A New York appellate court recently issued one of the more interesting policy interpretation decisions, highlighting the importance of clearly drafted policies and exhibiting the well-settled principle that any ambiguity in a policy should be construed liberally in favor of the insured.
In Platek v. Town of Hamburg, 2012 N.Y. Slip Op. 5459, homeowners sued their insurer for breach of contract after the insurer failed to provide coverage for water damage that resulted from a ruptured water main.
The insurer denied coverage because the policy excluded coverage for losses caused by “water on or below the surface of the ground, regardless of its source…”
The homeowners, however, pointed to an exception to this exclusion, which reinstated coverage for loss “caused by fire, explosion or theft resulting from [the exclusion].” They argued that the water main had exploded and the loss was therefore covered under the exception.
The insurer countered that the exception to the exclusion was an ensuing loss provision that provided coverage only for a secondary loss due to fire, explosion or theft that followed from the primary loss from the water intrusion.
The appellate court determined that because both interpretations were reasonable, the policy was ambiguous and was to be construed against the insurer.
Two justices dissented from the majority and offered a compelling argument in support of the insurer. Relying on principles of policy interpretation that require courts to determine the parties’ intent by “examining the policy as a whole” and defining words and phrases according to their “plain, ordinary, and popularly understood sense, rather than in a forced or technical sense,” the dissent thought the homeowners’ interpretation was unreasonable.
The dissent’s conclusion turned on its understanding of the phrase “resulting from,” which it said clearly referred to an “ensuing loss.” It argued that to read the policy otherwise would be to “contravene the purpose of the water loss exclusion, which is to preclude coverage for losses caused by water entry into the residence.”
The dissent agreed with the insurer that the exclusion and exception were structured such that loss from water incursion was excluded but any resulting fire, explosion or theft would be covered.
The dissent explained that the exception refers to a separate occurrence that follows from the excluded loss and gave the example of a fire or explosion triggered by water damage to a circuit breaker. The loss from the water damage would not be covered, but the loss from the ensuing fire or explosion would. To disassemble the sequential nature of the provisions and to force another interpretation would lead to an unreasonable and illogical interpretation.
To demonstrate the weakness of the plaintiffs’ interpretation, the dissent applied the plaintiffs’ analysis to another of the exceptions—theft. According to the dissent, to say that an explosion caused by water is covered is similar to saying that a theft directly caused by water would be covered. Water, of course, cannot cause theft, but theft may result where a home is damaged by water, abandoned, and thereby left vulnerable to theft. The distinction, though nuanced, captures the intent of the policy and reflects the most natural reading.
The dissent refused to accept that the policy was designed to exclude water loss but included an exception that hinged on whether a water main “exploded” or merely leaked. Such a reading would exclude loss from water that “exerts pressure on, or flows, seeps or leaks through any part of the residence premises” but include coverage for an explosion of water. Neither the policy nor common sense supports such a reading, but this was precisely the plaintiffs’ interpretation, and the majority agreed that it was a reasonable interpretation.
The majority focused its reasoning on a technical understanding of the language and its interpretation was more forced and less natural than the dissent’s contextual approach to the policy as a whole.
A technical reading of the term “explosion,” as explained by the majority could include a water main bursting from the pressure of the water, and a mechanical application of the policy language could support the argument that the explosion resulted from water below the surface of the ground.
The majority found this to be a reasonable interpretation and was not required to find more. Where a provision is reasonably susceptible of two interpretations, the provision is ambiguous and will be construed against the insurer.
The majority also noted that the insurer could have provided a definition of the term “explosion” or more clearly identified the exception as an ensuing loss provision. Other courts have reviewed policies that included such definitions and provisions.
In National Fire Ins. Co. of Hartford v. Tires, Inc. 153 F. Supp. 944 (W.D. S.C. 1957), the policy at issue clearly provided, “the bursting of water pipes are not explosions…” And in Pavuk v. State Auto Ins. Co., No. 96-8459 (E.D.Pa. July 15, 1997), the policy excluded loss from water, “unless loss by fire or explosion ensues and this company shall then be liable only for such ensuing loss.” It would have been simple enough for the insurer to eliminate all doubt by including similar statements. Its failure to do so resulted in liability where none was expected and none was likely intended.
Although the dissent provided a well-reasoned analysis for disallowing coverage, the majority found ambiguity by way of its technical reading of the provisions and liberally construed the policy against the insurer.
Policyholders can rely on this case, as much for its actual holding, as for its invitation to utilize technical interpretations of policy language to find ambiguities, even if such interpretations stretch beyond the context of the policy as a whole and the intent of the parties. For insurers, the decision is a reminder that clarity is essential when crafting policies and care should be taken to eliminate potential ambiguities.
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