Water Damage Exclusions, on the Rise, May Frustrate Insureds but Are OK, Court Says

A federal appeals court has affirmed a lower court ruling that a Scottsdale Insurance commercial policy for a community center excludes almost all non-weather water damage. It’s the type of “infuriating” exclusion that plaintiffs’ attorneys and some brokers have said they’ve seeing more often – and which have been largely upheld by the courts.

In Chabad of Key Biscayne vs. Scottsdale, the 11th U.S. Circuit Court of Appeals last week found that the insurer, a Nationwide Mutual Insurance excess and surplus lines unit, did not owe $247,584 in coverage, despite an appraisal for that amount and despite the confusing wording of the policy.

“We agree with the district court that there is no coverage here for the damage suffered,” the appeals panel wrote in the July 7 opinion. “The water exclusion bars coverage for water that backs up or is discharged from a sewer and the policy defines sewer and drain to mean ‘pipe, channel or conduit for carrying water, wastewater or sewage on or away from the premises.'”

The ruling reinforces and expands on a similar decision by a state appeals court in Florida on a homeowners’ policy, attorneys said. In Geovera Specialty Insurance vs. Glasser, Florida’s 4^th District Court of Appeal in early 2022 found that while the homeowner’s policy covered damage from a burst water supply line, the endorsement barred that coverage.

Jacksonville attorney Joseph Mackey at the time called it good news for insurance companies. Several insurers have expanded endorsements in recent years to exclude many types of damage from water as well as some types of roof damage.

Slide Insurance and Florida Peninsula Insurance this spring, for example, created a stir when they were approved for new HO roof endorsements that bar most non-storm-related claims. Florida insurance brokers also have complained about some of Frontline Insurance Unlimited’s policies, which have caught condominium associations off guard by broadly excluding losses from air conditioning issues, “sick building conditions,” and roof damage that may be considered cosmetic.

In the Scottsdale decision, the policy endorsement on water damage may have been a reaction to a rise in claims and lawsuits from cast-iron pipes in recent years, attorneys familiar with the issue said. Plaintiffs’ attorneys have often argued that aging iron drainpipes, common in homes built before 1975, have corroded, causing backups that damage the property. A remedy can involve full pipe replacement and extensive remodeling.

In response, some carriers have instituted new exclusions. But the wording isn’t always clear or may appear to conflict with the policy language.

Chabad, a Jewish community center in Miami, filed a claim under its all-risks commercial policy after “a drain or sewer pipe broke due to wear and tear, deterioration, and settling, and water accidentally discharged or leaked, causing damage,” the court explained. The 2020 damage was extensive and amounted to more than a quarter-million dollars, the claim said.

Scottsdale denied the claim but offered $5,000 under a sewer-overflow extension of the policy. Chabad sued for breach of contract, arguing that the policy the center officials thought they had purchased, with a limit of $900,000, had provided comprehensive coverage. But the center leaders weren’t quite sure, the complaint suggests.

“The plaintiff believes, but are in doubt, that the plaintiff is entitled to coverage for the full appraisal award under said policy, including but not limited to, coverage for damage to the building on the subject property, its contents, and its loss of use,” reads the initial complaint, filed by Chabad attorney Erik Diener, of Plantation, Florida.

The trial court and the appeals court noted that the policy exclusion states that Scottsdale will not pay for damages caused by flooding or by water that “backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment.”

The policy, however, also included a confusing exception – that it would, in fact, cover “specified causes of loss.” Those included leaks resulting from breakage of a plumbing system on the premises, or from wear and tear if the pipe is off-premises but connected to the property. The exclusion raised more questions by excluding damage covered by the exclusion, but also stating that accidental leakage is not subject to the exclusion.

Scottsdale’s answer to the complaint, penned by Coral Gables attorney Joseph Manzo, attempted to explain: “The policy covers the building, which does not include underground pipes, flues or drains. The policy then excludes coverage where damage is caused, in whole or part, by water backing up, overflowing, or otherwise discharging from a sewer or drain, which it specifically defines to include the property’s plumbing system.”

The lower court found that the exception to the exclusion did not apply, meaning that the full exclusion did apply and the full amount of the water damage to the community center was not covered. The appeals court agreed.

Topics Florida Oklahoma