In Platek v Town of Hamburg, 2015 NY Slip Op 01483 (Feb. 19, 2015) the plaintiffs' home incurred damage (in the stipulated amount of $110,000) when a subsurface water main pipe abutting their property ruptured, causing water to flood into their finished basement. Their homeowners' insurer, Allstate Indemnity Company, denied coverage under an exclusion which provided, in relevant part, that the policy did not cover loss to the property:
consisting of or caused by"¦4. Water"¦on or below the surface of the ground, regardless of its source [,including] water"¦which exerts pressure on, or flows, seeps or leaks through any part of the residence premises.***We do cover sudden and accidental direct physical loss caused by fire, explosion or theft resulting from items 1 through 4 listed above***(emphasis added).
Following Allstate's denial of the property damage claim, Plaintiffs commenced a breach of contract action in Supreme Court. Plaintiffs then moved for summary judgment based on their engineer's affidavit in which the expert opined that the damage to the Plaintiffs' home was "caused by an explosion resulting from internally pressurized water suddenly and accidentally bursting from the underground pipe."
Allstate opposed Plaintiffs' motion, and cross-moved for summary judgment based upon the foregoing policy exclusion for water on or below the surface of the ground, and argued that the policy exception to the exclusion was inapplicable and did not nullify the water loss exclusion or render it ambiguous.
Supreme Court granted Plaintiffs' motion, and denied Allstate's cross-motion, declaring that Plaintiffs' loss was covered under the policy. Allstate appealed, and the Appellate Division, 4th Dep't., found that the policy language was ambiguous and should be construed in favor of the insureds. Two justices dissented, and Allstate appealed from the resulting judgment.
On appeal, the homeowners argued that an "explosion" had resulted from "water"¦below the surface of the ground" – as a result of too much water pressure in the underground pipe – and that they were entitled to coverage for the ensuing "sudden and accidental direct physical loss to their property." Allstate countered that the sudden and accidental direct physical loss exception was an "ensuing loss" provision, and that while any initial loss to the insureds' property caused by water on or below the surface of the ground would be excluded, if an explosion resulted from that initial loss, any secondary or ensuing loss caused by explosion would be covered.
The Court of Appeals agreed with Allstate that the exception was properly characterized as an ensuing loss provision, providing coverage when damage is caused by a covered peril which arises as a result of an excluded peril. The Court traced the origins of such provisions back to the San Francisco earthquake of 1906, when disputes arose subsequently over whether coverage was provided where the earthquake, itself an excluded peril, resulted in fires sparked by broken gas pipes, such fires being a covered peril.
The Court emphasized that interpreting a policy exclusion for water loss, and then applying the ensuing loss provision to provide coverage for what is, essentially, a flood, would subvert the intent of the parties and force Allstate to insure a loss it did not contemplate and had affirmatively excluded. "Stated another way, an ensuing loss 'at least requires a new loss to property that is of a kind not excluded by the policy'***; it '[does not] resurrect coverage for an excluded peril'***."
The Court of Appeals also noted that, since the insured has the burden to establish the existence of coverage, the insured must demonstrate that an exception to an exclusion has been satisfied if coverage depends entirely on the applicability of the exception. The Court's clear message appears to be that, if property damage is caused directly by water entering the home from the outside, for whatever reason, a denial of coverage under a standard homeowner's policy is likely to be upheld.
Should you have questions regarding the information presented in this alert, please contact Anthony J. Piazza, Chair of the firm's Insurance Coverage & Regulation Practice Area, at (585) 295-4420 or apiazza@hblaw.com.