Water-damage claims: “Sudden and accidental”

Insurers frequently deny such claims, but they have a duty to investigate and identify evidence that supports coverage

2016 September

What happens when an insured makes a claim for suspected water damage manifested by buckling floors, but does not know the source of the leak? In most instances the adjustor will ask whether the damage was caused by a pipe burst. If the insured responds that he or she doesn’t know the answer, the adjustor will likely begin gathering evidence to deny the claim on the grounds that the damage was not caused by a sudden and accidental failure of plumbing which is covered under an all-risk policy.

When an insured makes an initial claim for water damage, what are the duties of the insurer? What, if any, are the concurrent duties on an insured? And what types of actions (or inactions) taken by the insurer raise issues of bad faith?

What is a “sudden and accidental” leak?

Sometimes the longevity of a leak is known. This was the case in Brown v. Mid-Century Insurance Co (2013) 215 Cal.App.4th 841. In Brown, the insureds began observing condensation on the windows for over a month before hiring a plumber (Lewis) to take care of the leak. Lewis observed the water coming from an open hole in the pipe which was coming out as a drip because the water had been turned off very low. Within a day or two of reporting the loss, the insurance adjustor came to the home and inspected and took photographs. The adjuster observed pervasive, visible mold and moisture on the interior walls of each level of the three-story home. The insured advised another claims representative that they had observed condensation and mold a month prior to the claim. Within a week of the original investigation, the insurer denied the claim on the basis that it was caused by a hole in a pipe which leaked over time and thus was not “sudden and accidental.”

In Brown, the insured chose not to challenge whether the leak at issue was “sudden and accidental.” Rather the insured claimed that the nanosecond it took for the pipe to break satisfied the “sudden and accidental” policy provisions. Of interest is the court’s discussion of what constitutes a sudden and accidental leak as follows, “…[“[g]iven the small size of the hole(s) through which the water leaked, and given the extensive amount of water damage ..., the leak must have lasted a sufficiently long time, or stopped and started sufficiently many times, to count as ‘continuous’ or ‘repeated’ under any reasonable construction of those terms”]; Truck Ins. Exchange v. Pozzuoli (1993) 17 Cal.App.4th 856, 860, [“[a]ny continuous event, whether it be of 30 years’ or 2 months’ duration, is simply not ‘sudden’”].) A dishwasher hose breaking in mid-cycle, a water heater giving out and flooding a room, or an overflowing toilet, is a sudden discharge of water. (See, e.g., De Bruyn v. Superior Court (2008) 158 Cal.App.4th 1213, [overflowing toilets sudden and accidental]; but see, Cardio Diagnostic Imaging Inc. v. Farmer’s Ins. Exchange (2012) 212 Cal.App.4th 69, 71, [malfunctioning toilet that failed to shut off water intake and overflowed because of blockage in the sewer line was not covered because of exclusion for loss or damages caused by water “that backs up or overflows from a sewer”].) A spray/stream/leak of water over several months is not.”(Id., at p. 85.2)

Ultimately the court in Brown concluded that there was no coverage, finding that, “The nature of the gradual water discharge from the Browns’ pipe (even if initiated by a nanosecond breach in the wall of the pipe) and of the incremental effects of the water on the Browns’ house precludes any finding that the discharge was sudden.” (Id, at p. 853.)

Regardless of how one views the conclusions reached by the Court in Brown, (and arguably its conclusions are limited to the facts of that decision) ACL Technologies, Inc. v. Northbrook Property & Casualty Ins. Co. (1993) 17 Cal.App.4th 173, 1786, more helpfully attempts to define “sudden and accidental.” It notes, “Whatever ‘sudden’ means, it does not mean gradual.” Plainly there is much room for interpretation between Brown’s discussion of the nanosecond of a pipe break and “not gradual.” That said, insurers are relying on Brown to deny coverage based upon the presence of mold in the insured’s home even though the mold may be unrelated to a broken pipe which resulted in the insured’s claim or takes mere days to appear. Moreover, the insurer is likely as not to have a bevy of “experts” (think mold experts or metallurgists) at the ready to provide opinions confirming the long-term nature of the leak.

Even if a lay person would not typically use the terms “sudden and accidental” to characterize a leak, insurers use the insured’s failure to identify the leak as “sudden and accidental” as a factor against coverage. Therefore when reporting a claim, whenever possible those terms should be used or a description as to the absence of any prior manifestations of the presence of water.

