Defining Surface Waters: United Policyholders Argues That a Flood Does Not Happen on a Roof

Amy Bach and Chip Merlin

United Policyholders filed an amicus brief in the case noted in the post, “Can a Flood Happen on the Top of a 10-Story Roof? What Is Surface Water?” United Policyholders argued the following point:

The Massachusetts Supreme Judicial Court has defined ‘surface waters’ as waters ‘that lie or flow on the surface of the earth and naturally spread over the ground but do not form part of a natural watercourse or lake.’ Boazova v. Safety Ins. Co., 462 Mass. 346, 354, 968 N.E.2d 385 (2012), quoting DeSanctis v. Lynn Water & Sewer Comm’n, 423 Mass. 112, 115 n.6, 666 N.E.2d 1292 (1996). Zurich American Insurance Company (‘Zurich’) would have this Court believe that that definition encompasses rainwater that collects on an enclosed roof one or more stories above the ground. As Defendant-Appellant Medical Properties Trust’s (‘MPT’) brief explains in detail, Zurich’s position is contrary to Massachusetts law, which applies here.

Zurich’s position is also incorrect for other reasons. It is belied by the way the insurance industry rates flood risk, it is belied by the terms of Zurich’s policy, and it undermines policyholders’ reasonable expectation that rainwater seeping through a roof is not ‘surface waters.’

The brief then provided a quick history of flood insurance, the National Flood Program, and that roofs are not considered when making flood rating assessments:

The federal government has been the primary provider of flood insurance for 60 years, and has been so because of private insurers’ exodus from the market. While private flood insurance was common between 1895 and 1927, the private market all but dried up in response to extensive flooding around the Mississippi River in 1927. Private insurers determined that flood peril was uninsurable because of the catastrophic nature of flooding, the difficulty of determining accurate rates, the risk of adverse selection, and the concern that they could not profitably provide risk-based flood coverage at an affordable price.

In the years following the 1927 floods, political leaders like President Eisenhower called for a national system of flood insurance. In 1956, the Federal Flood Insurance Act was passed, but the program was defunded in 1957. Then, in 1965, Hurricane Betsy inundated New Orleans, becoming the country’s first billion-dollar hurricane.

Enter the National Flood Insurance Act of 1968. In recognition of the lack of coverage offered by the private market and in the face of Hurricane Betsy and other natural disasters, the U.S. Congress established the NFIP. The NFIP aims to provide access to primary flood insurance while also mitigating the nation’s comprehensive flood risk through the development and implementation of floodplain-management standards.  And an essential component of the NFIP’s mission is developing flood maps.

The Federal Emergency Management Agency (‘FEMA’), NFIP’s administrator, is responsible for developing nationwide flood maps that identify areas with special flood, mudslide, and flood-related erosion hazards. In coordination with participating communities, FEMA develops Flood Insurance Rate Maps (‘FIRMs’) that depict an area’s flood risk and flood plain. As the name suggests, the FIRM, in part, establishes the premium to be charged for flood insurance in a particular area.

The FIRM delineates the Special Flood Hazard Area (‘SFHA’)–that is, an ‘area that will be inundated by the flood event having a 1-percent chance of being equaled or exceeded in any given year.’ Within the SFHA, areas are divided into zones based on the type of flood risk, e.g., tidal flooding, mudslides, and undetermined risks. Critically, FIRM data is used by the private insurance industry to assess risk and establish premiums.

Flood risk is determined primarily by a property’s location and how it is built, though variable inputs have changed over time. The property’s physical location is used to determine (1) its proximity relative to flood sources including the coast, ocean, rivers, and Great Lakes, (2) ground elevation, i.e., where the building is located relative to the elevation of the surrounding area and nearby flood sources, and (3) other factors such as whether the property is located on a barrier island or situated near a dam or levee. Additionally, building characteristics are also important to determining flood risk. Among the building properties that FEMA considers are: (1) the type and use of the building, (2) the foundation type, (3) first-floor height, (4) number of floors, (5) unit location, (6) construction type, (7) flood openings, and (8) whether machinery and equipment are located on the ground floor.

Noticeably absent from this list is the property’s roof type. And that makes good sense. The three most common types of floods, according to Zurich’s own website, are fluvial (river floods), coastal floods, and pluvial floods (flash floods and surface-water floods). ‘Surface water floods occur when an urban drainage system is overwhelmed and water flows out into streets and nearby structures.’  Areas most at risk for surface water flooding are where there is ‘run-off from surrounding areas into a central low-lying land.’

United Policyholders claimed that the case is an example of “creative denials” on water claims based on strained constructions of policy language and that this is occurring across the country.   I agree that insurers are more frequently battling their policyholders trying to reduce payments on water losses. I noted this four years ago in Water Loss Claim Denied? Don’t Take “No” For An Answer:

Water loss claim denials happen a lot more frequently than when I started in the business over 30 years ago. There are many reasons for this, including companies changing their policies so that while they advertise the illusion of policyholders having the peace of mind, that is far from the reality of what is sold. I noted this frustration felt by many policyholders—and not just State Farm’s—in, Is the State Farm Policy Really Worth Anything.

Another reason for denials is insurance company claims ignorance or wrongful claims practices. Many companies simply train their field adjusters in the wrong manner about what is and what is not covered. Some companies hope the denied policyholder will go away and not challenge the decision not to pay.

Insurance coverage analysis of water damage claims is often complicated. Getting a professional on the policyholder’s side is important.

Water loss claims are a significant and frequent cause of loss.  Understanding the term “surface water” is often a key component to coverage regarding water loss claims. I will continue this study of “surface water” with more posts to come.

Thought For The Day

Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.

—Mark Twain