Appeals court defines “surface water” in examining water damage exclusion clause

By Joe Forward, Legal Writer, State Bar of Wisconsin

Oct. 22, 2010 – In a highly intriguing case in which a homeowner suffered a loss due to heavy rains in 2008, the Wisconsin court of appeals defined, for the first time, how the term “surface water” impacts coverage under an insurance policy with a water damage exclusion clause.

In American Family Mutual Insurance Co. v. Schmitz, 2010 AP16 (Oct. 20, 2010), the District II appeals court – in an opinion by Chief Judge Richard Brown – reversed a circuit court ruling that sided with the plaintiffs, homeowners James and Jody Schmitz (Schmitz).

Heavy rains hit the Milwaukee area in 2008. At the time, Schmitz was constructing an addition to his home that required excavation for a basement underneath the addition. During heavy rainfall, water came through the excavated area and “washed soil out from underneath the footings of the home,” causing the foundation to collapse.

The homeowner’s insurance policy included supplementary coverage if collapse was caused by “use of defective … methods of construction.” But the policy also excluded losses due to flooding or “surface water” damage or earth movement.

In addition, the policy included an “anti-concurrent clause exclusion,” which determined that losses due to water damage or earth movement were excluded “regardless of any other cause or event contributing concurrently or in any sequence to the loss.”

Schmitz argued that he failed to build a retaining wall to block rain flow, and this failure was a defective method of construction that was covered by the policy. He also argued the water damage exclusion did not apply, regardless of the anti-concurrent clause exclusion, “because the water that contributed to the collapse of the house” was rainwater, not surface water.

The circuit court granted summary judgment to Schmitz, and American Family appealed.

What is surface water?

On appeal, Schmitz argued that the water damage exclusion – no coverage for damage caused by surface water – did not apply because “the water which caused the damage was rain water,” not surface water. Alternatively, Schmitz argued that “any water that was surface water lost its character as such when its course was altered by a trench on his property.”

Noting that Wisconsin case law does not define what constitutes “surface water,” the appeals court adopted the following definition as set forth by the North Dakota Supreme Court:

[Surface water is] water which is derived from falling rain or melting snow, or which rises to the surface in springs, and is diffused over the surface of the ground, while it remains in such a diffused state, and which follows no defined course or channel, which does not gather into or form a natural body of water, and which is lost by evaporation, percolation, or natural drainage.[i]

To support its “rainwater” theory, Schmitz cited two cases in which homes were damaged by rainwater. But the court noted that in those cases, the rain that damaged the homes “entered the house without ever touching the ground.”

“Neither of these cases supports the proposition that water on the ground is not surface water merely because it once fell out of the sky as rain,” the chief judge wrote. “To limit the definition of surface water to water that does not originate as rain would leave the term surface water without much meaning.”

Thus, the court held that once the rain “fell to the ground, it became surface water” and thus American Family’s water damage exclusion applied.

The “defined channels” exception?

Even if it was surface water, the water lost its character as such “when its course was affected by a ‘trench’ on his property,” Schmitz argued.

To support this argument, Schmitz pointed to the Colorado Supreme Court case of Heller v. Fire Insurance Exchange, 800 P.2d 1006 (Colo. 1990). In that case, the court held that water loses its character as “surface water” if diverted by humanly created trenches, or “defined channels.”

But the court declined to adopt the “defined channels” exception. Adopting such a rule, the court explained, “would make a surface water exclusion virtually useless.”

Independent concurrent cause rule vs. anti-concurrent cause provision

Under Wisconsin’s “independent concurrent cause” rule, the court explained, “where there are multiple causes for a loss, some of which are insured and others of which are excluded, the insured risk prevails over the excluded risk.”

But the American Family insurance policy included an “anti-concurrent cause provision,” which determined that losses due to water damage were excluded “regardless of any other cause or event contributing concurrently or in any sequence to the loss.”

American Family asked the court to adopt a rule “whereby the anti-concurrent cause provision operates to preclude coverage whenever an excluded risk contributes to a loss, regardless of any other contributing causes.” Such a rule would allow insurance companies to combat Wisconsin’s independent concurrent cause rule with an anti-concurrent cause provision. The court declined.

“We need not decide the effect of the anti-concurrent cause provision on the independent concurrent cause rule in this opinion because even using the independent concurrent cause analysis, Schmitz loses this argument,” Chief Judge Brown wrote.

The court explained that the independent concurrent cause rule does not apply unless the covered cause (defective method of construction, i.e., no retaining wall) provides the basis “for a cause of action in and of itself and must not require the occurrence of the excluded risk to make it actionable.”[ii]

“The covered risk (defective methods of construction) clearly would not have been actionable without the occurrence of the excluded risk (surface water washing out the earth underneath the home),” the court explained. “Defective methods of construction did not really cause the damage so much as it caused a failure to prevent it.”