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January 2013

Cardio Diagnostic Imaging, Inc. v. Farmers Insurance Exchange, et al. - California Appellate Court Holds Policy Exclusion for Water That "Backs Up or Overflows" Unambiguously Applies When Water Overflows Due to Drain or Sewer Blockage

On Dec. 18, 2012, the California Court of Appeal, 4th District, affirmed the trial court’s order granting summary judgment in favor of Farmers Insurance Exchange, holding an exclusion for damage caused by “[w]ater that backs up or overflows from a sewer, drain or sump” unambiguously applied to water that overflowed from a toilet because the drain or sewer was blocked. The Court rejected the insured's argument that the exclusion did not apply because the water originated from the toilet and not the drain or sewer.

As alleged, on Jan. 17, 2007, water overflowed from a toilet in a business suite several floors above a suite rented by Cardio Diagnostic Imaging, Inc. The water caused extensive damage to Cardio’s equipment, including a CT scan machine.

A representative of the building’s management testified the toilet that overflowed was new and possibly defective. The plumber who installed the toilet testified a blockage in the sewer line 20 to 40 feet away from the toilet caused it to overflow.

Farmers insured Cardio under a first-party commercial property insurance policy. The policy included an exclusion for any “loss or damage caused directly or indirectly by . . . [w]ater that backs up or overflows from a sewer, drain or sump.” (Water Exclusion No. 3.) The policy stated the exclusion applies “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” The policy also excluded loss or damage caused by “[f]aulty, inadequate or defective . . . [d]esign, specifications, workmanship, repair, construction, renovation, remodeling . . . [or] [m]aterials used in repair, construction, renovation and remodeling.”

Farmers denied coverage initially based on Water Exclusion No. 3, and later determined the exclusion for negligent work also applied. Cardio sued alleging for breach of contract and breach of the implied covenant of good faith and fair dealing, and sought declaratory relief. Cardio and Farmers filed cross motions for summary judgment.

Cardio argued Water Exclusion No. 3 did not apply because it was intended to exclude large-scale disasters, not blockages of interior drains. Cardio relied upon advertisements, Internet searches, and the placement of Water Exclusion No. 3 inside the policy in support. The trial court held Water Exclusion No. 3 was clear and unambiguous, and the extraneous material Cardio relied on was not relevant.

The trial court initially denied Farmers’ motion for summary judgment finding there was a triable issue of fact concerning the negligent-work exclusion and the applicability of the efficient proximate cause doctrine. Subsequently, the trial court determined there was only one cause of the loss: the blockage in the drain. Cardio did not dispute this determination. The trial court granted Farmers’ motion for summary judgment, holding Water Exclusion No. 3 precluded coverage.

On appeal, Cardio argued Water Exclusion No. 3 only applies when water comes out of the sewer or drain, and does not include water unable to proceed down an interior drain. Cardio relied on out-of-state cases interpreting “backs up” to mean water that flows in the opposite direction from the usual flow. Cardio argued the phrase “backs up or overflows from” as used in the exclusion is a pleonastic (redundant) phrase, similar to “each and every,” “null and void,” and “cease and desist,” and the exclusion only applied when water backed up from, i.e., originated from, a sewer or drain.

Cardio also argued that Water Exclusion No. 3 must be read in context of the other exclusions in the same section of the policy, which all refer to external events such as earth movement and power failure.

The Court of Appeal rejected Cardio’s arguments, holding that the policy must be read to give each term meaning. Water Exclusion No. 3 must be read as applying to water that “back ups from a sewer or drain,” or “water that overflows from a sewer or drain.” The Court of Appeal declined to follow the out-of-state cases cited by Cardio because those cases did not consider exclusions with the “or overflows from” language or did not read the policies so as to give that phrase meaning. The Court of Appeal held “overflows from” applied to water that spills over from a sewer due to blockage.

Finally, Cardio argued Water Exclusion No. 3 did not apply because the water overflowed from the toilet, not the sewer or drain. The Court of Appeal disagreed, finding that the water overflowing from the sewer or drain would always exit from the toilet. The Court of Appeal noted the result may have been different if a blockage in the toilet itself, rather than the drain or sewer, had caused the overflow.

Accordingly, the Court of Appeal affirmed the trial court’s order granting summary judgment in Farmers’ favor.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

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Jordan S. Altura