Oh the horror of extensive water damage – especially to a business operation!!
Insurers know this well. Companies are very careful to underwrite only certain losses in a standard BOP (business operations policy) insurance form. All other rain and water losses need to be covered by endorsement at an increased premium cost. A small commercial Iowa store owner found this out the hard way.
However before we get to the sad part, dear Readers, let’s put on our safari hat and explore the BOP policy in the insurance jungle. What are they and why are they different from a standard CGL? It will help us make sense out of the decision from the Iowa Supreme Court below.
Insurers commonly issue a BOP policy to small and medium size business owners. The BOP has a unique combination of coverage for both major property and liability risks – combined together all in one insurance policy package. It is cheaper than buying two policies separately. Generally the BOP covers property insurance for buildings and contents, business interruption coverage, and liability protection for losses caused by the business owner or her employees. It is a relatively new product in that it has not been around for decades and decades. For this reason there is not a great deal of litigation interpreting the standard ISO BOP form. What you really need to know is this: it is NOT an all risk policy like the standard form CGL. In an all risk policy, generally all risks are covered unless excluded by specific policy language. On the other hand, a BOP policy is a covered-peril policy. It only covers those perils specifically set out in the policy terms.
In the very recent Iowa case of Amish Connection, Inc. v. State Farm Fire and Cas. Co., —N.W.2d ___ 2015 WL 1260085 (March 20, 2015) the Iowa Supreme Court followed other Midwestern states in ruling on an issue of first impression there: does a business owners insurance policy cover rain water damage from a pipe that burst during a rainstorm? NO!!!
In Amish Connection, the plaintiff rented a bay in a shopping mall to sell its goods to the public. State Farm issued a BOP policy to Amish Connection. During a particularly heavy rain storm, a pipe which ran down an interior wall of the shopping mall burst in Amish Connection’s store. Amish Connection’s goods suffered some serious water damage. It turned to State Farm for coverage, arguing that this was an accidental loss due to water damage and leakage.
Why no coverage? Well to cut to the chase here, the State Farm policy did not specifically cover rain losses. In fact, it excluded such losses in clear and unequivocal language. The policy stated that it “will not pay for loss to the interior of any building…caused by rain … whether driven by wind or not unless the building or structure first sustains damage by an insured loss to its roof or walls through which the rain…enters…. What does this mean? This clause excluded rain losses unless, by way of example, hail or a tornado opened the structure and the rain came in through the opening.
In the Amish Connection loss, the rain collected in a leaky drain pipe. Due to the large amount of rain that day the pipe became overwhelmed and it burst. But remember that this was a covered-peril policy. The policy explicitly stated that this type of loss was not a covered peril. No coverage then. It’s that simple.
Below, the Iowa Court of Appeals tried to make a distinction between rainwater and rain. It concluded that rainwater is what is collected after the rain falls. Thus, it reasoned, this should be a covered loss because it was caused by accumulated rainwater – not falling rain. However the Iowa Supreme Court found such a distinction ludicrous: “(R)ainwater is unquestionably caused by rain, and it is undisputed the water damage occurred during a rainstorm when the drain pipe ruptured to spill rainwater into Suite 102.” Id., slip op at 6. All rain would be rainwater after it falls, thus making the exclusion for rain meaningless in the policy.
This issue has been decided before by other Midwestern courts. For example in Einspahr v. United Fire and Cas. Co., No. A-99-371, 2000 WL 758654 (Neb. Ct. App. 2000) the Nebraska Court of Appeals reviewed identical BOP policy form language and affirmed summary judgment for the insurer. It found that rain which had entered the roof of a building was still “rain” and excluded from the policy. The Missouri Court of Appeals also affirmed similar language in Stufflebean v. Fireman’s Fund Ins. Co., 710 S.W. 2d 931, 933 (Mo. Ct. App. 1986). The court there held that the policy clearly excluded coverage for water damage from a broken gutter which was caused by rain.
Amish Connection is simple case, but without a doubt it was hard for the Supreme Court to make its decision. Three judges dissented, trying hard to find coverage for the policyholder. There is a knee jerk expectation by policyholders in situations like this. If a loss from rain is not covered, then what exactly is a covered peril – since rain and water losses can be so devastating? But therein lies the rub dear friends, which of course now you know. This is a BOP policy. It is not a CGL policy or another form that is more generous in its coverage terms and which costs more too. The BOP is a specific, marketed product that costs less, combines coverage, and may not be for everyone if rain losses are contemplated. A policyholder can always obtain this coverage by endorsement, or consider a different product to suit its foreseeable and likely risks.
A BOP policy will not cover most losses caused by rain. Since heavy and indiscriminate rain losses are a foreseeable risk in the Midwest, it is wise to obtain a different policy or an endorsement which covers rain losses. The Iowa Supreme Court got it right: no coverage. So now you know, dear Readers. Now you know.