Did Water that Pooled on Roof Cause ‘Flood’ Damage? Mass. High Court Asked to Decide

December 21, 2023

A federal appellate court is asking Massachusetts’ top court to decide whether an insurance policy sublimit for damage caused by “surface waters” applies to damage from water that pooled on a parapet roof and second-floor courtyard during a rainstorm.

The 1st Circuit Court of Appeals says an answer is needed so that it can resolve a declaratory judgment lawsuit filed by two insurers against the owner and lessor of a suburban Boston hospital. Zurich American and American Guarantee and Liability insurance companies contend that damage caused by water seeping through the hospital’s roof was caused by a “flood” and subject to sublimits that capped coverage to $100 million from Zurich and $150 million from AGLIC.

The term “flood” was defined in the policy to include runoff and the rapid accumulation of surface waters.

“The definition of ‘surface waters’ in this particular context presents a novel issue of Massachusetts law not previously addressed by the Massachusetts Supreme Judicial Court,” the 1st District panel said. “Furthermore, existing SJC case law does not point towards a clear answer and deciding this question requires policy judgments on applying Massachusetts law to this key insurance coverage issue.”

The Norwood Hospital was damaged by severe thunderstorms on June 28, 2020. Torrential rain flooded the basement of the hospital’s two main buildings. Rainwater also accumulated on the hospital’s flat roof, which was surrounded by a law wall, or parapet. The storm also inundated an open-air courtyard on the second floor.

Medical Properties Trust had purchased an insurance policy from Zurich that provided up to $750 million in coverage, but a $100 million sublimit provided that no more than $100 million would be paid for damage caused by “flood.”

A company that leased the hospital, Steward Health Care System LLC, purchased a “substantively identical” policy from AGLIC that provided up to $850 million in coverage, but also limited damage from a “flood” to $150 million.

MPT and Steward both filed claims. Zurich and AGLIC first said that the damage to the basement was caused by a flood and would be subject to the sublimits, but damage to the upper floors of the hospital resulted from “water intrusion caused by wind-driven rain and/or overflow of roof drains and parapet flashings.”

A few months later, the companies submitted proof of loss claims for damages that exceeded $200 million. Zurich responded that substantially all of the damages were subject to the flood limit, contradicting its earlier statement that the sublimit applied only to the basement.

AGLIC’s response mirrored Zurich’s approach. The company said it would enforce the sublimit so only $150 million in coverage was available.

Zurich filed a lawsuit against MPT seeking a declaratory judgment that the sublimit applied to the damage caused by water that pooled on the roof and in the courtyard. The US District Court ruled in favor of the insurer, finding that “surface water” is not limited to the accumulation of water at ground level.

MPT and Steward appealed.

The 1st District panel said the Massachusetts Supreme Judicial Court had ruled on similar insurance coverage disputes. In one case, the high court found that surface water included rainwater that pooled on a paved parking lot. In another, it found that water that accumulated on a slightly elevated backyard patio was surface water.

The Supreme Judicial Court has not ruled, however, on whether surface water that collects on a roof before it reaches the earth’s natural surface can also be defined as surface water.

The panel sent this certified question to the court:

“Whether rainwater that lands and accumulates on either (i) a building’s second-floor outdoor rooftop courtyard or (ii) a building’s parapet roof and that subsequently inundates the interior of the building unambiguously constitutes “surface waters” under Massachusetts law for the purposes of the insurance policies at issue in this case?”

Top photo: Water pooling on an improperly drained flat roof is shown. Photo courtesy of Elite Roofing and Contractors Ltd.

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