An insurer’s duty to investigate and to provide reasonable assistance

Among the duties codified under Insurance Code section 790.3, subd (h)(3) is the duty “for the prompt investigation and processing of claims arising under insurance policies.” Additionally section 2695.1 (e)(3) of the California Insurance Department Fair Claims Settlement Regulations provides that, “Upon receiving notice of claim, every insurer shall immediately, but in no event more than fifteen (15) calendar days later, do the following unless the notice of claim received is a notice of legal action… begin any necessary investigation of the claim.”

In Mariscal v. Old Republic Life Insurance Company (1996) 42 Cal.App.4th 1617, the court addressed the insurer’s duty to investigate and the type of actions or inactions taken by the insurer which would constitute a breach of the policy. In Mariscal, the insured, Mariscal, was driving his automobile on Highway 101 when it went off the road and plunged down a 50-foot ravine. A family friend had been driving behind Mariscal at the time of the accident and witnessed Mariscal’s behavior following the accident. At that time Mariscal was lucid, did not complain of difficulty breathing and did not know why the accident occurred. He did complain about a cut to his head to other witnesses arriving on the scene. In a report by the Department of Forestry, the officer did not reference cardiac arrest or heart attack. The paramedics arriving at the scene found Mariscal’s blood pressure and heart to be normal and there was no evidence of cardiac malfunction prior to the accident.

After Mariscal’s admittance in the hospital with a multiple trauma diagnosis, Mariscal fell into a coma and died two days later. Hospital staff “... were not sure if the patient had a myocardial infarction triggered by the stress of the accident or whether it happened when the patient was driving the car causing him to have irregular heartbeats, syncope and subsequent accident.” (Id., at p. 1621.)

Mariscal’s wife and beneficiary under the policy thereafter made a claim for accidental death benefits under her husband’s life insurance policy. As part of its investigation, Old Republic requested Mariscal’s doctor (Doctor Diaz) to complete the proof-of-loss form. In the form Dr. Diaz noted that Mariscal’s death was “due to accident,” indirectly related to a brain contusion, coma and brain hypoxia and that the “disease or condition directly leading to his death was cardiopulmonary arrest with antecedent causes being myocardial and atherosclerotic heart disease,” and that the heart condition and accident-related injuries caused the death.

Old Republic retained a third-party investigator whose investigation consisted of reviewing the California Highway Patrol’s traffic collision report, the death certificate, some of the hospital records, the proof of loss form and a brief synopsis of the doctor’s records. Old Republic never contacted any of the witnesses at the scene or Mariscal’s doctor or retained its own doctor prior to denying the claim on the grounds that Mariscal’s death was not attributable to illness and the accident.

Following the denial, Mariscal’s wife filed suit and a jury held that Old Republic had unreasonably failed to pay the policy benefits. It awarded extracontractual damages. The jury’s judgment was affirmed on appeal. The appellate court addressed the insurer’s duty to investigate as follows: “The issue here is whether Old Republic considered all the information reasonably available to it at the time it denied the claim, and whether that information provided a basis for coverage. Old Republic had a duty to thoroughly investigate the circumstances to determine whether the accident was a factor causing his death. (See Egan v. Mutual of Omaha Ins. Co., supra 24 Cal.3d pt pp. 817, 819.)  An insurance company may not ignore evidence which supports coverage. If it does so, it acts unreasonably towards its insured and breaches the covenant of good faith and fair dealing. Old Republic asserts that it did not breach the covenant of good faith and fair dealing because it obtained every writing in existence setting forth the insured’s cause of death. It argues these writings reflect that the cause of death was the insured’s heart failure and not the injuries he sustained in the automobile accident. ….Old Republic did not fulfill its duty to obtain the readily available statements of all the percipient witnesses…. Old Republic was aware that no one knew what caused the accident….Old Republic never discussed the matter with Doctor Diaz, paramedic Pence, Hughes, Anderson or Chapin during the time it investigated the accident….Rybicki [the Old Republic adjustor] did not understand medical terms or conditions and Old Republic did not consult with its own doctor. Claims representatives…ignored evidence which supported coverage and did not fulfill its duty to investigate further. (Id., at p. 1624.)

Insurer must look for evidence that supports claim

The Mariscal case highlights the necessity for an insurer to actively investigate and identify evidence that supports coverage. That duty applies equally to insurance claims for water damage where an after-the-fact analysis of the premises may not result in a definitive answer as to whether or not the leak was sufficiently “not gradual” to fall within the policy requirements of “sudden and accidental.” In the context of a claim for water damage and a pipe burst, the duty to promptly investigate is particularly paramount where the cause of the water damage is not obvious.

