New York’s Highest Court Enforces a Water Damage Exclusion Despite an Ensuing Loss Exception

In Platek v. Town of Hamberg, et al., 2015 WL 685726, 2015 N.Y. LEXIS 252 (N.Y., Feb. 19, 2015), the New York Court of Appeals held that an exclusion for water below the surface of the ground was unambiguous and operated to bar coverage when a subsurface water main burst and flooded the insureds’ basement.  The policyholders’ attempt to invoke an ensuing loss exception to the exclusion was also rejected in an opinion that surveys the historical genesis of ensuing loss provisions and explains the limited circumstances under which they operate to restore coverage.

The insureds, Frederick and Mary Platek, owned a home in Hamberg, New York.  On September 7, 2010, a subsurface water main abutting their property ruptured, flooding the house’s finished basement and causing $110,000 in damages.  The Platek’s insurance claim was denied by Allstate, their homeowner’s insurer, because the policy contained an exclusion reciting that Allstate “does not cover loss to the property . . . consisting of or caused by . . . 4. Water . . . on or below the surface of the ground, regardless of its source[, including] water . . .  which exerts pressure on, or flows, seeps or leaks through any part of the residents premises.”

The insureds brought suit, contending that their loss was covered because it fit within an exception to the exclusion that recited as follows:  “We do cover sudden and accidental direct physical loss caused by fire, explosion or theft resulting from items 1 through 4 listed above.”  To support that position, they submitted an engineer’s affidavit stating that the water main “suddenly exploded from the internal water pressure being exerted on the pipe walls [and hence] the explosion resulted from internally pressurized water that was supposed to be contained in a buried underground pipe.”  The trial court granted the Plateks’ motion for summary judgment, and a panel of the Appellate Division subsequently affirmed the finding of liability in a 3-2 decision.  An appeal to New York’s highest court followed.

On February 19th, five judges of the Court of Appeals reversed and directed that Allstate’s cross-motion for summary judgment be granted.  Speaking for four out of five members of the court participating, Judge Susan Read began by noting that two of the principles guiding the court’s analysis were:  (1) that where the existence of coverage depends entirely on the applicability of an exception to an exclusion, the insured bears the burden of proof; and (2)  that an ensuing loss provision such as the one at issue “does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property itself.”

The panel held that the Plateks’ loss “clearly falls within item 4 of the water loss exclusion.”  As a result, the only issue was whether the exception operated to restore coverage.  Judge Read had no difficulty in concluding that “this clause is properly characterized as an ensuing loss provision,” and her opinion noted that such clauses were “a product of the San Francisco earthquake of 1906.”  As her opinion explained, an ensuing loss “requires a new loss to property that is of a kind not excluded by the policy” and cannot operate to “resurrect coverage for an excluded peril.”

The panel held that the insureds’ reliance on the engineer’s affidavit was misplaced.  According to Judge Read:

Plaintiffs . . . argue that the water damage to the basement was covered because it was “caused by an explosion of the . . . water main resulting from highly pressurized water located on or below the surface of the ground[.] . . . But this is not what plaintiffs’ expert said.  He opined that “highly pressurized water” exerted internal water pressure on the walls of a pipe buried off plaintiffs’ property; not that an explosion resulted from subsurface water “exert[ing] pressure on . . . any part of the residents’ premises” per item 4 of the water loss exclusion.

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Reading the policy as a whole, . . . the exception would trigger coverage for any sudden and accidental direct physical loss caused by an explosion resulting from a loss to the property consisting of or caused by water on or below the surface of the ground of the residents’ premises, regardless of its source . . . [T]his does not describe what happened here according to the plaintiffs’ own expert.

In conclusion, the panel felt that “interpreting the insurance policy as plaintiffs propose would contravene the water loss exclusion’s purpose, as expressed in unambiguous language, which is to preclude coverage for damages caused by the entry of water onto an insured’s property.”  As a result, “permitting coverage under the facts of this case would force Allstate to insure a loss it did not contemplate and, indeed, affirmatively excluded.”

Judge Eugene Pigott wrote separately concurring in the result.