24 N.Y.3d 684 (2015)

An ensuing loss provision in an insurance policy does not resurrect coverage for an excluded peril; instead, it provides coverage for a new loss that is of a kind not excluded by the policy and arises as a result of the excluded peril.

Summary

The New York Court of Appeals addressed an insurance coverage dispute concerning water damage to a home caused by a ruptured water main. The homeowners’ insurance policy contained a water damage exclusion but included an exception for sudden and accidental direct physical loss caused by fire, explosion, or theft resulting from the excluded water damage. The court found that the damage was directly caused by water on or below the surface of the ground, which was explicitly excluded by the policy. The court held that the exception to the water damage exclusion did not apply because the damage to the property was directly caused by the excluded peril (water), not a subsequent loss. Thus, the court reversed the lower court’s decision to grant summary judgment in favor of the insured and held that the water damage was not covered under the policy.

Facts

Plaintiffs’ home suffered water damage to its basement when a subsurface water main abutting their property ruptured. Plaintiffs filed a claim with their insurer, Allstate, under their homeowners’ insurance policy, but Allstate denied coverage, citing a water damage exclusion in the policy that excluded losses consisting of or caused by water on or below the surface of the ground. The policy included an exception to the water damage exclusion for sudden and accidental direct physical loss caused by explosion resulting from the water-related event. Plaintiffs argued that the water main explosion caused their water damage, thus falling under the exception.

Procedural History

Plaintiffs sued Allstate for breach of contract. The trial court granted summary judgment to the plaintiffs, holding that the damage was covered by the policy. The Appellate Division modified the trial court’s order by vacating the declaration and otherwise affirmed, finding the policy ambiguous. The Court of Appeals reversed the Appellate Division’s decision.

Issue(s)

1. Whether the water damage to plaintiffs’ home was excluded by the policy’s water damage exclusion.
2. Whether the policy’s exception to the water damage exclusion, pertaining to sudden and accidental loss caused by explosion, applied to the plaintiffs’ loss.

Holding

1. Yes, because the loss was caused by water on or below the surface of the ground.
2. No, because the exception was for subsequent loss, not for direct damage from an excluded peril.

Court’s Reasoning

The court applied three basic principles: (1) interpret the policy language; (2) the insured bears the burden of establishing coverage; and (3) an ensuing loss provision does not supersede an exclusion. The court first determined that the water damage exclusion unambiguously applied because the loss was caused by water on or below the surface of the ground. Then, the court analyzed the exception to the water damage exclusion. It found that the exception for sudden and accidental loss caused by explosion was an “ensuing loss” provision, meaning it covered a secondary loss (e.g., fire) that occurs as a result of an excluded peril (water damage). According to the court, the damage to the plaintiffs’ home was directly caused by the water from the broken water main, an excluded peril. Since the explosion did not cause a separate loss, there was no “ensuing loss” and, therefore, no coverage under the exception. As the Court stated, the policy language “provides coverage when, as a result of an excluded peril, a covered peril arises and causes damage.” The court distinguished between a loss caused directly by water and a loss caused by an explosion resulting from the water, the latter of which would have triggered coverage. The court further reasoned that interpreting the exception to cover water damage would contradict the exclusion’s clear intent to deny coverage for such damages. The court emphasized that the ensuing loss exception does not “resurrect coverage for an excluded peril.”