A burst city waterline causes water to flood into a building's basement. The water then proceeds into the common area of a mall, which is insured under a proprietary Special Cause of Loss form with replacement cost.

Q: The carrier denies coverage based on the water exclusion. Is that correct? 

Response 1: The policy excludes “flood," defined as inundation caused by: “The unusual or rapid accumulation of runoff of rain or surface water from any source." This was not rain, and most courts interpret the undefined term “surface water" to refer to lakes, rivers, streams and so forth. Therefore, this is not an excluded loss.

A few courts have ruled that such water is actually “surface water," but is the carrier willing to take it that far? Refer to case law such as Heller v. Fire Ins. Exch. or Ebbing v. State Farm Fire & Cas. Co.

Response 2: The Big “I” Virtual University (VU) article “Commercial Property Coverage from Public Water Main Breaks” explains that while the term “surface water” has been the subject of plenty of litigation, in most cases the courts restrict the definition to mean an accumulation of rain or melted snow on the ground.

Response 3: Some courts have found that water from a broken water main is not the same as rain or surface water. Therefore, this type of exclusion should not apply. See Ender v. National Fire Ins. Co. of Hartford as an example.

Response 4: I'm not quite sure how the carrier translates the exclusion to this situation. If they read closely, they will notice that the loss described in the question is in no way related to the exclusion they highlight:

(1) We will not pay for “loss" caused directly or indirectly by any of the following, unless otherwise provided. Such “loss" is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the “loss".

…

(g) Water

1) Flood, meaning the partial or complete inundation of normally dry lands areas due to:

a) The unusual or rapid accumulation or runoff of rain or surface waters from any source; or…

This exclusion applies regardless of whether the damage resulted from an act of man or nature. None of the exceptions to the exclusion for ensuing fire, explosion, or sprinkler leaks applies here.

There are several requirements within the exclusionary wording that limit its scope. Specifically, the meaning of “flood” in the carrier's highlighted section requires the unusual or rapid accumulation of either rain, which this was not, and or surface waters, such as a pond, lake or river, which this was not, either; the water came from an underground waterline.

Therefore, the carrier's logic is incorrect. The form’s wording does not exclude this loss, and neither does any of the other water exclusion wording they use. The only possible exclusion that might preclude coverage is:

4) Water under the ground surface pressing, or flowing or seeping through;

a) Foundations, walls, floor, or paved surfaces;

b) Basements, whether paved or not; or

c) Doors, windows or other openings.

However, the water entered the insured's location through another entity's basement, so it was no longer underground water when it reached the insured's premises. Based on this wording, the carrier owes for this loss.

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