In Zurich American Insurance Company v. Medical Properties Trust, Inc., 2024 WL 3504060 (Mass. Jul. 23, 2024), the Supreme Court of Massachusetts held that the term “surface waters,” as used in a limitation contained in a commercial property insurance policy, was ambiguous in the context of rainwater accumulating on roofs, thereby finding coverage for the insured.
Background
The insurers issued commercial property policies that provided coverage for a hospital. As a result of a storm, rainwater accumulated on multiple roof areas, and eventually seeped inside, causing damage to the building and property within. The policies contained lower coverage limits for damage caused by “Flood,” which was defined, in part, as the “unusual and rapid accumulation or runoff of surface waters” (emphasis added). Litigation ensued as a result of the insurer’s coverage determination that the insured’s recovery was subject to the “Flood” sublimit.
Analysis
The parties disagreed about whether the water that accumulated on the roofs and infiltrated the buildings was “surface water,” and thus whether the damage was due to “Flood” to trigger the sublimit.
The insureds contended that the plain meaning of “surface waters” included waters on the surface of the earth, or water at ground level or on a ground-level surface. The Court acknowledged that the flood provision’s reference to “waves, tides, … [and] the rising, overflowing or breaking of boundaries of…bodies of water” supported the insureds’ interpretation. Specifically, the Court noted that the listed terms all described water on the ground or moving from a body of water generally understood to be waters existing on the surface of the earth.
By contrast, the insurers argued that the plain meaning of “surface waters” included waters naturally accumulating on surfaces, not just waters accumulating on the surface of the earth. The Court acknowledged that this too was a plausible literal interpretation of the words “surface waters” given the absence of the particular words “surface of the earth” or “ground” in the definition of “Flood.” The introductory clause’s language of “inundation of normally dry…structure(s) caused by…surface waters” also supported the insurers’ interpretation, as the water on the surface of the roof inundated the structures. The Court further accepted that it would be difficult for a reasonable insured to distinguish between rain accumulating on the ground and on a roof from the same storm. In both circumstances, there would be an unusual and rapid natural accumulation of rainwater inundating a structure.
Continuing its analysis, the Court then turned to case law. However, the Court could not identify a consistent interpretation regarding whether the term “surface waters” included rainwater accumulating on a roof. Rather, multiple “reasonable interpretations” emerged: “a broader interpretation that includes rainwater accumulating on a roof…and a narrower interpretation that would exclude water not on the ground or the surface of the earth.”
Given the competing constructions, the Court concluded that the meaning of “surface waters,” and thus the meaning of “Flood” under the policies, was ambiguous as it was susceptible to multiple reasonable interpretations. It instructed that the insurers could have defined surface waters to include the unusual accumulation of rainwater on a roof, but they failed to do so. As such, the Court stated that such ambiguity warranted resolution in favor of the insureds.
Conclusion
In interpreting an insurance policy, the contract should be read as a whole with undefined terms given their plain and ordinary meaning. Medical Properties Trust highlights how the context in which a term is utilized can impact the extent and/or scope of coverage. As it pertains to “surface waters,” parties should remain cognizant of how their jurisdiction construes the term as there are inconsistencies nationally depending on the type of loss.
