Policyholder Victory: SJC’s ‘Surface Water’ Ruling Expands Property Coverage

In a recent decision, Zurich American Insurance Company (“Zurich”) vs. Medical Properties Trust, Inc. (“MPT”) and Steward Health Care (“Steward”), the Supreme Judicial Court (“SJC”) addressed an open question in Massachusetts property insurance law:

Does the term “surface water” in property insurance policies include rainwater that accumulates on roofs and causes interior damage?

This question stemmed from a severe 2020 rainstorm that caused disputed damage claims of over $400 million to the Norwood Hospital building and facility, resulting in the building’s total loss.

The SJC, responding to a certified question from the Federal First Circuit Court of Appeals, ruled that “surface water” does not unambiguously include water on roofs in this context. Finding the term ambiguous, the SJC applied the contra-insurer rule, construing the ambiguity in favor of the insureds against the insurers that drafted the policies.

The SJC’s answer determined the damage from rainwater accumulating on the roof before entering the upper floors of the Norwood Hospital building did not fall under MPT and Steward’s policies’ $100 million and $150 million flood sublimits but under the higher overall coverage limits of $750 and $850 million, respectively. Collectively, MPT’s proof of loss had sought $221,033,890 from Zurich, and Steward’s sought $202,483,879 from its insurer and American Guarantee and Liability Insurance Company (AGLIC)

This decision potentially expands coverage for certain water damage claims in Massachusetts, placing a burden on insurers to clarify policy language if they wish to limit such coverage.

Background of the dispute over the meaning of “surface water”

In June 2020, severe thunderstorms in Norwood dropped more than six inches of rain in approximately 90 minutes. The sudden deluge caused severe damage to the Norwood Hospital building, which was owned by MPT and leased to Steward. The sudden accumulation of rainwater flooded the Hospital’s basement and pooled on the Hospital’s roof and upper-level outdoor areas. These parts of the building, including elevated courtyards and parapet roofs—roofs bordered by a wall—seeped the pooled water into the Hospital’s upper floors without the water ever touching the ground.

MPT’s property policy with Zurich provided $750 million in coverage for “damage caused by a Covered Cause of Loss to Covered Property.” The AGLIC policy provided Steward with $850 million in coverage for “damage caused by a Covered Cause of Loss to Covered Property.”

Both policies consider “Flood” a “Covered Cause of Loss.” The policies defined “Flood” as:

A general and temporary condition of partial or complete inundation of normally dry land areas or structure(s) caused by:

The unusual and rapid accumulation or runoff of surface waters, waves, tides, tidal waves, tsunami, the release of water, the rising, overflowing or breaking of boundaries of nature or man-made bodies of water; or the spray there from all whether driven by wind or not[.]

However, the policies’ flood coverages had sublimits of $100 million (Zurich) and $150 million (AGLIC).

The $400 million in claimed losses and the carriers’ flood sub-limits

In August 2020, Zurich and AGLIC determined that water damage in the Hospital’s basement was caused by a “Flood” and would be subject to the policies’ flood coverage sublimits of $100 million and $150 million, respectively.

For the upper floor damage from pooled water, Zurich and AGLIC stated that this damage “appears to have resulted from water intrusion caused by wind-driven rain and/or overflow of roof drains and parapet flashings” and, therefore, the insurers indicated that they would “separate the flood damage sustained on the basement and ground floors . . . from the water intrusion property damage sustained on the first, second[,] and third floors.”

A few months later, MPT submitted a proof of loss for $221,033,890, consisting of the full $100 million Flood sublimit plus an additional $121,033,890 as ‘Storm’ damage not subject to the policy’s flood sublimit. Steward then submitted its proof of loss for $202,483,879, made up of $112,218,364 for flood damage and $90,265,515 ‘Storm’ damage, not subject to the flood sublimit, incurred for the water pooled on the roof and parapets.

Following the submissions of claims totaling $423,517,769 million, each carrier reassessed their coverage positions.

In December 2020, Zurich advised MPT that it would recognize its claim for the full $100 million “Flood” sublimit plus an additional $121,033,890 labeled as “Storm” damage. However, the carrier’s legal position was that nearly all the damages from the June 28, 2020, incident were subject to the policy’s $100 million “Flood” sublimit.

Zurich reasoned that water entering at or below ground levels and accumulated water on the roof both contributed to the problem, thereby causing a “Flood” issue, even on upper floors. Zurich viewed MPT’s claim for storm damage as an attempt to sidestep the flood damage sublimit and denied the entirety of MPT’s claim that exceeded the flood sublimit

AGLIC adopted Zurich’s coverage position in responding to Steward’s claim for $112,218,364 for “Flood” and an additional $90,265,515 for “Storm” damage. AGLIC advised Steward that the entirety of the water damage would be considered under the “Flood” category, enforcing a policy sublimit of $150 million across all levels of the Hospital.

Lawsuits over what is “surface water” referred to Massachusetts’ highest court

Zurich filed suit against MPT, and Steward filed against AGLIC in Federal Court, each seeking declaratory judgments on coverage terms. In particular, the meaning of “surface waters” in the context of flood coverage when the water causing the damage never touches the ground. MPT and Steward argued that the damage to the upper floors was not subject to the flood sublimits in their policies. They reasoned that the water accumulating on the upper floors was not “surface waters” within the definition of their limited flood coverage.

The federal district court ruled in favor of the insurers but allowed an immediate appeal to the First Circuit of Appeals to decide on the meaning of “surface waters” in these policies.

