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May 20.2009

Homeowner Denied Coverage for Water Damage Caused by Third-party Negligence

by Amanda Hairston

After sopping up the mess and shutting off your water main, most homeowners reach for the telephone to call their insurer after finding a water leak and the mess, damage, and mold left in its wake.  For years homeowners have found some comfort after making that call even when their homeowner’s policy excluded damage caused by water.  Until the recent decision by the California Court of Appeal’s Second District in Freedman v. State Farm Ins. Co.¸ B202617 (May 5, 2009), homeowners could argue that water damage caused by the negligence of a third party was not excluded.  The argument made by homeowners was that the third-party negligence, not the water, was the efficient proximate cause of the damage.  Since third-party negligence was covered by the policy, the fact that it caused water damage didn’t trigger the “water exclusion.” 

Courts agreed.  So insurers added another provision excluding any damage caused by a continuous or repeated seepage or leakage from a plumbing system regardless of whether it occurred suddenly or gradually, involved isolated or widespread damage, or arose from natural or external forces.  In Freedman, a contractor drove a nail through a pipe while installing sheetrock.  Although no leak started at the time, years later the nail corroded and caused a water leak and resulting damage to the Freedman’s home.  Although the homeowners strenuously argued that the third-party negligence was the “efficient proximate cause” of the damage, and the loss should therefore be covered,  the court held that the new provision in their policy excluded coverage.  The court found that the new provision barred coverage because water damage from a continuous leak was excluded regardless of whether or not the leak was caused by third-party negligence. 

The court applied Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005), which held that the “efficient proximate cause” did not always determine coverage and that “an insurer is not absolutely prohibited from drafting and enforcing policy provisions that provide or leave intact coverage for some, but not all, manifestations of a particular peril.”  The court held an excluded peril can be defined “in terms of a relationship between two otherwise distinct perils.”   The Freedman court found that this rule from Julian meant the exclusion applied despite an efficient proximate cause analysis.  This decision emphasizes the need for all homeowners to double check their policies and ensure that they have the water damage coverage that they bargained for so that their next water leak doesn’t lead to a flood of problems. 

Posted in General Liability Policies, Property Insurance | Permalink

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