SJC to Decide: What is Surface Water in a $400M Insurance Dispute?
The Federal First Circuit Court of Appeals (First Circuit) has requested guidance from Massachusetts’ top court, the Supreme Judicial Court (SJC), to address a novel question affecting property insurance policies in the state. The issue is whether rainwater that pools on the upper levels or flat roof sections of a building is considered “surface water” under Massachusetts law when it leaks and damages the inside of a building.
At the heart of the matter is how “surface waters” should be interpreted—a crucial factor in determining if Medical Properties Trust, Inc. (MPT) and Steward Health Care System LLC (Steward) will face restricted coverage for “Flood” damage as defined in their policies with insurers Zurich American Insurance Company (Zurich) and American Guarantee and Liability Insurance Company (AGLIC) for their over $400 million in water damage claims.
In Massachusetts, traditional legal interpretations view water that pools on artificial surfaces like parking lots as “surface water”—which most property insurance policies do not cover if it enters a building. But there is uncertainty when that water collects above ground level, like on a rooftop.
Background of the dispute over the meaning of “surface water”
In June 2020, severe thunderstorms in Norwood dropped more than 6 inches of rain in approximately 90 minutes. The sudden deluge caused severe damage to the Norwood Hospital building, which was owned by Medical Properties Trust Inc. (MPT) and leased to Steward Health Care System LLC (Steward). The sudden accumulation of rainwater flooded the Hospital’s basement and pooled on the Hospital’s roof and upper-level outdoor areas. These parts of the building, including elevated courtyards and parapet roofs—roofs bordered by a wall—seeped the pooled water into the Hospital’s upper floors without ever touching the ground.
MPT’s property policy with Zurich provided a total of $750 million in coverage for “damage caused by a Covered Cause of Loss to Covered Property.” The AGLIC policy provided Steward a total of $850 million in coverage for “damage caused by a Covered Cause of Loss to Covered Property.”
Both policies consider “Flood” a “Covered Cause of Loss.” The policies defined “Flood” as:
A general and temporary condition of partial or complete inundation of normally dry land areas or structure(s) caused by:
The unusual and rapid accumulation or runoff of surface waters, waves, tides, tidal waves, tsunami, the release of water, the rising, overflowing or breaking of boundaries of nature or man-made bodies of water; or the spray there from all whether driven by wind or not[.]
However, the policies’ flood coverages had sublimits of $100 million (Zurich) and $150 million (AGLIC).
The $400 million in claimed losses and the carriers’ flood sub-limits
In August 2020, Zurich and AGLIC determined that water damage in the Hospital’s basement was caused by a “Flood” and would be subject to the policies’ flood coverage sublimits of $100 million and $150 million, respectively.
For the upper floor damage from pooled water, Zurich and AGLIC stated that this damage “appears to have resulted from water intrusion caused by wind driven rain and/or overflow of roof drains and parapet flashings” and, therefore, the insurers indicated that they would “separate the flood damage sustained on the basement and ground floors . . . from the water intrusion property damage sustained on the first, second[,] and third floors.”
A few months later, MPT submitted a proof of loss for $221,033,890, consisting of the full $100 million Flood sublimit plus an additional $121,033,890 as ‘Storm’ damage not subject to the policy’s flood sublimit. Steward then submitted its proof of loss for $202,483,879, made up of $112,218,364 for flood damage and $90,265,515 ‘Storm’ damage, not subject to the flood sublimit, incurred for the water pooled on the roof and parapets.
Following the submissions of claims totaling $423,517,769 million, each carrier reassessed their coverage positions.
In December 2020, Zurich advised MPT that it would recognize its claim for the full $100 million “Flood” sublimit plus an additional $121,033,890 labeled as “Storm” damage. However, the carrier’s legal position was that nearly all the damages from the June 28, 2020, incident fell under the policy’s $100 million “Flood” sublimit. Zurich reasoned that water entering at or below ground levels and accumulated water on the roof both contributed to the problem, thereby causing a “Flood” issue, even on upper floors.
Zurich viewed MPT’s claim for storm damage as an attempt to sidestep the flood damage sublimit, thereby refusing the entirety of MPT’s claim that exceeded the sublimit
AGLIC adopted Zurich’s coverage position in responding to Steward’s claim for $112,218,364 for “Flood” and an additional $90,265,515 for “Storm” damage. AGLIC advised Steward that the entirety of the water damage would be considered under the “Flood” category, enforcing a policy sublimit of $150 million across all levels of the Hospital.
Lawsuits over what is “surface water” referred to the state’s highest court
Zurich filed suit against MPT, and Steward filed against AGLIC in federal court, each seeking declaratory judgments on coverage terms. In particular, the meaning of “surface waters” in the context of flood coverage when the water causing the damage never touches the ground. MPT and Steward argued that the damage to the upper floors was not subject to the flood sublimits in their policies. They reasoned that the water accumulating on the upper floors was not “surface waters” within the definition of their limited flood coverage.
The federal district court ruled in favor of the insurers but allowed an immediate appeal to the First Circuit of Appeals to decide on the meaning of “surface waters” in these policies.
The First Circuit, however, determined the nature of “surface waters” in this case was an unresolved question of Massachusetts law and, given the substantial monetary claims, decided to certify the question of what is “surface water to the SJC for clarification.
Federal Courts and State Law: A Delicate Balance
Federal courts often find themselves in the thick of deciphering state law when resolving disputes that hinge on local statutes, regulations, and contract terms. While they are adept at applying existing state law to cases before them, shaping or providing definitive interpretations of these laws is beyond their purview. This is where the principle of federalism comes into play, affirming the sovereignty of each state over its legal matters and the role of state courts as the ultimate arbiters of state law.
Since the First Circuit decided that there was no clear Massachusetts legal precedent that would decide the dispute over water accumulating on roofs and parapets, the First Circuit unilaterally referred the decision to the SJC under a formal process called “Certification.”
Under its certification rule, the SJC permits federal courts or other state supreme courts to certify questions of state law that are “determinative of the cause then pending in the certifying court,” but for which there is no controlling precedent by the SJC.
Question certified to the SJC for an answer
Ultimately, the First Circuit identified the question to certify to the Massachusetts SJC for its consideration as:
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?
The Court stated that it would “welcome any further guidance from the SJC on any other relevant aspect of Massachusetts law that it believes would aid in the proper resolution of the issues presented here.”
Agency Checklists will report on the SJC’s decision when issued.
