From Harvey to Irma: Is a Reservoir Release a Flood?

By James Harrington

When Hurricane Katrina struck, the big legal question was whether negligence in the construction of dams or levees constituted “the” cause of loss such that the flood exclusion in property insurance policies would not apply. In a series of decisions, federal and state courts rejected the negligence argument and upheld the flood exclusion. When Superstorm Sandy struck, policyholders again raised causation arguments, and in a series of decisions the courts again rejected the arguments and enforced the flood exclusion.

Hurricanes Harvey and Irma will bring their own disputes over flood exclusions, plus issues of flood sub-limits and deductibles. Many of these issues will be familiar to claims professionals and their lawyers, but insurers can expect at least one twist.

Policyholders are expected to raise the issue of whether the intentional act of a third party — the Army Corps of Engineers or another government agency — in opening a reservoir relief valve or flood gate constitutes “the” cause of loss such that the flood exclusion (or a flood sub-limit or deductible) will not apply. Some policyholder lawyers refer to this as the "man-made" flood argument. A corollary argument is that water that has been contained in a reservoir is not surface or flood water.

An unreported 2010 Massachusetts trial court decision suggests that the man-made flood argument will fail and the flood exclusion will prevail. In Cortina Realty Trust v. Pacific Insurance Co. (Mass. Super. 2010), the policyholder argued that the intentional release of water from a municipal reservoir following extended rains constituted insured water damage, not an excluded "flood." Relying on the anti-concurrent cause language of the flood exclusion, Judge David Lowy held that because “city officials had to make a determination pursuant to their official duties, does not change the fact that the damage to the plaintiff’s property was ‘caused by, and resulted from’ flooding throughout eastern Massachusetts.” The court concluded on summary judgment that the flood exclusion unambiguously barred all coverage.

Judge Lowy's enforcement of the flood exclusion is in accord with the limited case law touching the issue. See White v. West American, 2008 WL 5146555 (M.D. Pa 2008)(flood caused or contributed to by the opening of a flood valve or flood gate is still an excluded flood); TNT Speed & Sport Center, Inc. v. American States Ins. Co., 114 F.3d 731, (8th Cir. 1997) (anti-concurrent cause flood exclusion bars coverage for flood caused in part by vandalism of levees, but court criticizes as “inadequate” certain anti-concurrent cause policy language).

Because of its anti-concurrent cause language, the flood exclusion applies broadly when water inundates dry land. Flood sub-limits and deductibles generally rely on different wording, but with similar broad effect. Results will depend on individual policy wording, but Cortina Realty suggests that the flood exclusions, sub-limits and deductibles in property policies will generally withstand a man-made flood challenge.

As intentional releases of floodwater to protect aging dams and reservoirs become more common, the man-made flood issue will recur. Cortina Realty suggests that flood terms in policies will generally apply to properties inundated by water even if intentionally released from a reservoir or dam.

Note: The author represented the insurer in the Cortina Realty matter. Judge David Lowy (who decided the case) now sits on the Massachusetts Supreme Judicial Court.

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