By Susan L. Massmann, CPCU

From the April 2013 issue of Claims Magazine

Following the litigation that ensued from Hurricane Katrina in 2005, the Insurance Services Office (ISO) introduced a water exclusion endorsement in 2008. When ISO revised its commercial property program in 2012 (effective this month), the water exclusion endorsement's provisions were incorporated into the ISO causes of loss forms.

A review of a question from an FC&S subscriber illustrates some differences between the pre-2008 water exclusion and the current wording in the 2012 editions of the ISO forms.

The insured in this scenario is a lumber company that was storing shingles at a leased location owned by the city. The city was working on the sewer system and caused a pipe under the insured's building to burst, blowing a hole in the cement floor. Water and sewage were discharged into the building and the surrounding outdoor lot. The city ordered the insured to immediately move the pallets of shingles outside. That way, the city could access and repair the broken sewer pipe, which was affecting a large portion of the city. The pallets were moved and set in the lot in the discharged matter. 

An environmental study was performed to determine what—if any—damage was done to the shingles. It was determined that all stock was contaminated and should be disposed of because of the exposure to the raw, untreated sewage. E Coli was present in testing performed after the loss.

The insurance carrier stated the sewer backup coverage applied, so there is only $25,000 of coverage available.  

'Otherwise Discharged'

The subscriber did not think this constituted a sewer backup, as the pipe burst and caused the flow of sewage into the building. However, the subscriber did not know what the true cause of loss was.  

We agreed that the loss did not result from sewer backup. From what was described, this situation would be disqualified by the water exclusion form, which states that loss or damage caused by water or waterborne material that backs up, overflows, or is otherwise discharged from a sewer is excluded. Even if the backup of the sewer or drain endorsement gives back coverage for backup, the loss would not be covered as the water and sewage were “otherwise discharged.”  

The subscriber did not agree that the water exclusion applied in this claim, stating, “Water was not the cause of the loss—water does not damage shingles. If the discharge from the ruptured pipe would have been just water, there would have been no damage.”  

Under the pre-2008 water exclusion language, this could be true. The water exclusion then stated that loss or damage caused by «water that backs up or overflows from a sewer, drain or sump» is excluded.

However, the revised version of the water exclusion states that loss or damage caused by “water that backs up, overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment” is excluded. Another section was added to the exclusion, which states that loss or damage caused by “waterborne material carried or otherwise moved by any of the water referred to in [the section dealing with water discharged from a sewer, drain, sump, sump pump or related equipment]” is also excluded.

Floods and Weather-Related Cats

In this instance, waterborne material would include sewage, which caused the damage to the shingles. The water exclusion would apply to the loss.

Other changes made to the water exclusion reflect recent weather catastrophes, such as the previously mentioned Hurricane Katrina fallout. A new section was added, which states, “The exclusion applies regardless of whether any of the [causes of loss listed] is caused by an act of nature or is otherwise caused. An example of a situation to which this exclusion applies is the situation where a dam, levee, seawall, or other boundary or containment system fails in whole or in part, for any reason, to contain the water.” This addition contemplates a situation similar to the levees failing in New Orleans, Louisiana in the aftermath of Katrina. 

ISO cited Sher v. Lafayette Ins. Co., 988 So.2d 186 (La.2008), as playing a part in the creation of the water exclusion endorsement, whose language is now used in the causes of loss forms. The court in that case stated, “The plain, ordinary and generally prevailing meaning of the word 'flood' is the overflow of a body of water causing a large amount of water to cover an area that is usually dry. This definition does not depend on locality, culture, or even national origin—the entire English speaking world recognizes that a flood is the overflow of a body of water causing a large amount of water to cover an area that is usually dry land. Contrary to the court of appeal's reasoning, this definition does not change or depend on whether the event is a natural disaster or a manmade one—in either case, a large amount of water covers an area that is usually dry.”

Also, tsunami and storm surge were added to the flood section of the exclusion to clarify that damage or loss caused by these types of events does fall under the water exclusion.

Incorporation of the water exclusion into the causes of loss forms was one of several changes made to the ISO commercial property program. To read about the other changes to the program, refer to the National Underwriter Company's Commercial Property Coverage Guide, 5th Edition.