Insurance Claim Denial – Policy Language

I know, I know.  Nobody reads the policy.  But, not reading the policy and understanding it can be a killer.  This is illustrated in a May 2022, opinion from the United States 5th Circuit Court of Appeals.  The opinion is styled, Bradford Realty Services, Incorporated v. Hartford Fire Insurance Company.

The Policy at issue in this case is a commercial building policy.  It provides coverage for losses “caused by or resulting from water that backs up from a sewer or drain.”  It also excludes coverage for damage caused by rain unless the Property “first sustains damage by a covered Cause of Loss to its roof or walls through which the rain . . . enters.”

In September 2018, heavy rains swept over the insured property.  Drains on the building were clogged.  The clog and a subsequent leak caused extensive damage to the inside of the property.  Bradford filed a claim that was subsequently denied by Hartford with Hartford saying the damage was caused by rain that did not enter the building through damage caused by the storm and thus fell into the Policy’s exclusion for damage caused by the rain.

A lawsuit was filed by Bradford who argued the drain backup coverage provision covered the loss.  Eventually cross motions for summary judgment were filed.

When analyzing an insurance contract, Texas courts use well- established principles of contract construction.  The goal of the exercise is to determine the contracting parties intent through the policy’s written language.  The analysis is frozen within the four corners of the policy itself.

Important here, Texas courts do not dilute the meaning of contractual provisions but instead “give effect to each word, clause and sentence, and avoid making any provision within the policy inoperative.  Mere disagreement between the parties “does not create an ambiguity” in the contract’s language, as only when a provision is subject to two or more reasonable interpretations may it
be considered ambiguous.

Bradford first argues that because the policy provides coverage for damage caused by water backing up from a drain, and because the parties stipulated that the drains were clogged such that H 2 O accumulated on the roof, eventually reaching a “rooftop air handling unit” and leaking inside the building, the damage should be covered.  Thus, Bradford argues, even if the rain exclusion applies, the drain backup provision is an exception to that exclusion that renews coverage.  Hartford argues this issue under the assumption that Bradford is asserting the drain backup provision as affirmative coverage in the first instance, not as an exception.  The result is the same either way.

If the drain backup provision provides coverage in the first instance, it does not apply here.  The section of the Policy that includes the drain backup coverage also states that the coverages provided in that section “are added . . . unless otherwise indicated in the Property Choice Schedule of Premises and Coverages or by endorsement to this policy.”  The rain exclusion is contained within the “Property Choice” portion of the Policy.  Further, the subsection that contains the rain exclusion states that the limitations contained therein “apply to all policy forms and endorsements.”  Thus, the drain backup coverage applies “unless otherwise indicated,” and the rain exclusion otherwise indicates.

If the drain backup provision is an exception, it does not apply to the rain exclusion.

The rain exclusion’s only listed exceptions are unambiguous and only concern losses that result from covered damage “to [the Property’s] roof or walls through which the rain . . . enters” and damage “caused by . . . thawing of snow, sleet or ice on the building or structure.”  Bradford has stipulated that the cause of undefined liquid entering the Property was only that “the roof drains were clogged with debris” which allowed the liquid to pool and leak into the Property through an air handling unit.  Thus, Bradford cannot establish that the drain backup provision fits within either of the two exceptions to the rain exclusion, and this argument

The rainwater exclusion is also discussed in this case and is informative for those presented with a similar situation.


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