October 9, 2018

How to Navigate the Operation of a Flood Exclusion

In early January 2011, Brisbane and other parts of Queensland experienced a major flood causing people to scramble for their policies of insurance to check whether they’d be covered for flood damage. This reignited debate as to when a surge of water is actually a flood.

When water entered through the wall of the basement of Murphy Schmidt Solicitor’s offices, both damaging the fit out and causing disruption to their legal practice, they no doubt did exactly the same thing.[1]

What they found in the bottom of their waterlogged drawer was a policy with Insurance Australia Limited (“the Insurer”) entitled “Industrial Special Risks Insurance Policy (Steadfast Mark V)” (“the Policy”). It said:

“The Insurer(s) shall not be liable … in respect of: …

3. Physical loss, destruction or damage occasioned by or happening through[2]:

(a)  flood, which shall mean the inundation of normally dry land by water escaping or released from the normal confines of any natural water course or lake... 

Because no overland flow of river water reached Murphy Schmidt they claimed under the policy. The Insurer refused to cover their losses as they took the view that the subterranean soil around the basement was normally dry land and the water which had leaked from nearby drainage pipes into the basement was water “escaping from the normal confines” of the river and thus a flood.

 

the Argument

Debate at trial centred on what type of water had inundated the basement and where it came from. The argument being that local run off or water already in the soil was not flood water!

Hydrologists agreed that water had been forced under pressure through cracks in nearby stormwater drainage pipes into the subterranean soils between those pipes and the basement. A combination of river water, together with ground water that was already in the subterranean soils and local stormwater runoff was then pushed into the basement.

Importantly, the Court accepted expert evidence that:

  1. as the river rose any local run off which was in the pipes was pushed back up the pipes with mixing of the river water and local runoff; and
  2. as the river water came up the drainage pipes, pressure built which forced water through cracks and defects in the pipes into the subterranean soils at a point near the basement wall and local run off alone was insufficient to cause enough pressure for the pipes to surcharge and inundate the basement.

In an effort to avoid the operation of the flood exclusion, the policy holder argued that:

  1. there was no “inundation of normally dry land” because overland flood water had not reached the Murphy Schmidt building and it would be inappropriate to treat inundation of the insured property itself or the subterranean soil as meeting that description; and
  2. what entered the basement first and caused the damage was subterranean ground water forced into the basement by pressure caused by the rising river and not flood water.

 

the finding

The Court did not like the property owner’s first argument and said notions of “normally dry land” and “the property insured” are not mutually exclusive. The term “normally dry land” can include the land occupied by the insured building and any other land which is “normally dry”.

As to the argument that the subterranean soils were not “normally dry”, the Court accepted that there would usually be some ground water in subterranean soil and that heavy rainfall might raise that level but countered that for any significant leakage of water from the pipes to occur there had to be a build-up of pressure caused by significant rainfall to fill them.

The character of the land inundated refers to its “usual” character- not what it is like following abnormal rainfall - otherwise no land other than a desert would be “normally dry land.” On this basis, the Court found the usual character of the subterranean soil between the pipes and basement wall was “dry” and it was “normally dry land” within the meaning of the exclusion.

As to the argument that leakage into the subterranean soils was not “inundation of … land by water” the Court noted the dictionary defined “inundation” as “the action of inundating; the fact of being inundated with water; an overflow of water; a flood”. Escape was noted to mean “to issue from a confining enclosure.” This supported the policy holder’s argument that inundation ofland by waterenvisaged flooding of the land surface! Despite this, the Court felt that the mechanism of the flooding was relevant and the process of water under pressure being forced into gaps between soil particles, filling those gaps and then flowing into other gaps and  making its way towards the basement wall was sufficient to constitute an “inundation” of the subterranean soils which were “land”.

As to the second argument, a “sponge” analogy was used to contend ground water and or local run off caused the damage - if you have water contained in a sponge and then introduce new water to it, it pushes the water that was already there out first. The Court rejected this and noted that as the water escaped from the pipes under pressure, it stood to reason that the flood water mixed with, rather than simply pushed along, runoff water already in the pipe and ground water which is not under pressure but sitting near the pipe in the subterranean soil. The “first drip” into the basement could have been groundwater, or water which had left the pipes[3] but as the river level rose a further 1.7 metres this would have pushed the local runoff further up the pipes and as such “most of the water” that entered the basement was river water.

The policy holder’s next suggestion that river water leaking from the pipes was not “escaping” the river; rather it was water now “escaping” the drainage pipes was also rejected. The exclusion simply required that the water had “at one time” been in the river. In other words that the damage was done by river water. The Court was content to find that water may “escape” the normal confines of the river through drainage pipes – had the expression been “overflowing” rather than “escaping” from normal confines of the river the result might have been very different!


conclusion

If you suffer water damage during a significant rainfall event and are worried about how the Flood Exclusion in your policy actually works- you should seek legal advice before you simply give up on being covered. McInnes Wilson Lawyers specialise in indemnity issues and can tell you where you stand.

 

[1] WIESAC Pty Ltd and Anor v Insurance Australia Limited [2018] QSC 123 concerned flood damage to the basement of Murphy Schmidt Lawyers which was inundated by water coming through drainage pipes.

[2] the Court followed Mercantile Mutual Insurance (Aust) v Rowprint Services (Victoria) Pty Ltd [1998] VSCA 147 which said: “The words ‘occasioned by or happening through’ have a wide meaning: A motor car may be stolen or a shop may be looted, the proximate cause of the loss being theft. The ‘occasion’ of the loss may nevertheless be riot or civil commotion… Loss or damage may also ‘happen through’ a cause that is not the proximate cause. It is a more difficult question whether, and if so in what circumstances, the words include a mere link in a chain of causation that began with the proximate cause, although it is true that such a link may be the immediate occasion of the loss or damage and in a sense the latter happens through it. It is easier to see how the words, and similar expressions, may refer to a cause or set of conditions anterior to the proximate cause or to a concurrent cause, less important than but operating together with the proximate cause.”

[3] this was a case where there were multiple causes of the damage and only one of those causes was caught by the flood exclusion. The Court noted the Wayne Tank principle that where there are two proximate or substantial causes of the one loss and only one falls within an exclusion clause, the insurer may rely upon the exclusion and avoid liability. Or to put it another way, such exclusions are normally construed as excluding damage caused in a particular way. If as a matter of fact the damage was caused in that way, whether or not there was another concurrent cause, then cover was excluded.