Michigan – Water Damage – Natural Source

INTRODUCTION

In Michigan “surface water” and “water under the ground surface” is not limited to water that originates from precipitation or other natural sources.

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

In Michigan “surface water” and “water under the ground surface” is not limited to water that originates from precipitation or other natural sources.

Commerce Center Partnership v. Cincinnati Insurance Co., No. 265147, 2006 WL 1236745 (Mich. App. 5/09/06) (unpublished) [reviewed at PLRB, Prop. Ins. L. Rev. 7237 (2007)], water and mold damage allegedly caused by water from a break in a city water main was excluded from coverage under a businessowner’s policy. Neither the exclusion for “surface water” nor the exclusion for “water under the ground surface” was limited to water that originates from precipitation or other natural sources. Even if the insured could establish that another peril, which was not excluded, contributed to the loss, damage caused by a combination of excluded and covered causes of loss would not be covered because (a) Michigan courts have rejected concurrent causation doctrine, and (b) the anti-concurrent causation language in the policy would preclude such a result. The policy’s additional coverages for “Pollutant Clean Up and Removal” and “Water Damage, Other Liquids, Powder or Molten Material” were not triggered because there was no covered cause of loss. The exception to the policy’s pollutant exclusion also could not create coverage for an otherwise excluded loss.

The Commerce Center court quoted the Michigan Supreme Court’s definition of “surface water” broadly as follows:

[W]aters on the surface of the ground, usually created by rain or snow, which are of a casual or vagrant character, following no definite course and having no substantial or permanent existence. Such waters are lost by percolation, evaporation or by reaching some definite water-course or substantial body of water in which they are accustomed to, and so, flow with other waters.

Id. at *3, quoting Fenmode, Inc. v. Aetna Casualty & Surety Co., 6 N.W.2d 479, 481 (Mich. 1942). The Commerce Center court found that while the Fenmode court stated that surface water “usually” results from precipitation, its definition of the term did not require that it originate from precipitation or other natural sources. Furthermore,

In all other respects, water that escapes from a broken water line and rises to the surface fits squarely within the definition of Fenmode. Such water would be located “on the surface of the ground,” would possess “a casual or vagrant character,” and would follow “no definite course and hav[e] no substantial or permanent existence.”

Id., 2006 WL 1236745 at *3.

[Editor’s note] : Saying that surface water “usually” comes from “precipitation” arguably lends little support for the proposition that a policy exclusion, which should be narrowly construed, is broad enough to encompass water from all kinds of sources, natural and artificial. However, while the water in Fenmode did not originate from a pipe, it did run off and flow over several manmade surfaces before it reached the insured’s basement. As the court described the loss:

The damage was caused by the defective drain pipe. So much water apparently came down from the roof and instead of being carried away through the pipe, ran down into the driveway, the accumulation being too much for the sewer to carry away. It then came into the store through the back door, and ran down the stairs and also entered the basement from a hole in the floor where there is a Western Union lead-in wire.

Fenmore, 6 N.W.2d at 480.

Surface water and “acts or decisions” exclusions applied to damage to the insured’s basement caused by rainwater flowing inside. The insured claimed that the efficient proximate cause of the damage was nearby construction activity, which had removed the curb on the sidewalks and unsealed the entrance to an old coal chute, thus enabling water from heavy rains to flow from the street into the building. The court determined that the surface water exclusion applied because once the rain fell on the street and began to pool and flow, it became surface water and it remained surface water as it entered the insured’s basement. [Legal Services Plan of Eastern Michigan v. Citizens Ins. Co. of America, No. 278110, 2009 WL 1175514 (Mich. App. 4/30/09) (unpublished) [reviewed at PLRB, Prop. Ins. L. Rev. 7797 (2009)].

For a related PLRB coverage discussion, see PCQ.2012.04.04a (distinguishing facts from Commerce Center case, above, when water comes from fire hose and therefore was never underground).

Capital Mortgage. Solutions, LLC v. Cincinnati Ins. Co., No. 21-CV-10873, 2023 WL 3632705 (E.D. Mich. 5/24/2023) (U.S. District Court for the Eastern District of Mich., applying MI law) [reviewed at PLRB, Prop. Ins. L. Rev. (2023)]. A surface water exclusion, with an anti-concurrent causation preface, precluded coverage for damage caused by rain accumulating on a patio and entering the basement through doors and windows. The water did not cease to be surface water because it was of a casual character, having accumulated on the patio and entered the basement accidentally and without design, as a result of the failure of the drain and pumping system below.

Plymouth United Church of Christ Congregational v. Phila. Indem. Ins. Co., 2024 U.S. Dist. LEXIS 128611 (July 12, 2024) (United States District Court for the Eastern District of Michigan, Southern Division, applying MI law). Ambiguous policy language regarding limits of coverage and flood exclusions for water damage caused by flood and sewer backup precluded summary judgment for both the insurer and the insured. While an endorsement limited coverage for any one occurrence to $50,000 and eliminated the flood exclusion, a different endorsement addressed sewage/drainage backup as a separate and distinct peril that could be subject to broader coverage limits. This created a conflicting interpretation that must be presented to a jury to resolve.

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.