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Interpreting Insurance Exclusions for Flood and Surface Water Damage Caused by Human Activity in Oregon



Stormwater overflows and similar accidents are a frequent source of damage in Oregon and the Pacific Northwest generally. Insurers often deny coverage for resulting damage under the "surface and flood" waters exclusion. A recent case out of the U.S. District Court of Oregon held that surface and flood water insurance exclusions do not apply to man-made sources. In Veloz v. Foremost Ins. Co. Grand Rapids, Mich. (2018), the court held that surface and flood water exclusions apply to waters from natural—not man-made—sources. Veloz also implied that if the insurer wants to exclude water damage from a burst water main, the insurance policy must specifically state that man-caused waters are excluded.

Past Case Law on the Interpretation of Flood and Surface Water Exclusions

In Hatley v. Truck Insurance Exchange (1972), the Oregon Supreme Court considered whether damage caused from a vandal leaving a hose on all night was excluded from coverage under a surface and flood water exclusion. The exclusion provided:

"This policy does not insure against...Loss caused by, resulting from, contributed to or aggravated by any of the following...flood, surface water, waves, tidal water or tidal wave, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not."

The Hatley court found that the hose water was not "surface water" because "[t]he term 'surface water,' particularly when used in conjunction with flood, waves, and tidal water, was intended to mean water 'diffused over the surface of the ground, derived from falling rains or melting snows.' We have been cited to no cases either in the field of property insurance or that of water law in which water from any but a natural source is held to be surface water."

New Case Holding: Human-Caused Waters Not Within Flood and Surface Water Exclusions

In Veloz, Sabino Veloz's rental property was damaged after a water main burst and water flowed downhill to Veloz's house. Foremost Insurance Company denied Veloz's claim based partly on a flood and surface water exclusion in Veloz's insurance policy that provided:

"Loss caused by...Flood Water, surface water, waves, tidal water, tidal waves, storm surge, tsunami or overflow of a body of water or spray from any of these whether or not driven by wind...This exclusion applies whether or not there was widespread damage and whether or not it was caused by a human activity or an act of nature."

Foremost claimed that the damage was caused by "surface water" or "flood water" from the water main. Foremost argued that it did not matter if the cause of the released water was man-made because the insurance policy provides that the exclusion applies to "human activity," citing Citi Gas Convenience, Inc. v. Utica Mut. Ins. Co. (2016), which involved similar policy language.

The Veloz court was not convinced by Foremost's arguments and reliance on Citi Gas. Instead, it held "that the terms 'surface water' and 'flood water' unambiguously refer to natural water sources and that no reasonable insured would interpret those terms to refer to water that escapes from a man-made source such as a water main." In coming to its decision, the court relied on the finding in Hatley that flood and surface water is water arising from a natural source. The court distinguished Citi Gas based on subtle differences in the policy wording. The court held that the "it" in Foremost's policy "refers to structural damage," not to the source of the water. In other words, if the Veloz policy had excluded "flood and surface water caused by a man-made source" rather than excluding "damage... caused by a human activity," the court may have found that the water damage was excluded from coverage.

Implications Going Forward

Veloz has implications for the future interpretation of flood and surface water exclusions in insurance policies under Oregon law. The court chose to narrowly interpret the exclusion and distinguished Citi Gas by carefully examining the exclusion language from that case, leaving open the possibility that a policy using the Citi Gas language would effectively ban coverage. After Veloz, Oregon courts are likely to construe surface and flood water exclusions as applying only to waters from natural sources, but policyholders need to examine their policies carefully—if the exclusion unambiguously includes flood and surface waters caused by humans, the exclusion may be enforced.

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