Homeowners Policy Excludes Damage From Prolonged, Unattended Water Inundation

Based on standard homeowner policy water damage exclusions, the United States District Court in Utah found no coverage for extensive damage from water escaping over several months from a sink located in the lower level of a seasonal cabin in Duck Creek, Utah. The decision was filed September 29, 2015 and is entitled Wheeler v. Allstate Ins. Co., 2015 U.S. DIST. LEXIS 13136.

Plaintiff owned a log cabin which was unoccupied during the winter months of 2010 to 2011, not having been even visited since the first of January, 2011. In April, 2011 acquaintances of the plaintiff entered the cabin to get a drink of water and found water “everywhere” inside to a depth of 4 or 5 inches. Mold had grown so thick on the walls and appliances that the front door would not open, and the blades on a ceiling fan on the main level sagged so low they were touching the inside cabin lights. Water continued to spray inside the cabin when the damage was discovered. Leading up to the incident, the practice of plaintiff’s contractor was to leave the water and heat on in the cabin to prevent the freezing of the pipes serving the dwelling.

Pivotal to the court’s coverage decision were two policy exclusions, referred to as exclusions 3 and 7. Exclusion 3 stated, “We do not cover loss to the property . . . consisting of or caused by . . . continuous or repeated seepage or leakage over a period of weeks, months or years, of water . . . from a plumbing . . . system, or . . . from within or around any plumbing fixtures, including . . . sinks.”

Exclusion 7 denied coverage for loss to the property consisting of or caused by “wear and tear, aging . . . deterioration, inherent vice, latent defect, rust or corrosion.” That exclusion, however, contained two exceptions that became a focus of the court’s attention. The exception read as follows:

“If any of [the causes of loss excluded from coverage by Exclusion 7] cause the sudden and accidental escape of water . . . from a plumbing . . . system . . .within your dwelling, we cover the direct physical damage caused by the water . . .. If loss to covered property is caused by water . . . not otherwise excluded, we will cover the cost of tearing out and replacing any part of your dwelling necessary to repair the system . . .. This does not include damage to the defective system . . . from which the water escaped.” (Emphasis added.)

The court agreed with Allstate regarding the operation of the exception to Exclusion 7, holding that it does not apply to the loss at the cabin because (1) the loss occurred over a period of weeks, months, or years, and (2) the loss was “otherwise excluded” under Exclusion 3.

Plaintiff contended that Exclusion 3 was ambiguous regarding the meaning of the terms “seepage”, “leakage” and “weeks.” The court rejected the argument, finding the contract terms clear and unambiguous based on the plain, ordinary meaning of the language in the insurance contract.

The plaintiff pointed to the exception to Exclusion No. 7, restoring coverage for loss due to sudden and accidental escape of water from a plumbing system. Here too, the court agreed with Allstate that loss can start as a sudden and accidental escape of water, but if ignored and allowed to continue, the resulting damage is not sudden and accidental. The court found that the exclusions were designed to overcome a“moral hazard” inherent in a policyholder’s inattention – a less than conscientious attitude on the part of the homeowner to the proper maintenance and care of the property insured.

Finally, the plaintiff attempted to support his contention that Exception 3 is ambiguous by confining his insurance claim to the loss resulting from the first few days of escaping water. The court rejected the argument, stating, “Because the damage to Plaintiff’s cabin was so extensive and was not found for at least 60 to 70 days, it is difficult if not impossible for the Court to determine exactly what amount of damage would have occurred in the first few hours and days. In addition, the Court believes the interpretation Plaintiff wishes the Court to make is against the authority . . . that found coverage to be specifically excluded for long-term water damage.”

The Wheeler decision is sound in its result, holding that “the policy language works to preclude coverage for . . .water damage that [is] undiscovered or unattended for an extended period of time regardless of the source.” The court reconciled the exclusion of long-term water damage with coverage for damage due to sudden and accidental escaping water, even though only one of the two Exclusion 7 exceptions – the one covering the cost of tearing out and replacing any part of the dwelling necessary to repair the leaking plumbing system – expressly states it is triggered only if the loss is “not otherwise excluded” from coverage. The Wheeler opinion thus treated the Allstate policy as if the “not otherwise excluded” language controlled both of the Exclusion 7 exceptions, as was the case with the policy considered by the court in Schwartzenfeld v. Nationwide Mut. Fire Ins. Co., 2011 Mich. App. LEXIS 752 (unpublished), a decision on which Wheeler also relied.

But the Wheeler court was nevertheless correct in giving effect to Allstate’s Exclusion 3. Any different result would have improperly read that exclusion out of the policy. In this respect the Wheeler decision is consistent with an Oregon case on which it relied, Marsh v. American Family Insurance, 231 Or.App. 332, 339 (2009). That case involved a policy with a similar Exclusion 3, excluding coverage for loss caused by water leakage over a period of time. The policy in Marsh lacked, however, the “not otherwise excluded” policy language triggering an exclusion exception, there exclusion 6, roughly equivalent in other relevant respects to Exclusion 7 in Wheeler. Nevertheless, the court in Marsh found no coverage for the water damage. In a passage quoted by the Wheeler court, Marsh said all that was needed to justify the results of both cases:

“Paragraph 6 would provide coverage generally for loss caused by water. However, paragraph 3 operates to exclude from that coverage loss that is caused by leakage of water over a period of time. Because the policy contains a specific exclusion for water damage caused by the continuous leakage of water from a plumbing system, plaintiffs’ loss is not covered, even though other types of damage caused by water are covered.” (Emphasis in both Marsh and Wheeler opinions.)