SOUTHERN DISTRICT EXAMINES SCOPE OF WATER DAMAGE COVERAGE & RULES IN INSURER’S FAVOR

Judge Ellison of the Southern District of Texas recently conducted a detailed lesson on how to parse coverage for a water damage claim resulting from an accidental discharge.  In Praetorian Ins. Co. v. Arabia Shrine Ctr. Houston, No. 4:14-CV-3281, 2016 WL 687564, (S.D. Tex. Feb. 19, 2016), the insured, Arabia Shrine, suffered a large water damage loss when an 8-inch fire suppression water main under the slab ruptured, releasing over a million gallons of water into the building. The water caused the building slab to heave and crack in one area, undermined the slab in other areas, and damaged floor coverings, baseboards, drywall, and furniture throughout 95% of the building. 

Although Praetorian’s experts concluded the total cost of repairing all the damage would be approximately $1.8 million, Praetorian issued a coverage decision that the majority of the loss was excluded, and the only covered costs were (a) the cost of accessing the burst pipe (~$12,000), the $25,000 limit of the policy’s Masonic Coverage Extension, and the $25,000 business personal property limit.  Thus, Praetorian paid approximately $62,000.

In the resulting declaratory judgment and breach of contract/bad faith lawsuit, the court examined the scope of coverage on a summary judgment standard, and carefully and methodically applied the general rule requiring (1) the insured to prove coverage, (2) the carrier to prove any exclusion negating coverage, and (3) the insured to prove any exception to that exclusion once the carrier has proven the exclusion. The commercial property policy was a named-peril policy with a set of enumerated “Covered Causes of Loss.”

First, the court examined the definitions of Covered Property and found that the burst pipe itself was not “Covered Property.”  Arabia Shrine argued the pipe was “fire-extinguishing equipment,” but the court rejected this argument, noting that “fire-extinguishing equipment” was mentioned only in a list labeled “personal property.”  The pipes were clearly not personal property, and therefore they could not gain status as covered property by way of this list.

Foundations of buildings were also excluded from the definition of “Covered Property.” While there was argument over whether the concrete slab was part of the “foundation,” the court concluded it did not need to answer this question because it found the loss was caused by an excluded peril.

Next, the policy included an endorsement titled “Water Exclusion Endorsement” which excluded “water under the ground surface pressing on, or flowing or seeping through foundations, walls, floors, or paved surfaces…” Praetorian argued, and the court agreed, this exclusion barred coverage for the entire loss unless some portion of the loss was restored by an exception. Arabia Shrine pointed to a definition of “water damage” in the policy’s “specified causes of loss” and argued it created a broad grant of coverage for water damage. The court rejected this proposal, citing existing Texas law holding an exception to an exclusion is not a broad affirmation of coverage, but only restores coverage within the context and scope of the particular exclusion where it appears.  The court concluded the list of fourteen “specified causes of loss” functioned only as exemptions to the various exclusions in the policy, and noted that the Water Exclusion Endorsement did not contain any provisions restoring coverage for any of the “specified causes of loss.”  Arabia Shrine attempted iterations of this argument several times, and the court rejected them every time, holding the insured cannot lift exceptions from various parts of the policy, apply them out of context, and treat them as general grants of coverage. 

Therefore, while water damage was a “specified cause of loss,” the Water Exclusion Endorsement explicitly negates coverage for this particular type of water damage; i.e., “water under the ground surface pressing on, or flowing or seeping through foundations, walls, floors or paved surfaces.”

Arabia Shrine also argued the “ensuing loss” provision for sprinkler leakage restored coverage, but the court also rejected this argument, noting that while the pipe was part of the automatic sprinkler system, the pipe itself was underground, rendering all water coming from it, “water under the ground surface…” The court also observed that the “ensuing loss” provision required a new and different type of damage to occur as a result of an excluded loss before the provision could create coverage.  E.g., an excluded loss must cause a fire, explosion, or sprinkler leakage, and the sprinkler leakage must cause additional damage.  Here, the excluded loss was water under the ground surface, and it was the only cause of loss.  There was no ensuing loss from sprinkler leakage.

After concluding based on the above reasoning that Praetorian had paid the correct amount and properly denied the rest of the claim, the court also denied Arabia Shrine’s claims for breach of contract, bad faith, and Insurance Code violations. The court relied on the general rule that “when the issue of coverage is resolved in the insurer’s favor, extra-contractual claims do not survive.” Although the court acknowledged the few narrow circumstances mentioned in Republic Ins. Co. v. Stoker, 903 S.W.2d 338 (Tex. 1995), in which an extra-contractual claim might survive, it found Arabia Shrine had presented no evidence of those here.