California – Water Damage – Natural Source

INTRODUCTION

In California, it is unclear from the case law whether the natural source rule would apply to the ISO HO-3 form, 4/91 edition. The case law on point is either factually distinguishable or contains a water damage exclusion with unique language. However, a federal trial court held that an exclusion for water regardless of whether it arose from “natural or external causes,” did not preclude coverage for water from a broken pipe.

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

Sewage Leak (limited by the natural source rule where exclusion contained the phrase natural water) — An exclusion for damage due to “natural water below the surface of the ground” did not apply where cracking damage to a home was caused by an artificially high level of ground water from the sewage systems of the housing development, in State Farm Fire and Cas. Co. v. Von Der Lieth, 2 Cal. Rptr. 183 (Cal. 1991) [reviewed at PLRB, Prop. Ins. L. Rev. 3689 (1989)]. The court apparently distinguished between water that is in the ground as a result of an act of nature, and water and sewage that is in the ground as the result of an act of man.

Man Made Berm (not limited by the natural source rule) — However, the water damage exclusion, along with acts or decisions exclusion, precluded coverage for water damage to various insureds caused by a neighbor’s refusal to remove a berm that was built to and did divert a river in Cuevas v. Allstate Ins. Co., 872 F. Supp. 737 (S. D. Cal. 1994) [reviewed at PLRB, Prop. Ins. L. Rev. 4216 (1995)].

The water damage exclusion would not apply to damage caused by water from a heating system because the water would not be subsurface water. Anderson v. USAA Casualty Ins. Co., No. C 06-07948, 2008 WL 619004 (USDC N.D.Cal. 3/04/08) [reviewed at PLRB, Prop. Ins. L. Rev. 7529 (2008)].

Lucky Leather, Inc. v. Mistsui Sumitomo Ins. Group, No. 14-55019, 2016 WL 2866056 (9th Cir. (Cal.) 5/17/16) (unpublished [reviewed at PLRB, Prop. Ins. L. Rev. 9458 (2016)]. A surface water exclusion precluded coverage for damage caused by rainwater that flowed through the drainage system for a nearby building and was expelled on the ground near the policyholder’s building, and seeped down into the basement. The exception in the policy for water that backs up or overflows from a sewer, drain, or sump did not afford coverage because there was no evidence that the drainage system was blocked or did anything but convey the water as it was designed to do.

“Natural or External Causes” Limited By Natural Source Rule

Varela v. State Farm General Ins. Co., No. 119CV00617DADEPG, 2021 WL 3630499 (E.D. Cal. 2021) (U.S. District Court for the Eastern District of California, applying California law) [reviewed at PLRB, Prop. Ins. L. Rev. 11084 (2021)]. An exclusion for water below the surface of the ground, which excluded coverage for damage caused by water regardless of whether it arose from “natural or external causes,” did not preclude coverage for damage caused by water from a burst pipe beneath the insured home.  The court interpreted the exclusion as limited to water within the earth from natural sources, such as that which supplies wells and springs. The phrase “natural or external forces” in the preface to the exclusion was interpreted as meaning forces applied to the water, rather than the source of the water itself.  The exclusion was also ambiguous, as applied to water from a burst pipe, in light of the policy’s coverage for “sudden or accidental discharge or overflow of water from within a plumbing system.” The court thus concluded that the exclusion did not apply to damage to the home caused by water that escaped from a burst water line.

“Naturally Occurring or Due to Man made or Other Artificial Causes” Not Limited By Natural Source Rule

In Ruffin Rd. Venture Lot IV v. Travelers Prop. Cas. Co. of Am., No. 10-CV-11-JM (WVG), 2011 U.S. Dist. LEXIS 66095, at *10-11 (S.D. Cal. June 20, 2011), water that leaked or seeped upwards through the first floor after an underground pipe buried beneath the Building ruptured was undeniably excluded water “under the ground surface” and “pressing on, or flowing or seeping through” the foundation and floor of the Building. The court stated that the policy made this exclusion applicable regardless of whether the water is “naturally occurring or due to man made or other artificial causes.”

“Caused by Act of Nature or is Otherwise Caused” Not Limited By Natural Source Rule

In Wisteria Props. LLC v. Ohio Sec. Ins. Co., No. 8:20-cv-01708-JVS-JDE, 2021 U.S. Dist. LEXIS 228135 (C.D. Cal. Nov. 17, 2021), the court held that “water under the ground surface” unambiguously referred to all water, natural or otherwise, and thus, that the insured’s claim was precluded by the Water Exclusion. The clarification that the “exclusion applies regardless of whether . . . [water under the ground surface seeping through the foundations] is caused by an act of nature or is otherwise caused” confirmed that the term unambiguously referred to all types of water, natural or otherwise. Id. at *12. The Wisteria court distinguished the Varela decision because the water exclusion provision at issue did not contain a lead-in clause clarifying that water under the ground surface was precluded from coverage “regardless of cause,” a substantially similar version of which was included in the policy at issue here.

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.