Intro & TOC – Water Damage – Natural Source

Introduction

The water damage exclusions in most homeowners, BP and CP forms preclude coverage for many types of losses caused by water, such as flood, surface water and water below the surface of the ground.

However, most courts have limited the exclusions for flood, surface water, etc., and water below the surface of the ground, to water from natural sources. This is often referred to as the Natural Source Rule or the Natural Source Limitation. Under the natural source limitation, the surface water and water beneath the surface exclusions do not apply where the flow of the water is controlled by a man-made source such as a pipe, trench or other artificial structure. Note, however, the natural source limitation does not confine the application of the surface water exclusion to water that has pooled or flowed over only undeveloped land; if it did, the exclusion would never apply in urban areas.

While the majority of jurisdictions have subscribed to the “natural source rule” among those jurisdictions that have opined (approximately 19 States), there is an equal number that have no case law at all on the issue. Furthermore, as of 2019, eight States do not follow the natural source rule, and six are either unclear or have mixed case law.

The natural source limitation should not apply to the sewer backup exclusion, because the wording of this part of the water damage exclusion, unlike the “flood, surface water” and “water under the ground surface” provisions, clearly contemplates exclusion of water damage caused by water flowing out of a man-made drainage system.

Natural Source May Not Apply to Newer Forms

Note that in the 2000 edition of the ISO HO 00 03 form, it states that the water damage exclusion applies whether caused by or resulting from “human or animal forces.” This was changed beginning in ISO’s 2011 edition of the the HO 00 03 form to, “regardless of whether” the loss is caused by “an act of nature or is otherwise caused.” Based on these additions, it appears that the natural source rule should no longer be relevant. However, note also that ISO has specified that the exclusions for surface water and water below the surface do not apply to loss by water covered under the following three provisions:

(a) the accidental discharge peril;

(b) the exception to the mold exclusion; or

(c) the tear out exception to the wear and tear exclusions.

Therefore, although the newer water damage language,  beginning in the HO-3 2000 form, makes the natural source rule irrelevant in many cases, the water damage exclusions will not apply to the loss by water that is covered under these three provisions.

Olson v. Allstate Ins. Co., No. 2010-CA-00612-MR, 2011 WL 2693555 (Ky. App. 7/08/11) (unpublished) [reviewed at PLRB, Prop. Ins. L. Rev. 8271 (2011)]. A Water damage exclusion, which applied to loss or damage caused by “water on or below the surface of the ground, regardless of its source,” precluded coverage for damage caused by more than 20,000 gallons of water that escaped from an above-ground pool, when it suddenly collapsed. The exception to the exclusion for a resulting explosion did not apply because there was no evidence that the water in the pool constituted an active internal force. Nor was the exclusion, which applied to water “regardless of its source,” limited to only natural occurrences of water. The evidence also failed to support the policyholder’s theory that the water never reached the ground.

Surface Water Exclusion

One reason for applying the natural source limitation to the surface water exclusion is that by definition, the term “surface water” suggests that the water originates from a natural source, without being contained or diverted from its natural flow over the ground, before causing the claimed damage. Application of the surface water exclusion may thus turn upon whether the water was of natural origin, as opposed to originating from a plumbing system or other artificial source serving to divert or contain the water.

As one court stated:

[S]urface waters are commonly understood to be waters on the surface of the ground, usually created by rain or snow, which are of a casual or vagrant character, following no definite course and having no substantial or permanent existence. Such waters are lost by percolation, evaporation, or by reaching some definite water-course or substantial body of water in which they are accustomed to and do flow with other waters.

Front Row Theatre v. American Mfrs. Mut. Ins. Cos., 18 F.3d 1343, 1347 (6th Cir. Ohio 1994) [reviewed at PLRB, Prop. Ins. L. Rev. 4088 (1994)]. See also Hatley v. Truck Ins. Exch., 1972 Fire and Casualty Cas. (CCH) 148 (Or.); State Farm Fire & Cas. Co. v. Paulson, 756 P.2d 764 (Wyo. 1988), and State Farm Fire & Cas. Co. v. Bowen, No. 87-223 (Wyo. 1988) [both reviewed at PLRB, Prop. Ins. L. Rev. 2839 (1988)]; Heller v. Fire Ins. Exchange, 800 P.2d 1006 (Colo. 1990) [reviewed at PLRB, Prop. Ins. L. Rev. 3570 (1991)].

Note, however, in Smith v. Union Auto. Indem. Co., 2001 WL 812621 (Ill. App. 2001) [reviewed at PLRB, Prop. Ins. L. Rev. 5965 (2001)], the court held that “surface water” was not limited to water that was completely unaffected by man-made constructions. It considered its holding to be compatible with the natural source limitation.