The nature of that duty is additionally complicated by the insured’s own duty to mitigate, i.e., stop the flow of water if the damage of the leak is ongoing. So in our hypothetical where the insured notices some buckling of his or her floors and contacts his insurer, the insurer’s first response may be to advise the insured to hire a plumber to stop the leak. While the policy may cover damage from the leak, it likely does not cover the actual repair of the leak and the insurer does not have a duty to provide the name of a plumber. Most policies do not cover opening up walls necessary to locate the source of the leak. Many policies do cover closing up any opening if the loss is covered.

On the other hand, the policy may cover emergency services necessary to “dry down” the premises. In that event and if asked by the insured, the insurer has a duty to provide the insured with the names of emergency services to repair damage caused by the leak. The process of remediation potentially involves demolition of walls, removal of drywall, dry rot, etc., raising the question as to whether the insurer has a duty to conduct its investigation before any dry down which potentially involves the destruction of evidence which the insurer may later claim should have been preserved. In effect, an argument can be made that, notwithstanding the insurer’s insistence that the insured locate the source of the leak before conducting its own investigation, the condition of the premises and the need to immediately remediate may require the insurer’s immediate presence on the property at or about the time the leak is located to preserve and/or provide instructions for the preservation of evidence that the insurer deems necessary for its investigation.

The potential conflict between the insurer’s duty to provide assistance and to investigate and their lack of duty under the policy to actually fix a leak poses serious challenges in a real-time situation where remediation services are on the insured’s premises and their work necessitates decisions about what evidence may be needed to be preserved to support coverage while concurrently insuring that the potentially dangerous materials be removed from the premises.

Damned if you do, and damned…

Anecdotally, agents have been known to blame the insured for removing drywall (which may show evidence of mold and support the denial of coverage) and also for failing to remove drywall (thus purporting to show an insured’s failure to mitigate).

In the event that the insurer fails or refuses to promptly investigate, the insurer should provide guidelines beyond simply preserving the broken pipe. For instance, did the insurer advise the insured to take photographs of the area around the pipe (or other source of the leak) for signs of a sudden leak? Did the insurer clarify its expectations regarding the removal or preservation of drywall? Or conversely, should the insurer opt not to promptly investigate, should it be precluded from relying on later obtained and possibly compromised or incomplete evidence in support of a denial of a claim?

The plumbers and remediators need to keep in mind that insurers will likely hire experts to support a denial of coverage. Evidence of, for instance stachybotrys mold, may provide evidence of the nature of the leak since this mold variant takes a long time to generate, thus suggesting that the leak may be long term. As a consequence, it may be helpful to take samples of the mold found on the premises or air-borne samples prior to remediation to provide an alternative explanation for the presence of mold where the insurer relies on the presence of mold as proof of a long-term leak. Additionally, the moisture level and the type of materials on the premises may be factors in accelerating the growth of mold and thus may negate opinion testimony suggesting that the presence of certain molds confirm the long-term nature of the leak. This again raises the importance of collecting evidence of the condition of the premises prior to any remediation which may in fact be necessary to mitigate the insured’s damages.

Additional living expenses

Additionally, the adjustor should proactively ask the insured about whether the water damage renders the entire or part of the home uninhabitable and, if so, advise the insured of his or her entitlement to benefits under the Additional Living Expenses (“ALE”) provisions of the policy. The ALE benefits kick in where the premises are uninhabitable or somehow unfit to live in pending the repairs or investigation. Since policies do not define what constitutes “unfit,” there is significant room for interpretation. The insured has strong arguments that the premises are “unfit” or uninhabitable where contaminants such as mold, lead or asbestos are present and where there are young children or elderly adults living on the premises. Additionally, the extent and nature of the impact of the water damage on the premises (for instance, the kitchen) plays a role in determining the habitability issue.

Once the insured’s entitlement to ALE benefits is established, the insurer is required to provide its insured with accommodations comparable to those enjoyed by the insured prior to the loss. Consequently if the insured was living in a multi-million-dollar home at the time of the loss, he or she may be entitled to hotel accommodations falling within the same high-end standards. Not unexpectedly there are significant ranges in an insurer’s willingness to abide by the ALE requirements of their policies and thus ALE issues are often highly contentious.

Conclusion

While a water-damage claim may, on its face, seem straightforward, insurers aggressively challenge every aspect of water-damage claims and often use the insured’s duty to mitigate to avoid their responsibility to investigate proactively. In instances where the source of water damage is not obviously “sudden and accidental,” there is a tremendous advantage for insureds to be represented when seeking benefits under their all-risk polices.