Avoiding Denials of Water Damage Claims Based on “Long Term Damage Exclusions”

We have all seen it – an insured has a water damage claim; the insurance policy has an exclusion for long term water damage occurring over a period of weeks, months, years (or even 14 days); and the insurer’s expert claims the damage is clearly long term. In these situations, insureds need their own expert to prove that the damage is not long term to have any chance of prevailing.

In Wheeler v. Allstate Insurance Company,¹ the 10th Circuit Court of Appeals recently provided an alternative approach to evaluate these claims to provide insureds with a methodology to trigger coverage where some (but not all) of the damage may not clearly be long term damage.

In Wheeler, the insured’s cabin suffered water damage after a leak in a sink initially went undetected. After the insured submitted his claim to the insurance company, it was denied because its expert determined that the damage arose from seepage over time. The Allstate policy contained an exclusion for long term damage. Under Exclusion 3 of the Policy, Allstate disclaimed responsibility for damage “consisting of or caused by … [s]eepage, meaning continuous or repeated seepage or leakage over a period of weeks, months, or years, of water … from, within or around any plumbing fixtures, including … sinks.”

The policy also provided an exception to the water damage exclusion where the damage was caused by the sudden and accidental escape of water from a plumbing system.

The trial court concluded the insured’s damages were excluded under Exclusion 3 and did not construe the exception to the exclusion or analyze its application to the facts presented.

On appeal, although the insured conceded that long term water damage was excluded, he argued: (1) that there was a dispute over whether all of the damage was long term, and (2) that he should be able to recover for the water damage that was sudden and accidental.

The Court of Appeals agreed with the insured because it felt that:

[I]f Mr. Wheeler can prove the damages he is seeking were caused within the first 13 days of the release, then the damages fall outside Exclusion 3 and inside the Exception to [the] Exclusion. In that situation, the damages would be covered under the Policy and Allstate would have breached the Policy by denying coverage. Viewing the evidence in the light most favorable to Mr. Wheeler, a reasonable jury could find that the short- and long-term damages are, in fact, separable. Accordingly, we conclude there is a genuine dispute of material fact that should have precluded the trial court’s grant of summary judgment on the breach of contract claim.

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¹ Wheeler v. Allstate Ins. Co., No. 15-4159, 2017 WL 1827843 (10th Cir. May 4, 2017).