The First Circuit, however, determined the nature of “surface waters” in this case was an unresolved question of Massachusetts law and, given the substantial monetary claims, decided to certify the question of what is “surface water to the SJC for clarification.

Since the First Circuit decided that there was no clear Massachusetts legal precedent that would decide the dispute over water accumulating on roofs and parapets, the First Circuit referred the decision to the SJC under a formal process called “Certification.”

Under its certification rule, the SJC permits federal courts or other state supreme courts to certify questions of state law that are “determinative of the cause then pending in the certifying court,” but for which there is no controlling precedent by the SJC.

Question certified to the SJC for an answer

The First Circuit identified the question to certify to the Massachusetts SJC for its consideration as:

“Whether rainwater that lands and accumulates on either (i) a building’s second-floor outdoor rooftop courtyard or (ii) a building’s parapet roof and that subsequently inundates the interior of the building unambiguously constitutes “surface waters” under Massachusetts law for the purposes of the insurance policies at issue in this case?”

The question of what the term ‘surface water’ means argued to the SJC

Before the SJC, MPT and Steward argued that the water damage to the upper floors of the insured property was not subject to the policies’ flood sublimits because the water that accumulated on the roofs should not be classified as “surface water.” They contended that “surface waters” referred specifically to water at ground level. Conversely, Zurich and AGLIC maintained that the rooftop water constituted “surface water” and, therefore, the resulting damage was subject to the policy’s flood sublimits.

SJC observes the term ‘surface water’ undefined in the policies

The SJC’s reasoning in deciding whether the term ‘surface water,’ as used in the Zurich and AGLIC property policies, applied to water pooling on parapet roofs and a second-floor outdoor rooftop courtyard followed a structured approach.

The Court begins by addressing the policy language itself, noting:

“Neither the specific policy language nor the insurance policy as a whole directly addresses whether surface water includes rainwater accumulating on a roof.”

The absence of a policy definition for surface water required the Court to determine whether the term as used had an unambiguous meaning in the context of the policies’s definition of a “Flood” and the policies’ flood sublimit.

The SJC looks for consensus on the term’s meaning from other courts

The SJC next engaged in a comprehensive review of court decisions involving coverage suits involving “surface water,” both within Massachusetts and across other jurisdictions, as to whether there was a general consensus on the meaning of ‘surface water’ in relation to property policy interpretation. This analysis revealed a notable lack of consensus on the interpretation of “surface water” in the context of water on roofs. As the Court explicitly stated:

“Our review of the case law outside of Massachusetts also reveals no ‘consistent interpretation’ of whether surface waters include rainwater accumulated on a roof.”

The SJC  characterized this split in legal authority, stating:

“Some courts have concluded that the water must be on the ground, but others have not, reasoning that surface waters’ embrace waters derived from falling rain and melting snow, whether on the ground or on the roofs of buildings thereon.’”

The SJC highlighted instances where courts within the same state reached conflicting conclusions, citing examples from Colorado and Louisiana. To the SJC, this lack of uniformity served not just as evidence of disagreement but as an indication that the term “surface water” was susceptible to mutually exclusive reasonable interpretations.

The SJC’s prior decisions offered no answer

In examining its own case decisions on the meaning of ‘surface water,’ the SJC distinguishes two of its previous decisions that held surface water causing property damage to the insured building had no coverage. The SJC ruled these decisions had no application to the certified question because: “Neither case involved the accumulation of rain on a roof.”

The SJC finds the term ‘surface water’ is ambiguous in the circumstances

Ultimately, the SJC ruled:

“We conclude that it is ambiguous whether rainwater accumulation on roofs constitutes ‘surface waters’ within the meaning of the policies. In evaluating such accumulation, the term’ surface waters’ as used in the present policies is susceptible to two meanings, and reasonably intelligent persons could differ as to which meaning is the proper one.”

Finding the term ‘surface water’ ambiguous leads to a ruling in favor of insureds

The Court’s finding of ambiguity then triggered the application of the contra proferentem rule, which states that if a contract term is ambiguous, it should be interpreted against the person who wrote it. In this case, the SJC interpreted the ambiguity in favor of the insureds.

The SJC emphasized this rule, stating:

“Where the insurer had the ability to include… language in its policy that clearly would have excluded a disputed loss and failed to do so, we will not interpret the policy to exclude coverage for that loss.”

Report to the First Circuit Court of Appeals of the answer to the certified question

The SJC ended its opinion with instructions for the Clerk of the Supreme Judicial Court to transmit a certified copy of the decision with the statement:

We answer the reported question as follows. Rainwater that lands and accumulates on either a building’s second-floor outdoor rooftop courtyard or a building’s parapet roof does not unambiguously constitute “surface waters” under Massachusetts law for the purposes of the policies at issue in this case. We also report that any such ambiguity as to the intended meaning of the words must be resolved against the insurance company that employed them and in favor of the insured. 

The further proceedings in the First Circuit Court of Appeals after receipt of the decision of the SJC

Based upon the SJC’s decision, the First Circuit will almost certainly vacate the United States District Court’s judgment in favor of the insurers and issue an order for judgment to enter for the insureds on coverage under the larger policy limit.

Assuming there is no further dispute over the amounts of the proofs of loss and the actual damages, the District Court would enter judgment and award breach of contract interest at 12 percent per annum from the date of the insurers’ refusal to pay the monies now due under their policies beyond the policies’ flood sub-limit.