State’s High Court Asked to Define ‘Surface Waters’ Under Flood Coverage

Do “surface waters” covered by property flood insurance include rainwater that accumulated on an enclosed roof one or more stories above the ground?

The landlord and operator of a suburban Massachusetts hospital disagree with their insurers on the answer to that question. Courts are also having some difficulty.

A ruling by a federal district court favoring the insurers is under appeal before the First Circuit Court of Appeals, which is questioning the district court’s ruling but wants help from the top state court to proceed.

The final answer will determine whether hospital landlord Medical Properties Trust, Inc. (MPT) and hospital operator Steward Health Care System are subject to coverage limitations on “flood” damage to their Norwood Hospital facility in policies issued by Zurich American Insurance Co. and American Guarantee and Liability Insurance Co. (AGLIC).

In June 2020, the hospital suffered significant damage after severe thunderstorms passed through Norwood. Torrential rain and strong wind gusts caused heavy flooding in the basement of the hospital’s two main buildings. Rainwater also accumulated on the hospital’s roof and a second-floor courtyard, eventually seeping into the hospital’s upper floors. Some of the hospital’s buildings have “parapet roofs,” meaning a roof enclosed by a wall surrounding the roof’s outer perimeter. Moreover, the rainwater that inundated the hospital’s upper floors from the roof and courtyard never reached the earth’s natural surface nor any other ground-level surface before entering the hospital.

The insurers have argued that the water on the enclosed roof is “surface water” that falls under the definition of flood and should therefore be counted against their policies’ flood damage sublimits.

The insureds see it differently. They argue that surface water is limited to “waters flowing naturally and spreading diffusely over surfaces at ground level.” Thus the water on the roof that never touched the ground does not fall under flood and should not be counted against the flood sublimits. Instead, it should be considered storm damage that is covered under other sections of the policies.

MPT’s Zurich policy provides a total of $750 million in coverage. Steward’s AGLIC policy provides a total of $850 million in coverage. Both policies consider flood a covered cause of loss. But both policies also limit the amount of coverage for flood damage. Zurich limits its flood coverage to $100 million, while AGLIC limits its flood coverage to $150 million. The policies do not define “surface waters.”

MPT and Steward submitted claims to Zurich and AGLIC that each exceeded $200 million. They submitted flood claims to each insurer that reached each policy’s flood limit. They also submitted separate claims for another $121,000 (Zurich) and $90,000 (AGLIC) for what they called storm damage to the upper floors from the water on the roof.

The insurers, which had initially said they thought there might be separate damages, changed their mind. They refused to accept the full value of the hospital’s separate claims, suggesting that it was an improper attempt to circumvent the flood damage sublimits. They said they would enforce the flood sublimits on all damage throughout the hospital.

Zurich filed suit seeking a declaratory judgment that the hospital’s recovery under its policy cannot exceed the policy’s $100 million sublimit applicable to flood because the damage was caused by “surface water” accumulation. Meanwhile, Steward sued AGLIC sought a declaratory judgment that the $150 million flood coverage limit did not apply to all of its losses.

In October 2022, the federal district court issued its order in Zurich’s case against MPT. The district court rejected MPT’s argument that “‘surface water’ is limited to waters flowing naturally and spreading diffusely over surfaces at ground level.” Instead, the district court concluded that “the term ‘surface waters’ is not limited to the accumulation of water on the ground.”

The district court cited a Supreme Judicial Court ruling in which it said “the SJC did not define ‘surface waters’ to exclude accumulation of surface waters that are ‘constrained’ before flowing on the ground,” like water enclosed within the walls of a parapet roof.

A few weeks later, in an order adopting by reference its decision in Zurich’s case, the district court granted AGLIC’s motion for partial summary judgment against Steward.

The First Circuit Court took up the appeals. But this week it said it does not believe it can rule on the appeals without resolving the surface water question and to do that, it needs guidance from the state’s high court, the Massachusetts Supreme Judicial Court .

The circuit court expressed doubts about the main 2013 precedent (Fidelity Co-operative Bank v. Nova Casualty Co.) relied upon by the district court on the question of surface water.

Despite several cases, the court said it “cannot say that the course that the SJC would take is reasonably clear.”

“Given that interpreting ‘surface waters’ in the context of water pooled on a roof is determinative of the case and it is not clear from existing case law how the SJC would resolve this issue,” the court stated.

The court said the Supreme Judicial Court has not really addressed whether rainwater that collects on a roof without reaching the earth’s natural surface constitutes “surface water.”

Thus it has asked the state’s high court to advise. The following question has been certified to the SJC for its consideration:

Whether rainwater that lands and accumulates on either (i) a building’s second-floor outdoor rooftop courtyard or (ii) a building’s parapet roof and that subsequently inundates the interior of the building unambiguously constitutes “surface waters” under Massachusetts law for the purposes of the insurance policies at issue in this case?

In an amicus brief, the policyholder advocacy group United Policyholders (UP) argued that the way the industry rates flood insurance shows that “surface waters” does not encompass water enclosed on a building’s roof. According to UP, flood-risk ratings “have nothing to do with rainwater collecting on a roof. In fact, to the extent flood risk is building specific, it is the building’s elevation off of the ground and the basement that inform the potential risk. The roof does not.”

UP calls the insurers’ approach an example of “creative” denials and an effort to limit the coverage they agreed to provide.

Topics Flood Massachusetts