Is all water damage excluded under a Contractor Limitation Endorsement? Or only long-term, invasive water damage? This was the issue decided in Evanston Ins. Co. v. R & L Dev. Corp., 2014 WL 1389803 (D.S.C. April 9, 2014).
R & L Development Corporation was a contractor hired by Claflin University and the General Board of Higher Education and Ministry (the “University Defendants”) to remove existing metal partitions in all the bathrooms of one of the University Defendants’ science buildings. Work proceeded without incident until work commenced in the final bathroom in the building, when the contractor, in removing the metal partition lost control of the partition, which hit a water supply valve within the bathroom. The impact of the partition broke the supply valve causing a heavy stream of water to gush out, quickly flooding the bathroom. Because the water system was pressurized and contained in pipes within the building, water continued to flow from the broken valve for fifteen to thirty minutes until a separate maintenance contractor could disconnect the water supply. Water poured into the lower floors of the building causing significant damage.
The University Defendants filed suit against R&L in South Carolina state court (the “University Litigation”). Evanston Insurance Company (“Evanston”) had issued a commercial general liability insurance policy (a “CGL Policy”) to R&L with a limit of $500,000 per occurrence and general aggregate limits of $1,000,000. The CGL Policy contained a Contractor Limitation Endorsement which stated:
Contractor Limitation Endorsement
I. The coverage under this policy does not apply to “bodily injury,” “property damage,” or “personal and advertising injury;”
3. Caused by, arising out of, resulting from, or in any way related to the invasion or existence of water or moisture including but not limited to mold, mildew, rot, or related deterioration of any property. (emphasis added)
Evanston provided R&L a defense of its claims in the University Litigation until R&L and the University Defendants unsuccessfully mediated the case. At the conclusion of that mediation, R&L legally admitted that it owed the University Defendants $207,875.93 and assigned its rights under the CGL Policy to the University Defendants. After that, Evanston filed a declaratory judgment in the federal district court asking the Court to hold that Evanston was not required to indemnify the University Defendants, as R&L’s assignees, under the CGL Policy.
Evanston argued that the Contractor Limitation Endorsement was clear, and that the damage suffered by the University Defendants was unambiguously excluded from coverage by the water damage exclusion under the Contractor Limitation Endorsement. Evanston emphasized that the “incoming” of the water from the piping system to the dry spaces of the building constitutes as “invasion” under the plain and ordinary meaning of the word used in the water damage exclusion. Evanston also argued that the water damage exclusion does not require mold, rot or deterioration of the property, but instead the exclusion cites these merely as examples of “property damage.”
Taking the opposite position, the University Defendants asserted that the water damage exclusion in the Contractor Limitation Endorsement was ambiguous and should be construed against Evanston – and in favor of providing coverage. The University Defendants specifically argued that the language used could have two possible meanings. First, it could mean that any and all water damage is excluded from the CGL Policy – as Evanston argued. Alternatively, the University Defendants asserted that it could also mean that “only long-term, invasive damage, like mold and the like, are excluded from the policy.” The University Defendants’ position was that, because of these alternative readings of the language, that the policy should be construed in favor of coverage and Evanston should indemnify the damages.
The Court agreed with Evanston. It held that under the plain and ordinary meaning of the Contractor Limitation Endorsement in the CGL Policy, coverage does not apply for “property damage” “caused by, arising out of, resulting from, or in any way related to the invasion or existence of water or moisture.” The Court went on to note that the Contractor Limitation Endorsement excludes all property damage caused by water and only identifies mold, mildew, and rot as examples of the type of property damage that are excluded –the exclusion does not limit itself to only long-term invasive damage like mold. The Court also disregarded the University Defendants’ argument using the doctrine of “reasonable expectations” finding that South Carolina has not adopted this rule of insurance policy construction.
The foregoing case is instructive to policy holders as it highlights that, while there can be several interpretations of the reading of a policy, if the language is clear and unambiguous, it will not be subject to multiple interpretation. Further, it shows that where language provides a non-exclusive list of examples for explanatory purposes, the coverage can expand beyond those examples and the insurer does not necessarily limit itself solely to excluding those exact situations. The introductory language of the exclusion, “[c]aused by, arising out of, resulting from, or in any way related to” should serve as words of caution to policyholders when reviewing the insurance policy. This type of expansive phrase can be used by insurers to argue broad applications of the exclusion to losses that were never considered as excludable by the insured. In short, the introductory language and non-exclusive examples gives the insurer flexibility in its coverage denials.
Frank Cragle is a trial lawyer and a member of Hirschler Fleischer’s Insurance Recovery Team. He handles a variety of commercial business disputes, including insurance recovery and policyholder claims. Frank also devotes a substantial portion of his time to business tort litigation and intellectual property claims. For more information, contact Frank at 804.771.9515 or firstname.lastname@example.org.
Kristen M. Chatterton