170 F. Supp. 3d 1349
D. Colo.2016Background
- Chateau Village North Condominium Association purchased a Businessowners insurance policy from American Family effective Feb. 1, 2013, which contained an anti-concurrent causation clause (ACC) and a water exclusion that originally excluded sewer/drain/sump backup.
- A Condominium Enhancement Endorsement added express coverage for sewer-backup and sump-overflow and replaced the policy’s original water exclusion with a revised exclusion that omitted sewer/drain/sump from the exclusion list but retained the ACC preamble.
- Severe rainstorms in Sept. 2013 caused water intrusion at the condos; damages were attributed to both sewer backups (from groundwater infiltrating the sewer system) and surface/ground/rain water entering units and foundations.
- American Family inspected, concluded overlapping causes (surface/groundwater and sewer backup), and denied coverage citing the water exclusion and ACC; Association sued for breach of contract, common-law bad faith, and statutory bad faith (Colo. Rev. Stat. § 10-3-1115).
- The parties filed cross-motions for summary judgment; the court reviewed (1) whether the ACC applies to the endorsement, (2) whether surface water that enters a sewer loses its character and becomes sewer water, (3) whether material facts remain about the water’s character, and (4) whether bad-faith claims survive.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the ACC applies to the endorsement's sewer-backup coverage | Endorsement does not expressly make additional sewer-backup coverage subject to policy exclusions or the ACC; therefore ACC should not bar endorsement coverage | The endorsement modifies but does not escape the policy structure; ACC applies to the new exclusion language and thus can operate against claims where excluded perils contributed | ACC applies to the endorsement; the endorsement and main policy are read as one instrument, so ACC governs the replaced exclusion |
| Whether surface water retains its character after entering a sewer/drain | Rain/surface water that enters a man-made channel or sewer loses its character as surface water and becomes sewer/drain water, so sewer-backup coverage applies when that water backs up | Surface/groundwater that contributed to the damage remains surface water regardless of path; characterization is irrelevant if flood/surface water caused damage | Court adopts plaintiff’s construction: surface water that enters a sewer and then backs up is sewer/drain water (loses surface-water character) and can be covered under the endorsement |
| Whether the record permits summary judgment on the character/causes of the damaging water | Insured asked court to construe terms but sought judgment on facts showing only sewer-backup; argues damage was from sewer-backup covered by endorsement | Insurer argues that surface/groundwater also contributed and ACC would preclude recovery if any excluded peril contributed | Genuine disputes of material fact remain about whether surface/groundwater contributed to damage; summary judgment on causation is inappropriate |
| Whether bad-faith claims survive summary judgment | Insured contends denial was unreasonable and not fairly debatable | Insurer contends denial was based on fairly debatable coverage grounds and investigations, so bad-faith claims fail | Bad-faith (common-law and statutory) claims survive summary judgment because reasonableness is a factual question for a jury |
Key Cases Cited
- Kane v. Royal Ins. Co. of Am., 768 P.2d 678 (Colo. 1989) (ACC bars recovery when an excluded peril contributes to loss; rejects efficient proximate cause in presence of ACC)
- Heller v. Fire Ins. Exchange, 800 P.2d 1006 (Colo. 1990) (defines surface water and holds diverted surface water can lose its character when confined to defined channels)
- Surabian Realty Co., Inc. v. NGM Ins. Co., 971 N.E.2d 268 (Mass. 2012) (endorsement placed within policy structure means other policy provisions, including ACC and surface-water exclusion, continue to apply; but water entering a drain and then backing up is drain/sewer water)
- Allstate Ins. Co. v. Huizar, 52 P.3d 816 (Colo. 2002) (insurance policy interpretation is a question of law to be given plain meaning)