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May 2013

No Coverage Under Homeowners' Policy That Excluded Damage Caused By Gradual Water Discharge

In a recent opinion, the California Appeal Court held that an insurer properly denied the homeowners’ claim because the water and mold damage alleged was caused by a gradual discharge of water, not by a sudden discharge as required by their policy.

The appeal in Leroy Brown v. Mid-Century Insurance Co. arises out of an underlying action for alleged water and mold damage at a residential property. On Feb. 18, 2009, Leroy and Terri Brown observed condensation on the windows of their home and on the drywall around the windows. Approximately one week later, the Browns noticed mold or mildew forming on the inside of their windows and on walls. On March 17 or 18, 2009, the Browns observed moisture in the crawl space underneath their house and, as a result, turned the hot water off in the residence. The Browns called a plumber who found a leak in one of the copper hot water pipes attached to the hot water manifold.

The Browns tendered this water damage and mold claim to Mid-Century Insurance under their Farmers Next Generation Homeowners Policy. The policy included an “extension of coverage” providing “limited” water damage coverage for damage resulting from a “sudden and accidental discharge, eruption, overflow or release of water.” However, the policy specifically excluded coverage for gradual, intermittent or slow releases of water over a period of time and for loss caused by mold. Mid-Century denied the Browns’ property damage claim under the policy. 

The Browns sued Mid-Century for breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, fraud, unfair competition, and declaratory relief. The Browns later dismissed their causes of action for negligence, fraud, unfair competition, and declaratory relief.  Mid-Century filed a motion for summary judgment on the remaining two claims. The trial court ruled in favor of Mid-Century and the Browns appealed.    

In opposing Mid-Century’s motion for summary judgment, the Browns asserted that Mid-Century breached the insurance contract by denying coverage because water damage is covered under the policy. In support of this argument, the Browns’ expert testified that the pipe burst at the residence was “sudden” because it occurred within a fraction of a second causing water to spray or stream out of the hole. In contrast, Mid-Century’s expert testified that the pipe developed an opening over a few months causing hot water to slowly drip out. After considering the evidence, the trial court found that the Browns failed to show that the loss was caused by a “sudden” discharge of water. 

On April 2, the Court of Appeal agreed, holding that, even if the initial breach in the pipe happened within a fraction of a second, the leakage of water from the pipe into the house occurred gradually over a period of time. This type of gradual release of water is not “sudden” and, therefore, did not fall within the limited “extension of coverage” for damage caused by “sudden and accidental” releases of water. Thus, the court affirmed the trial court’s decision. 

The Browns also asserted that their mold damage should be covered because, under the “efficient proximate cause” theory, a “sudden” discharge of water produced the mold. California Insurance Code §530 provides that, when a loss is caused by a combination of covered and excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss. But the loss is not covered if the covered risk was only a remote cause of the loss or if the excluded risk was the efficient proximate cause of the loss. 

The Court of Appeal concluded that the efficient proximate cause doctrine did not apply because there was no combination of a covered risk and an excluded risk, but rather, only two excluded risks (gradual discharge of water and mold). Also, the court held that the efficient proximate cause doctrine did not apply because it requires two distinct perils and here, there was only one: the leaking pipe.

Further, the Browns asserted that the extension of “limited” water coverage for property damage from a “sudden and accidental” discharge was not conspicuous, plain, and clear because it should have been on page 21 under “Uninsured Loss or Damage and Excluded Causes of Loss of Damage,” rather than page 14 under “Extensions of Coverage.”  

The appellate court disagreed and found that the coverage-limiting provision was printed in a readable and adequately spaced print, organized in a helpful outline format, positioned under the correct section listing extensions of coverage, and not hidden in fine print. Also, the court found that the policy was not ambiguous for not defining “a period of time” because an average layperson could understand that water escaping from a pipe for “a period of time” may qualify as one to two months. Therefore, the court found the policy language was conspicuous, plain and clear.

Lastly, the Court of Appeal found that, because the policy did not cover the Browns’ claims, the Browns had no claim for breach of implied covenant of good faith and fair dealing.

Please click here for the opinion.

The opinion in Leroy Brown v. Mid-Century Insurance Co., (April 2, 2013) 2013 Cal. App. LEXIS ___, 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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Christopher R. Wagner