INTRODUCTION
There is New Jersey case law that has held that water from a burst water main is not flood water or surface water despite policy language stating that the exclusion applied “regardless of whether” the water was “caused by an act of nature or otherwise caused.”
It is likely the exclusions for water below the surface and surface water are limited to losses from natural sources, unless the policy states otherwise.
Under language like that found in the 4/91 edition of the ISO HO-3 form, most courts from other jurisdictions have limited the exclusions for flood, surface water, etc., and water below the surface of the ground, to water from natural sources. The natural source limitation should not apply to the sewer backup provision, since the wording of this part of the water damage exclusion, unlike the “flood, surface water” and “water under the ground surface” provisions, clearly contemplates exclusion of water damage caused by water flowing out of a man-made drainage system.
Note that in the 2000 edition of the ISO HO 00 03 form, it states that the water damage exclusion applies whether caused by or resulting from “human or animal forces.” This was changed beginning in ISO’s 2011 edition of the the HO 00 03 form to, “regardless of whether” the loss is caused by “an act of nature or is otherwise caused.” Based on these additions, it appears that the natural source rule should no longer be relevant. However, note also that ISO has specified that the exclusions for surface water and water below the surface do not apply to loss by water covered under the following three provisions:
(a) the accidental discharge peril;
(b) the exception to the mold exclusion; or
(c) the tear out exception to the wear and tear exclusions.
Therefore, although the newer water damage language, beginning in the HO-3 2000 form, makes the natural source rule irrelevant in many cases, the water damage exclusions will not apply to the loss by water that is covered under these three provisions.
For a general discussion of the Natural Source Limitation as well as relevant language contained in many policies, see Water Damage Natural Source Introduction.
DISCUSSION
There is New Jersey case law that has held that water from a burst water main is not flood water or surface water despite policy language stating that the exclusion applied “regardless of whether” the water was “caused by an act of nature or otherwise caused.”
Sump Discharge Line (limited by the natural source rule) — In Stone v. Royal Ins. Co., 511 A 2d 717 (N.J. App. 1986) [reviewed at PLRB, Prop Ins. L. Rev. 2295 (1986)], a water below the surface exclusion did not apply to water loss caused by rupture of a hose connecting a sump pump with a drain, even though it set off the chain of events leading to the loss. The last event, the ruptured hose on the appliance, was a covered risk under the accidental discharge peril.
Water Main Burst (limited by the natural source rule) — River Vale at Holiday Farms Condominium Association-Apartment Section, Inc. v. Greater New York Mutual Ins. Co., No. A-4806-08T2 , 2010 WL 3185567 (N.J.Super. A.D. 8/11/10) (unpublished) [reviewed at PLRB, Prop. Ins. L. Rev. 8146 (2011)]. An exclusion for water under the ground surface did not apply to water that escaped from a water main that burst below the insured building and caused flooding of the interior.
Sosa v. Massachusetts Bay Ins. Co., 206 A.3d 1011 (N.J. Super. App. Div. 4/24/19) (Superior Court of New Jersey, Appellate Division, applying New Jersey law) [reviewed at PLRB, Prop. Ins. L. Rev. 10317 (2019)].Water from a burst water main, which flowed into the insured home, was not excluded flood, surface water, or water below the surface of the ground, notwithstanding the policy language stating that the exclusion applied “regardless of whether” the water was “caused by an act of nature or otherwise caused.” “Flood” could be reasonably construed as limited to a great inundation of water or deluge affecting a broad area or to an overflow of a body of water (whether natural or not). Therefore, the flood exclusion would not apply to the isolated condition of water that damaged the insured property, regardless of whether the water was the result of natural or manmade causes. “Surface water” was ambiguous because it could be reasonably construed as limited to water of a permanent nature, and, therefore, the surface water exclusion did not preclude coverage for damage caused by water from a burst water main. Finally, the exclusion for “water below the surface of the ground” did not apply because the water was above ground when it reached the insured home. Consequently, none of the water exclusions precluded coverage.
The court took care to state that it was not relying on the distinction between natural and manmade causes of water damage to conclude that neither the flood nor the surface water exclusion applied. Many of the cases cited from other jurisdictions relied on such a distinction, applying what is sometimes called the natural source rule. See PLRB, Water Damage – Natural Source – Introduction . Nevertheless, the court insisted that the terms “flood” and “surface water” were ambiguous as applied to water that was not: (a) a “general inundation” over a widespread area, (b) an overflow of a body of water, or (c) water that “possesses a permanent nature, akin to a body of water.”
It is debatable whether these were reasonable constructions of the policy language at issue in this case (and probably would not be of policy language that specifies that the exclusions would apply regardless of whether damage is widespread). One flaw in the court’s reasoning was that it relied on statutory definitions of “surface water” outside the insurance context and rejected judicial definitions, from cases from New Jersey and elsewhere, interpreting surface water exclusions in insurance policies.
It remains to be seen whether this decision, which appears in a published New Jersey appellate court opinion, will ultimately be appealed and accepted for review by the New Jersey Supreme Court. In the meantime, the case has been remanded to the trial court to deal with the remaining factual issues.
In G.E.M.S. Partners LLC v. AmGUARD Ins. Co., Civil Action No. 22-1664 (MEF)(JBC), 2024 U.S. Dist. LEXIS 133178 (D.N.J. July 29, 2024) [reviewed at PLRB, Prop. Ins. L. Rev. (2024)], a federal trial court applying New Jersey law held the Flood Exclusion did not apply where the backup of sewer water was caused, at least in part, by rain that overwhelmed the city’s drainage system. The court predicted that the New Jersey Supreme Court would interpret “flood,” as used in the Flood Exclusion at issue here, as the overflow of a body of water. The court held this interpretation was consistent with the plain, ordinary meaning of “flood” as reflected in dictionaries, how the term is generally used in insurance contracts, and the language of the Flood Exclusion. The court also stated that the Sosa court’s interpretation buttresses its approach to the Flood Exclusion, and is strongly suggestive of how the New Jersey Supreme Court would see things.
This discussion is based on the most commonly used forms and is updated to reflect recent changes. However, the discussion cannot discuss all variations in policy forms. The standard forms and form language change based upon introduction of new editions. Also, many companies use manuscript forms that differ from standard forms. Furthermore, certain states have mandatory endorsements or language that must be incorporated or read into a form.
