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What You Don’t Know Can Hurt You: The Enforceability of Long-Term Leak Exclusions

10/24/19

By: Anastasia Osbrink

My family and I recently arrived home one evening to discover our laminate floors warm to the touch and pushing up at the seams. A friend who was visiting asked if we had heated floors. Heated floors? Not in Southern California. What I was experiencing first-hand was a water pipe leak under our flooring. My first call was to a plumber who would be out the next morning to do a “slab leak detection.” My second call was to my homeowner’s insurance.
Indeed, the plumber detected a slab leak; and two days later the claims specialist from my insurance company met me at the house to examine the damage. The floors had been torn up by a remediation company. As we walked through the demo-zone trying to speak to one another over the deafening sound of massive fans and dehumidifiers trying to dry everything out, my claims specialist said something to me that I hadn’t considered: “you’re so lucky that you are in the 10% of homeowners who don’t have a long-term leak exception.” She stated she rarely sees a policy that doesn’t have the exclusion. I asked what constitutes “long term.” My claims specialist answered “long term” means over 14 days; and based on the amount of damage she observed the leak probably had been going on for a month or more. But there was no way I could have discovered the leak prior to the evening two days earlier. It doesn’t matter. Such exclusions apply whether or not the homeowner is, or could be, aware of the leak.
California courts (and courts throughout the country) are clear that long-term leak exclusions to coverage for water damage in homeowner’s policies are enforceable. (See Brown v. Mid-Century Ins. Co. (2013) 215 Cal. App. 4th 841 [insurance policies, like any contract, must be interpreted based on their plain meaning, and the plain meaning of a “sudden” leak that excludes long-term leak damage is self-evident and enforceable].) Though there are frequent disputes between homeowners and insurers about whether the leak did in fact exist for more than two weeks, insurers often refer insureds to plumbers from their “preferred vendor” lists. Frequently insurers ask those plumbers to opine as “experts” on how long the leak has existed. Homeowners may not realize when the leak first occurs. By the time they do notice, much of the water has dried up and the evidence has disappeared. Later, when the disgruntled homeowners consider a suit against their homeowners’ insurer for breach of contract, they have lost the ability to present evidence regarding the length of the leak. Additionally, these types of claims often raise a reasonable, genuine dispute regarding the existence of coverage. (See Chateau Chamberay Homeowners Assn. v. Associated Int’l Ins. Co. (2001) 90 Cal.App.4th 335, 347.)
An insured may argue that some of the claimed damage occurred immediately due to sudden discharge, which should be covered. (See Wheeler v. Allstate Ins. Co., 687 F. App’x 757 (10th Cir. 2017).) The Court in Wheeler, applying Utah law, held that coverage existed for any damage the homeowner could show resulted from the initial sudden leak within the first 13 days of the leak. (Id. at 772-73.) The court in another case in Florida, Hicks v. American Integrity Insurance Company of Florida, came to a similar conclusion. (Hicks v. Am. Integrity Ins. Co. (Fla.Dist.Ct.App. 2018) 241 So.3d 925, 926.) The practical effect of these rulings was to force a close examination of the insured’s evidence of a sudden leak and of the claimed damage caused by that sudden leak, as distinct from other damage.
Recent attempts by the California legislature to graft a delayed discovery rule onto such contractual exclusions (which would require both the homeowner’s actual discovery of the leak and the homeowner’s delayed reporting) have failed. Additionally, while nationwide there does not appear to be a push by state legislatures to pass such laws, there have been varied approaches by both insurers and departments of insurance to clarify these exclusions and the type of coverage available. For instance, the Texas Department of Insurance issued an Order stating that USAA reported to it that it would cover damage, including mold, caused by a “hidden” long-term leaks despite the fact that its policies contain standard exclusion language. (Texas Department of Insurance, Commissioner’s Order 02-0523.) Such clarifications could benefit not only consumers, but also insurers hoping to avoid breach of contract and bad faith litigation based upon exclusions.
If you have any questions or would like more information, please contact Anastasia Osbrink at [email protected].