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Andy crawled to freedom through five hundred yards of – – – smelling foulness I can’t even imagine. Or maybe I just don’t want to. Five hundred yards. The length of five football fields. Just shy of half a mile.
–The Shawshank Redemption (1994)
Many homeowners and other property insurance policies contain an exclusion to address one of the by-products of the increased frequency of severe weather: it bars coverage for property damage caused by “water which backs up through sewers or drains.” But the same policies often list as covered perils both “accidental discharge” and “overflow” of water from indoor plumbing systems. So what happens when (brace yourself) the local sewer backs up so badly that it “discharges” or “overflows” through indoor toilets and sinks? Coverage litigation, that’s what. Cases based on this fact-pattern are becoming more frequent, and recent decisions suggest that current policy language may be inadequate to stem the tide of this litigation.
“The fountains of the great deep [were] broken up, and the windows of heaven were opened”
This past June, the National Oceanic and Atmospheric Administration issued a report finding that rising sea levels are increasing the incidence of “extreme flooding events.” But sea level rise relative to land (which the NOAA calls “SLRel”) also produces other problems:
Another consequence of SLRrel is the increase in lesser extremes such as occasional minor coastal flooding experienced during high tide. These events are becoming more noticeable and widespread along many U.S. coastal regions and are today becoming more of a nuisance. As sea levels continue to rise and with an anticipated acceleration in the rate of rise from ocean warming and land-ice melt, concern exists as to when more substantive impacts from tidal flooding of greater frequency and duration will regularly occur…
Impacts from recurrent coastal flooding include overwhelmed stormwater drainage capacity
When stormwater drainage capacity is overwhelmed, it can cause sewers and drains to back up—sometimes, all the way back to the indoor plumbing systems that discharge into them. The “increase in lesser extremes” that the NOAA documented is correlated with a spate of litigation arising from this type of mess.
Point of Ordure
As noted, these cases turn on the application of policy language that makes “accidental discharge” or “overflow” from plumbing systems a named peril, but which excludes coverage for damage from “water which backs up through sewers or drains.” One recent case from New York, Pichel v. Dryden Mut. Ins. Co., 986 N.Y.S.2d 268 (N.Y. App. Div. 2014), which was filed after sewers backed up through the plaintiff’s toilets and sinks, held that the outcome depends on where the blockage to the sewer or drain occurs. If the clog is on the policyholder’s property, then the peril is covered. But if the problem originates outside the property, then the exclusion applies.
[W]ater damage caused by a backup/overflow that originates from a pipe or clogged drain located within the insured’s property line comes from the insured’s plumbing system and is covered by the policy; conversely, if the cause of the backup/overflow is from outside the insured’s property boundaries—such as a clogged municipal sewer that forces water from outside the insured’s plumbing system to overflow—the sewer or drain exclusion is applicable…
Yet even this resolution seemed a bit tentative:
In our view, when the exclusion and coverage provisions at issue here are read together, an ambiguity exists in the insurance policy as to losses resulting from a backup and/or overflow from sewers, drains and/or plumbing systems…
The court pointed out that the insurer could have presented a stronger case if the policy had defined such terms as “sewer,” “drain,” “plumbing system,” “backup” and “overflow.” It then affirmed a ruling by the trial court, denying motions for summary judgment by both sides, because there were factual disputes about the cause and origin of the backup.
Other courts applying New York law have followed suit. In a recent federal case involving sewage backup into a home, the court similarly held that dispositive fact questions were unresolved, and it similarly complained that the policy failed to define key terms:
[T]he Court finds that the plain meaning of the phrase ‘water[ ] or water borne material[ ] which … backs up through sewers or drains’ is water or water-borne material that attempts to enter a sewer or drain, is prevented from doing so by an obstruction, and flows back to where it came from through that sewer or drain, and/or overflows into adjacent areas through that sewer or drain. . . . [B]ased on the current record, it is unclear how far from the obstruction Plaintiffs’ basement is located, and whether that basement is an ‘area’ that is ‘adjacent’ to the municipal sewer line in the street.
Moreover, the Policy does not define the term ‘sewer or drain.’ Based on the current record, it is unclear whether Plaintiffs’ lateral line is part of the ‘sewers or drains’ through which the water-borne material had flowed before it ‘backed up’ (i.e., the municipal sewer line in the street). If it is not, it is difficult to understand how the ‘back[ ] up’ occurred ‘through sewers or drains’ (as opposed to occurring ‘from one sewer or drain to a separate sewer or drain’).
