A Maryland agent asks, “Our insured suffered water damage to his basement when rain was blown in around and under the basement door. Apparently the door did not fit tight against the frame or floor, allowing wind-driven rain to enter the basement. Is this covered by the current ISO HO-3 policy?”

On at least a monthly basis, our “Ask an Expert” service gets a question very similar to the one above. Usually it involves the issue of grade floor or basement water damage to carpets, flooring, baseboards or other property following a heavy rainstorm. Whether this damage is covered or not depends on exactly what is the efficient proximate cause of the damage and whether or not that cause is covered by the policy in question.

The Section I—Exclusions area of the HO-3 excludes water damage, including “surface water.” So, if the damage results from “surface water” (undefined in the HO policy), there is no coverage. This exclusion applies even if the surface water results from a covered peril because of the concurrent/sequential causation wording of this set of exclusions. Therefore, at issue is what is “surface water”? This issue has been examined by a number of courts with mixed results. However, the dominant position appears to be that losses resulting from an accumulation of rain water that then enters a structure is not covered by the policy.

A notable decision is State Farm Fire & Casualty Company v. Paulson, a 1988 Wyoming Supreme Court case. In this decision, the court found that the “surface water” exclusion applied where the accumulation of rain water entered a basement through ground level windows. In reaching this decision, the court cited logic from several other cases where the issue of “surface water” had been considered. For example:

“[Surface water is] natural precipitation coming on and passing over the surface of the ground until it either evaporates, or is absorbed by the land, or reaches channels where water naturally flows.”

“Surface waters are commonly understood to be waters on the surface of the ground, usually created by rain or snow, which are of a casual or vagrant character, following no definite course and having no substantial or permanent existence.”

“The term ‘surface water’ is used in the law of waters in reference to a distinct form or class of water which is generally defined as that which is derived from falling rain or melting snow, or which rises to the surface in springs, and is defused over the surface of the ground, while it remains in such defused state or condition....”

“Surface waters are those falling upon, arising from and naturally spreading over lands produced by rainfall, melting snow or springs. They continued to be surface waters until, in obedience to the laws of gravity, they percolate through the ground or flow vagrantly over the surface of the land into well-defined watercourses or streams.”

In addition, IRMI (www.irmi.com) recently reported on the case of Crocker v. Am. Nat’l Gen. Ins. Co., S.W.3d, 2007 WL 29708 (Tex. App., Jan. 5, 2007), where the court ruled that water damage arising from rain water accumulating on a patio was excluded.

In dissentions in these cases, and in a few other cases, the exclusion was reputed not to apply because the attempt, based on the grouping of terms in this exclusion, was to avoid coverage for “widespread” flooding-type claims. ISO addressed this issue in the 2000 edition of their forms by adding the wording: “These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.”

One final note: Most of these court cases are based on naturally occurring water, as opposed to a water source such as a broken water main. Several state courts (Texas, Arkansas, Pennsylvania and Nebraska, to name four) have held that “surface water” does not include water from “unnatural” sources. As a result, the 2000 ISO HO-3 form makes a specific exception for coverage due to water damage that originates from a water line off the premises.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University. To read the entire article, click here. If you do not know your Big “I” website user name and password, e-mail logon@iiaba.net to request your login.