Blocked or Overtaxed Sewers or Drains

Surface water that is prevented from entering a blocked or overtaxed sewer or drain remains surface water. Courts have applied the exclusion in several such cases. See Earhart v. Maryland Cas. Co., 1985-86 Fire & Casualty Cas. (CCH) 1267 (Pa. Common Pleas 1985) [reviewed at PLRB, Prop. Ins. L. Rev. 2340 (1986)] (rainwater diverted from drainage system clogged with neighbor’s cornstalks flooded insured’s property); Hirschfield v. Continental Cas. Co., 405 S.E.2d 737 (Ga. App. 1991) [reviewed at PLRB, Prop. Ins. L. Rev. 3615 (1991)] (rainwater diverted from storm drain to the surface by underground blockage flowed into a basement); Front Row Theatre v. American Mfr.’s Mut. Ins. Cos., 18 F.3d 1343 (6th Cir. Ohio 1994) [reviewed at PLRB, Prop. Ins. L. Rev. 4088 (1994)] (damage to carpet caused by surface water that never entered clogged sewer system); Sunshine Motors, Inc. v. New Hampshire Ins. Co., 1995 Fire & Casualty Cas. (CCH) 17,650 (Mich. App.) [reviewed at PLRB, Prop. Ins. L. Rev. 4262 (1995)] (flooding caused by blockage of nearby street sewer with large piece of wood).

Application

Water From a Downspout

In Holcomb v. United States Fire Ins. Co., 279 S.E.2d 50 (N.C. App. 1981) [reviewed at PLRB, Prop. Ins. L. Rev. 1015 (1981)], an unusually heavy rainstorm caused a gutter downspout to fail, depositing an abnormally large amount of water adjacent to a wall. The surface water and water below the surface exclusions did not apply to hydrostatic pressure damage to the wall because the water had accidentally discharged from a plumbing system.

Water From Trenches

In Heller v. Fire Ins. Exchange, 800 P.2d 1006 (Colo. 1990) [reviewed at PLRB, Prop. Ins. L. Rev. 3570 (1991)], water from melted snow runoff was diverted onto the insured’s property by man-made trenches, 15-20 feet long, six inches deep, and lined with plastic sheets, rocks and tree limbs. The surface water exclusion did not apply because the runoff was diverted and prevented from percolating, evaporating or naturally draining.

Water In an Atrium

It is unclear whether the natural source limitation would apply to water in an atrium. One might consider the ordinary understanding of surface water as waters flowing freely over the surface. Based on the definition alone, it is not clear what result a given court would reach. It is possible that courts would split on this issue, as they have with respect to whether roof water is surface water. On the other hand, it might be reasoned that impoundment in an atrium is not significantly different than channeling that occurs to ground water due to the presence of other constructed structures, such as steps, doors, and so forth.

One might also reason that courts that apply the natural source limitation would be less likely to consider water in an atrium surface water. However, it might be argued that the natural source limitation should only apply to structures that cause the water to form a clearly defined body or course. Examples would be a pipe, guttering system, ditch or channel which would direct or contain the flow of water rather than allow the water to diffuse over ground level whatever that surface may be.

Water Below the Surface of the Ground

One reason for applying the natural source limitation to the water beneath the surface exclusion is that by definition, the phrase “water below the surface of the ground” suggests that the water originates from a natural source, without being contained or diverted, before causing the claimed damage. Application of the water under the ground surface exclusion may thus turn upon whether the water was of natural origin, as opposed to originating from a plumbing system or other artificial source serving to divert or contain the water.

Under the HO 00 03; CP 10 30; BP 00 02, in interpreting exclusions for “water below the surface of the ground,” one court stated that it meant “subterranean waters, whether percolating waters or underground streams,” Hatley v. Truck Ins. Exch., 1972 Fire and Casualty Cas. (CCH) 148 (Or.), and another interpreted it as “any water below the extreme upper crust of the soil which retains its characteristic of liquidity,” Lee v. Nationwide Mut. Ins., 1988 Fire & Casualty Cas. (CCH) 1806, 1808 (Tenn. App.) [reviewed at PLRB, Prop. Ins. L. Rev. 2946 (1988)].

Application

Broken Water Main

A clear example of water that is not from a natural source is water leaked from a pipe, either above or below ground. The containment and diversion of the water by the pipe prevents its characterization as being from a natural source, and thus prevents application of the surface water or water below the surface exclusions, even though the water may have in the past been naturally occurring. In Novick v. United Servs. Auto. Ass’n, 639 N.Y.S.2d 469 (App. Div. 1996) [reviewed at PLRB, Prop. Ins. L. Rev. 4501 (1996)], the water below the surface exclusion did not apply to water damage caused by a broken water main.

ADDITIONAL REFERENCE SOURCES

CP908 Discussion of Similar language in the Commercial Property forms.

BP44 Discussion of similar language in the Businessowners form.

HO81 Water Damage; HO82 Flood, Surface Water, etc.; HO83 Water Which Backs Up;HO84 Water Below The Surface; and HO85 Water Damage Ensuing Loss Exception – Discussion of similar language in the Homeowners Property forms

STATE-BY-STATE

Following chart, organized by state, provides links to cases, which have dealt with the application of the natural source limitation directly, or at least have rendered decisions pertinent to the issue. Where the case dealt directly with whether or not the natural source limitation applies, the summary will note as such.

POLICY LANGUAGE

ISO HO 00 03 10 00

ISO HO 00 03 04 91

ISO BP 00 02 12 99

ISO CP 10 30 04 02

Includes copyrighted material of ISO Properties, Inc. with its permission.