Leaky Underground Pipes, But No Water Damage: Is Tear-Out Covered? – Claims Magazine

ISSUE

The insured discovered water flowing from beneath a concrete slab in one of the insured buildings. The insured believed the source of the water was leaky fresh water pipes which passed below the slab. Apparently, many of the pipes throughout the premises suffered from pinhole leaks of undetermined origin. Potential causes of the leaks included rust, wear and tear, deterioration due to electrolysis, and deterioration due to acidic soil.

The insured sustained no known loss from the water. The water apparently escaped under the building as downhill run-off or became absorbed in the surrounding soil.

The insured sought recovery of insurance proceeds for costs necessary to tear out building components in order to repair the leaky pipes. The insured did not seek the costs of repairing the pipes, nor did the insured request coverage for loss of metered water.

The policy was an ISO CP 00 10 10 91 with CP 10 30 10 91, which listed underground pipes, flues or drans as "Property Not Covered," and also listed exclusions for wear and tear, rust, corrosion and continuous or repeated seepage or leakage of water that occurs over 14 days or more.

In addition, the policy’s Additional Coverage Extentions stated: "If loss or damage caused by or resulting from covered water or other liquid, powder or molten material damage loss occurs, we will also pay the cost to tear out and replace any part of the building or structure to repair damage to the system or appliance from which the water or other substance escapes."

Three questions arose: 1) Does the policy, in general, provide coverage for tear-out of the concrete slab and ground under the building for the purpose of repairing leaking water pipes where no covered loss has occurred? 2) Does the policy, under paragraph 2 of the Additional Coverage Extensions, provide coverage for tear out and replacement costs where there was loss of "covered water" even though there was no covered loss? 3) If no coverage for tear out is provided now, may the insured ignore the problem and wait for a covered ensuing water loss to occur at a later date in hopes of getting coverage?

ANALYSIS

The answer to all three questions appears to be no. The policy provides no coverage for tear-out, generally or under the extension, because no covered loss occurred. Next, although the insured owes no express contractual duty to make repairs, if the insured waits for an ensuing loss to occur, tear out and any other coverage may not be provided because the loss will not be fortuitous.

Coverage for tear out is not provided because no covered loss to covered property occurred. Here, pipes apparently corroded or wore thin allowing water to leak through pin-sized holes in the pipe. No known water damage ensued. The only losses at present include loss of (a) underground pipes and (b) metered water.

The underground pipes are expressly listed as property not covered. However, even if covered, the probable causes of loss, wear and tear, rusting, or corrosion to the pipes are not covered. Therefore, no coverage for loss to the pipes or for tear out is provided.

At least one court found that metered water constituted personal property. If a similar ruling was made here, the lost water could potentially be considered lost property. However, the loss of the water is expressly excluded. The policy expressly provides that "We will not pay for loss or damage caused by or resulting from . . . [c]ontinuous or repeated seepage or leakage of water that occurs over a period of 14 days or more." Here, the insured reported that there was a long standing problem with pinhole leaks in the underground piping. Consequently, the loss appears to be excluded.

The Additional Coverage Extension provides no coverage for tear out due to loss of "covered water." In paragraph 2 of the Additional Coverage Extension, the term "covered" does not modify the term "water." The term "covered" modifies the term "loss," which follows the modifying phrase "water or other liquid, powder or molten material damage." Therefore, a "covered . . . loss" must occur before tear out is covered under the extension.

It is worth noting that until the 07 88 edition of the policy, the language included the word "a" before the word "covered." The paragraph read "resulting from a covered water damage loss occurs." (emphasis added). For the 07 88 edition, the language was amended to include "other liquid, powder or molten material" in addition to water. When the language was added, the "a" was dropped.

However, without the "a," which might further clarify the current form, the meaning remains clear. If the word "covered" is read to modify "water," the term "covered" would also be read to modify "other liquid, powder or molten material damage." Such a reading would leave the words "damage loss" without context or meaning.

Duty of Insured to Make Repairs

The insured owes no express contractual duty to make repairs. Under the policy, the insured must take steps to protect property only in the event of loss to covered property. Here, no loss to covered property occurred. Therefore, the insured’s responsibilities under the policy have not yet been invoked.

On the other hand, the insured cannot ignore the problem and wait for a loss to occur in hopes of getting insurance proceeds for tear out. Any future loss resulting from bursting of an underground pipe would not likely be accidental or fortuitous, and therefore, would not be covered.

A policy of insurance provides coverage for fortuitous losses. A fortuitous occurrence is an event which is not certain to occur during the policy period. Here, the insured admittedly believes that future loss from water due to burst pipes is almost a certainty due to the widespread problem with underground pipes. Therefore, any future loss might not be considered non-fortuitous and not insurable under the policy.

Furthermore, if a water damage loss later occurs due to water escaping from a burst pipe, coverage for ensuing water damage may not be covered. Here, the likely cause of a burst pipe will be either rust, corrosion, or wear and tear. For these perils, the policy provides coverage for ensuing loss by specified perils. The specified perils include water damage. However, the definition of water damage as a specified cause of loss requires that the loss be caused by an "accidental discharge." Here again, the insured is aware that the problem with his pipes requires attention. If he ignores the danger, any subsequent water damage may not be accidental because it is almost certain to occur.