Davis v. Standard Fire Ins. Co., 2014 WL 4145552 (N.D.N.Y. Aug. 19, 2014). The Court denied summary judgment to both parties.
When the Wind Comes Right Behind the Rain
In Porter v. Oklahoma Farm Bureau Mut. Ins. Co., No. 11218 (June 17, 2014), the Supreme Court of Oklahoma reversed the dismissal of a coverage claim, reinstating a putative class action and exposing the defendant insurer to significant litigation costs. The plaintiffs in Porter sought coverage after their home was damaged by backed-up sewage. The insurer denied the claim, and the trial court dismissed the ensuing lawsuit, based on the exclusion for damage from water “which backs up through sewers or drains.”
The court first addressed the issue of whether the policy was ambiguous, because of the apparent tension between (i) the term that provided coverage for “Accidental Discharge or Overflow of Water or Steam from within a plumbing, heating, air conditioning or automatic fire protection sprinkler system or domestic appliance,” and (ii) the exclusion of coverage for damage from “water which backs up through sewers or drains.” The New York court in Pichel had (sort of) found such an ambiguity, and an Oklahoma appellate court had reached the same conclusion, in a case against the same insurer that was sued in Porter. Andres v. Oklahoma Farm, Bureau Mutual Insurance Co., 227 P.3d 1102, cert. denied, 290 P.3d 15 (2009). (Interestingly, the Supreme Court held in Porter that the insurer had not committed bad faith by taking a position contrary to the result in Andres, because the insurer had denied Porter’s claim before the opinion in Andres had been ordered for publication.)
The Oklahoma Supreme Court found that the two provisions did not create an ambiguity, and it expressly rejected the reasoning of Andres. “We . . . find that the sewer-or-drain-backup exclusion does not conflict with the accidental-discharge coverage provision to create an ambiguity to be resolved in favor of coverage. We decline to adopt the reasoning of … [Andres].” (The court refrained from commenting on the fact that it was now overruling a case in which it had previously denied certioriari to the same insurer-defendant.)
Despite this ruling, the court reversed the trial court’s dismissal of the case, because it could not discern from the record the nature of the source or origin of the back-up.
The parties dispute the source of Plaintiffs’ loss, whether the plumbing system or the sewer. If the facts are as Plaintiffs allege–the source of the damage was the plumbing system–Plaintiffs’ real property loss is covered under the general coverage provision for real property and is not excluded under the sewer-or-drain-backup exclusion. On the other hand, if the facts are as Defendant alleges–the source was the sewer line to Plaintiffs’ property–Plaintiffs’ real property loss is excluded under the sewer-or-drain-backup exclusion. We thus remand to the district court to determine the source of Plaintiffs’ damage, specifically whether the source was Plaintiffs’ plumbing system or the sewer line, as the denial letter contended.
The court did affirm dismissal of the plaintiff’s additional claim for bad faith (for the reason discussed above), but that ruling did not necessarily reduce the insurer’s expenses:
The district court dismissed the class-action breach of contract claim based on Plaintiffs’ failure to state a claim for individual breach of contract. Because we reverse the district court’s dismissal of the individual breach of contract claim,the district court must revisit the class-action breach of contract claim on remand.
Go Right to the Source
One possible solution to the problems these suits identify is a proactive approach. Farmers Insurance recently filed suit against two hundred Illinois municipalities, in a class action alleging that the local governments knew, or should have known, that flood is an increasing hazard, and that they failed adequately to prepare for the hazard by updating infrastructure and putting systems in place to prevent overflows from drains. Farmer’s ultimately withdrew the suit, and it is unclear if there was any settlement (at the outset, the defendants asserted a defense of qualified immunity). But it demonstrates the level of angst insurers are feeling as a result of these claims, which is only likely to increase.
Another desirable practice would be to investigate these claims thoroughly enough (if possible) to avoid the kind of dispute over the ultimate source of the clog that prevented the court in Porter from deciding the case on the pleadings.
Finally, insurers should consider revising the language of their sewage back-up exclusions, so as to define the scope of the exclusion more precisely. After all, as the NOAA recently concluded: Cometh the deluge.