A recent decision by the First Circuit Court of Appeals illustrates the importance of clearly articulating the efficient proximate cause of any insurance loss and the narrow interpretation applied by courts to exclusionary clauses. In Fidelity Co-op. Bank v. Nova Cas. Co., Nos. 12-1572, 12-2150, 2013 WL 4016361 (1st Cir. August 7, 2013), the court ruled that damages to the interior of a building caused by the pooling of water on the building’s roof, which resulted from excessive rain during Tropical Storm Hanna, did not constitute damage “caused by rain” excluded by the insured’s all risk insurance policy. Rather, the court held that the damages were caused by the failure of a drain that resulted in a “flood,” which peril was expressly covered under the policy.
The insured owned a five-story mixed-use rental property in Clinton, Massachusetts. The building, which was approximately 100 years old, had a flat, rubber-covered roof that had been installed a few years before the loss. The drainage system on the roof consisted of a single drain located at the center of the roof with an internal diameter of 2.5 inches. The roof also contained two glass skylights directly above the building’s stairwell.
On September 6, 2008, Tropical Storm Hanna brought heavy rains to Clinton. The excessive rain overwhelmed the rooftop drain on the building, causing the water to pool to such a height on the roof that it flowed over the curbs of the two skylights and entered the building, which resulted in substantial damage to the building’s interior. As a result of the damage, the Town of Clinton ordered the building to be closed, causing forced evacuation of all tenants. The town would not permit reentry until repairs were completed and a structural engineer provided an inspection report confirming that the structure was sound.
The insured sought coverage for the loss under its all risk insurance policy. After investigating the cause of the damage, which the insurer confirmed was the inadequate roof drain causing the rain water to excessively pool, the insurer denied coverage based on the rain limitation contained in the policy. The rain limitation excluded coverage for loss suffered to “[t]he interior of the building . . . caused by or resulting from rain, . . . whether driven by wind or not, unless [t]he building . . . first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain enters.” The insurer argued that the damages were “caused by rain” and, therefore, coverage was excluded.
In a declaratory judgment action regarding coverage, the district court agreed with the insurer, finding that the rain limitation precluded coverage.
On appeal, the First Circuit Court of Appeals reversed. The First Circuit explained that in determining whether a loss is excluded or covered by insurance, courts in Massachusetts must look to the efficient proximate cause of the loss. If the efficient proximate cause of the loss “is an insured risk, there will be coverage even though the final form of the property damage, produced by a series of related events, appears to take the loss outside the terms of the policy.” Applying this analysis, the First Circuit found that the efficient proximate cause of the loss was the blocked or inadequate roof drain that caused the water to accumulate on the flat roof – the efficient proximate cause was not the rain. The court explained that because the inadequate roof drain was a covered loss under the policy, not excluded by any other exclusion, and because the policy expressly covered damages arising from flood, which was defined as “[t]he unusual accumulation of surface waters from any source,” there was coverage.
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