In an insurance dispute involving more than $200 million in water damage to Norwood Hospital, the Massachusetts Supreme Judicial Court (SJC) was asked to resolve the parties’ disagreement over the insurance-policy term “flood.” The dispute arose because, while the two operative insurance policies’ total coverage limits were higher than the cost of repairing the damage, the policies’ sub-limits for flood-caused damages were lower than the repair costs. In Zurich American Insurance Company v. Medical Properties Trust, Inc. (Docket No. SJC-13535), the SJC found that the policy term “flood” – defined in relevant part as “surface waters” – did not clearly encompass the waters that caused most of the damage. As a result, the policies’ flood sub-limits did not apply and the hospital could be made whole.
The case arose from a heavy rainstorm that caused groundwater flooding and associated damage to the lower portions of the Hospital. The parties agreed that these damages were caused by “surface waters.” However, the vast majority of the damages contained in the hospital’s $200,000,000 claim were caused by rainwater that infiltrated the Hospital roof. The insurers maintained that this rainwater also constituted “surface waters,” which left the Hospital short of full coverage.
Litigation ensued in U.S. District Court, where the trial judge agreed with the insurer that all the Hospital’s damages were caused by “surface waters” and subject to the cap on flood-related damages. The Hospital appealed to the U.S. Court of Appeals, which decided to refer this muddled question to the SJC. Specifically, the Court of Appeals certified the following specific question to the SJC: “Whether rainwater that lands and accumulates on either (i) a building’s second-floor outdoor rooftop courtyard or (ii) a building’s parapet roof and that subsequently inundates the interior of the building unambiguously constitutes ‘surface waters’ under Massachusetts law for the purposes of the insurance policies at issue in this case?”
The term “unambiguously” was crucial to the certified question, because the law of Massachusetts (and most everywhere) provides that ambiguous insurance policy terms must be construed against the insurer and in favor of the insured, particularly when a construction favoring the insurer would prevent or limit coverage. The Hospital argued that “surface waters” was susceptible to multiple different interpretations, including the Hospital’s interpretation that the term only included water entering the building from the surface of the Earth (and not that which enters through a roof). The insurers argued that a “surface” is any surface, including the surface of a roof.
The SJC closely examined the language of the operative insurance policies, finding language to support both the Hospital’s and the insurers’ positions: “Both parties propose what appear to be plausible interpretations based on the policy language alone.” The SJC also surveyed prior case law from Massachusetts and elsewhere, again without finding any clear authority supporting either side’s position: “This lack of clear definition is confirmed by the case law across the country that is divided on the issue with no consensus position.”
As a result, the SJC agreed with the Hospital that (1) the damages caused by the rainwater that infiltrated its roof did not clearly fall within the policy term “surface waters,” and (2) the cap on flood-related damages therefore did not apply. In the end, the SJC left the insurers with the following admonition, which presumably will lead them – and other insurers – to rewrite their policies to more clearly define flood-related damages: “The insurers here could have defined surface waters to include the unusual accumulation of rainwater on a roof, but they did not clearly do so.”
For questions about this case and how it may apply to you, please contact Michael Sullivan or any member of Prince Lobel’s Construction Group.