On February 19, 2015, the New York Court of Appeals issued a decision upholding Allstate Indemnity Company’s disclaimer of coverage under a homeowners’ insurance policy in Platek v. Town of Hamburg. The Court enforced the unambiguous language of the policy in holding that Allstate was not required to insure a loss that the policy had affirmatively excluded.
In September 2010, a subsurface water main abutting the plaintiffs’ property ruptured, causing water to flood into and severely damage their home’s finished basement. The plaintiffs made a claim under their homeowners’ insurance policy, issued by defendant Allstate Indemnity Company.
The policy excluded property damage caused by water, with an exception for certain sudden and accidental direct physical losses:
[Allstate does] not cover loss to the property . . . consisting of or caused by:
1. Flood . . .
2. Water . . . that backs up through sewers or drains
3. * * *
4. Water . . . . on or below the surface of the ground, regardless of its source, [including] water . . . which exerts pressure on, or flows, seeps or leaks through any part of the residence premises.
We do cover sudden and accidental direct physical loss caused by fire . . . [or] explosion . . . resulting from items 1 through 4 listed above.
Allstate disclaimed coverage on the basis of the policy provision excluding coverage for damage caused by water.
The plaintiffs commenced an action against Allstate, alleging it had improperly disclaimed coverage. The plaintiffs asserted that because they had sustained a water intrusion loss caused by an “explosion” of the water main, their claim fell within the exception to the water loss exclusion. In support of their motion for summary judgment, the plaintiffs submitted an expert affidavit of an engineer, who stated that the water main “suddenly exploded from the internal water pressure being exerted on the pipe walls.” He opined that the plaintiffs had therefore suffered direct physical loss to their home that had been caused by an explosion resulting from internally pressurized water suddenly and accidentally bursting from an underground pipe.
Allstate cross-moved for summary judgment. Supreme Court granted the plaintiffs’ motion, declaring that the plaintiffs’ loss was covered under the policy and that Allstate was required to pay the claim. Allstate appealed. The Appellate Division, Fourth Department found that the policy provisions were ambiguous and, therefore, that the ambiguity should be construed in favor of the plaintiffs.
The Court of Appeals reversed, concluding that the policy’s unambiguous language excluded the water damage to the plaintiffs’ home. The Court held that three basic principles governed its analysis: (1) fair meaning should be afforded to all of the language of the policy, leaving no provision without force and effect, (2) although the insurer bore the burden of proving the applicability of the exclusion, it was the insured’s burden to prove the existence of coverage, and where the existence of coverage depends entirely on the applicability of an exception to the exclusion, the insured has the duty of demonstrating that it has been satisfied, and (3) where a property insurance policy contains an exclusion with an exception for ensuing loss, courts have sought to assure that the exception does not supersede the exclusion by disallowing coverage for ensuing loss directly related to the original excluded risk.
The Court of Appeals reasoned that the plaintiff’s loss in Platek v. Town of Hamburg held that the loss clearly fell within the water loss exclusion, which barred coverage for loss to the property caused by water below the surface of the ground.
The Court then turned to the sudden and accidental exception, which was an “ensuing loss provision.” An “ensuing loss provision” provides coverage when, as a result of an excluded peril, a covered peril arises and causes damage. The Court noted that such provisions were a product of the San Francisco earthquake of 1906. In the wake of that natural disaster, some insurance companies had argued that because earth movement was an excluded peril under property insurance policies, so was the damage caused by the devastating fires sparked by gas emitted from pipes broken by the shaking of the earth, even though fire was a covered peril. The California legislature enacted statutes to prevent insurers from disclaiming coverage under such circumstances, and, in order to comply, insurers added exceptions to their earthquake exclusions to preserve coverage for ensuing fires.
The Court of Appeals concluded that the ensuing loss exception requires a new loss to property that is of a kind not excluded by the policy. The Court rejected the plaintiffs’ argument that their loss resulted from an explosion, noting that the plaintiffs’ expert engineer did not opine that the explosion resulted from subsurface water exerting pressure on any part of the residence, per item 4 of the water loss exclusion. The Court also reasoned that the plaintiffs’ interpretation ignored the water loss exclusion’s prefatory language, which specified that Allstate did not cover loss to the property caused by any of the four items of water loss.
In sum, held the Court, interpreting the insurance policy as urged by the plaintiffs would contravene the water loss exclusion’s purpose, as expressed in unambiguous language, which was to preclude coverage for damages caused by the entry of water onto an insured’s property. To apply the ensuing loss provision to provide coverage for what was essentially a flood would subvert the intent of the parties and force Allstate to insure a loss it did not contemplate and, indeed, affirmatively excluded.