CP 10 32–WATER EXCLUSION ENDORSEMENT

(February 2012)

BACKGROUND

Two lower court rulings following Hurricane Katrina losses concluded that the term flood in Insurance Services Office (ISO) coverage forms was ambiguous. Both rulings were overturned on appeal but ISO decided to revise the water damage exclusions in all of its forms to avoid future misunderstandings. Using this exclusion is mandatory starting in January 2009 (or whenever a specific state approves it and the issuing insurance carrier adopts it). The intent is to clarify the current exclusion (not to broaden or restrict it) and to bring it in line with the personal lines water exclusion so all ISO forms are consistent.

INTRODUCTION

This water damage exclusion is not specific to a particular covered cause of loss form but instead applies to the entire commercial coverage part. This means that this new exclusion replaces the present water exclusion in any property coverage form. This is not how ISO usually adds exclusions and reveals that it wants this exclusion to be uniform throughout all of its coverage forms and policies.

ANALYSIS

This endorsement has two parts.

A. The first part explains that this exclusion replaces the water exclusion in the coverage form or policy.

Note: It might be better to state that it replaces any and all water exclusions in the coverage form or policy because more than one of the covered causes of loss forms may apply to a coverage form or policy. However, the water damage exclusion is identical in each of the causes of loss forms.

B. Water

1. The first part of this exclusion has four terms that are unchanged, three that are modified, and one new term compared to the exclusion being replaced. The terms that are unchanged are "flood," "surface water," "tides," and "overflow of any body of water." The new term is ‘’tidal water." The modified terms are:

• "Waves" is broadened to be "waves, including tidal wave and tsunami." "Tidal wave" was included in the previous version but as a stand-alone term, not as part of the term "waves."
• "Or their spray" is broadened to "or spray from any of these."
• "All whether driven by wind or not" is broadened to "all whether or not driven by wind, including storm surge."

Note: "Tsunami" and "storm surge" are new terms. Judicial interpretation will be based on common usage and dictionary definitions because the endorsement does not define either term.

2. The second part of this exclusion is unchanged. Mudslide or mudflow is not covered (and were not covered in the previous edition).

3. The third part of the exclusion is expanded in two ways. The first is the how and the second is the what. In the previous edition, water had to back up or overflow. In this edition, the water can be discharged in other ways (and those other ways are not described). Secondly (in the version being replaced), the water came from a sewer, drain, or sump. In this edition, it can also come from a sump pump or related equipment (and the related equipment is not described).

4. The fourth section is unchanged and describes the exclusion of damage from underground water seeping into doors, foundations, basements, etc.

5. The exclusion being replaced did not have section five. This section introduces the term "waterborne material." Damage caused by this material carried by waters described in sections 1, 3 and 4 above (or by any material moved or carried by mudslides or mudflow described in section 2 above) is not covered.

Example: In an updated version of the Wizard of Oz, a storm surge (instead of a tornado) picks up Dorothy’s house and it lands on top of the Wicked Witch’s castle. The Wicked Witch’s policy does not cover the property loss that Dorothy’s house causes because of this new exclusion.

ISO adds a paragraph that explains when this entire exclusion applies. It states that it applies whether any of the events are caused by an act of nature or "otherwise." In order to clarify the term "otherwise," ISO provides an example that uses the terms "dam," "seawall," "levee," "boundary" or "containment system" and states that failure of any of them to contain the water is an "otherwise" type situation. However, it is important to note that by using this example format, ISO does not limit the exclusion to failure of only those specific items. The goal is to define the term "otherwise" as broadly as possible.

The final paragraph is similar to the exclusion being replaced. It states that coverage applies to loss or damage caused by or that results from fire, explosion, or sprinkler leakage.

Note: Sprinkler leakage coverage applies only if sprinkler leakage is a covered cause of loss on the coverage form or policy.

Example: Continuing the previous example, Dorothy’s house striking the castle severs the overhead power line, causing sparks to fly. The sparks ignite the Wicked Witch’s massive broom collection, resulting in the entire castle burning down. The Wicked Witch’s property form covers the fire damage.

Important Note: This endorsement can (and will be) added to all editions of ISO property forms. It is filed as mandatory, so its being attached should be expected, whether the carrier has adopted the latest edition of the ISO property forms or not.