfaces does not lose its character as ‘surface water’ merely because it flowed along the artificial surface and seeped into or continued to flow onto the property.” Because of that, the court declined to disturb the “district court’s finding that the ‘ponded’ water on the roof of the property here was ‘surface water.’”
Since the water on the roof could properly be considered “surface water,” the court noted that, even if the interior damage to the building had been “caused by rain” as the lower court found, the damage would still have, independently, been covered under the flood endorsement, which specifically provided coverage for “the unusual or rapid accumulation or runoff of surface waters from any source,” and which the lower court failed to address in its opinion.
While the outcome of this case may be relatively unique because of the policy’s numerous endorsements and deviations from the typical coverage form, the First Circuit’s opinion nonetheless provides valuable additional jurisprudence concerning efficient proximate cause and the concept of “surface water” under Massachusetts law.