Two weeks ago in Wheeler v. Allstate Ins. Co., 2015 WL 5714392, 2015 U.S. Dist. LEXIS 131736 (C.D.Utah, Sep. 29, 2015), a Utah court barred coverage for a mold loss caused when a vacant log cabin suffered a long-term water leak.  The policy excluded “seepage or leakage over a period of weeks, months or years,” and the judge held that that language embodied the concept that such a loss was a moral hazard – a preventable risk best assumed by the policyholder rather than by his or her homeowners insurer.

The insured owned a seasonal cabin in Duck Creek that was not used during the winter months, and his practice was to leave both the water and the heat turned on.  At some point during the early months of 2011, a valve under the sink in the basement wet bar failed.  The consequences were discovered when the wife of one of his employees visited the building in April, 2011.  According to the insurance adjuster’s report, there was “extensive mold damage throughout the house” and “[m]old upstairs on every wall and ceiling in [the] home.”  Water district records showed that the policyholder’s water bill had jumped from $15 in January to $93.75 in March, but this went unnoticed because the bills were “automatically paid” by his office.

The cabin was covered by a Deluxe Homeowners Policy, and the insured made claim for the loss.  Exclusion 3 of the contract of insurance barred coverage for loss caused by “[s]eepage, meaning continued 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,” while Exclusion 7 barred coverage for loss from wear and tear, deterioration, latent defect and rust or corrosion.  Exclusion 7 had an exception, however, that recited that if those perils

cause the sudden an accidental escape of water or steam from a plumbing . . . system . . . within your dwelling, we cover the direct physical damage caused by the water or steam.

The carrier inspected the dwelling and issued a denial letter citing the seepage exclusion only seven days after being notified of the claim.  The insured then brought suit, asserting: (1) that Exclusion 7’s exception was ambiguous; and (2) that his loss was covered under Exclusion 7 as a “sudden and accidental escape of water.”

Two weeks ago Magistrate Judge Brooke Wells rejected those arguments and granted the insurer’s motion for summary judgment.  The court found that the provisions of the contract of insurance were “clear and not ambiguous” in nature.  The Judge also rejected the attempt invoke Exclusion 7’s exception because the policy barred coverage for loss from long-term seepage.  As the decision explained, “the plain reading of Section 7 demonstrates that the exception is triggered only if no other exclusion applies.”  The Judge agreed with Schwartzenfeld v. National Mut. Fire Ins. Co., 2011 Mich. App. LEXIS 752, 2011 WL 1565466 (Mich.App. 2011), quoting that case for the following proposition:

Further, “[c]overage” under a policy is lost if any exclusion in the policy applies to the insured particular claims.  Exclusions serve to limit the scope of coverage provided and must be read with the policy as a whole and independently of every other exclusion.”  Therefore, “[b]ecause the loss is excluded, the exceptions do not apply.”

Finally, the court was unpersuaded by the policyholder’s assertion that Exclusion 3 did not apply because he was only seeking to recover for non-mold damage caused during the first three days after the leak.  In her words:

Because the damage to Plaintiff’s cabin was so extensive and was not found for at least 60-70 days, it is difficult if not impossible for the Court determine exactly what amount of damage would have occurred in the first few hours and days.

Judge Wells’ decision also contains a useful discussion of moral hazard.  On direct, the carrier’s expert had explained that this defense deals:

with “attitude rather than intention.  It deals with loss or damage that occurs that and/or is increased because of less-than-conscientious attitude on the part of the homeowner towards the proper maintenance and care of the property insured.”  Therefore “continuous or repeated seepage or leakage of water from a plumbing system is considered a moral hazard because the damage and/or the extent of loss can be limited or prevented entirely through proper maintenance and attentive care of the property insured.”

As the opinion explained:

the Court agrees with [insurer’s expert’s] analysis of the contract where she stated: “[t]he clear meaning when Exclusion 3 is read together with the exception to Exclusion 7 is 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.

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Allstate did not assume the risk that Plaintiff was going to leave his cabin unattended for months at a time, just like the insurance company in Schwartzenfeld did not assume the risk that a leaky bathroom would take a considerable amount of time to discover.  Rather, the Court finds it is Plaintiff rather than Allstate who was in the best position to assume the risk that a leak might develop if the water was left on.  The Court understands that Plaintiff left the water on in order to prevent the freezing of pipes but again, that is a risk and that is best assumed by the homeowner and not an insurance company.

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This reasoning is line with Allstate’s arguments both in their briefs and at oral argument that if Plaintiff had discovered his loss in a more timely fashion, perhaps there would have been coverage but because Plaintiff’s loss was over an extended period of time, the exclusionary language precludes Plaintiff’s recovery.