I often receive calls from policyholders asking how an insurance company can deny their claim based on an exclusion that isn’t defined in the policy. One of these terms is “surface water,” a common exclusion found in most policies. Recently, I had a client whose home’s gutter system malfunctioned during a rainstorm. Rather than channeling water to run from his roof, through the gutter system and out to the street, water was redirected at the side of the home. The water filled up a planter built in to the side of the house and eventually made its way into the home, damaging his flooring.
His insurer denied the claim based on the “surface water” exclusion, claiming the water became “surface water” when it pooled in the planter. In that case, I used one of my favorite resources, Couch on Insurance, to define “surface water” and to explain to the carrier that they were wrongly defining the term. We were forced to file a lawsuit and the trial court agreed the term was ambiguous, and better yet, agreed with our definition of the term, ruling that surface water is water diffused over the surface of land, following no defined course or channel, and which naturally drains. In that case, as the water did not follow a defined course—that is through the gutter and into the planter—it was not surface water. The carrier’s “everyday” definition of surface water (“water on the surface of the ground”) was unpersuasive in the insurance context.
Recently, an appellate court in California was faced with making a similar decision in determining whether undefined policy exclusions for “war” should exclude coverage in a commercial claim. In California, an insurance policy is a contract subject to ordinary contract interpretation rules holding that the “mutual intention” of the parties.1 When it comes to undefined terms, like ‘war” or “warlike actions by a military”, the terms are to be interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage, in which case the latter must be followed.2 3 Even then, the policy exclusions need to be strictly construed against the insurer and exceptions to those exclusions are broadly construed in favor of the insured, under the doctrine of Contra Proferentem.4
Last week, the United States Court of Appeals for the Ninth Circuit issued its opinion in Universal Cable Productions, LLC, et al. v. Atlantic Specialty Insurance Company, Case No. 17-56672 (Central District of California Case No. 2:16 cv-04435 PA). The appellate panel reversed portions of the lower court’s summary judgment ruling in favor of Atlantic Specialty Insurance Company (“Atlantic”), in the lawsuit brought by its insured Universal Cable Productions (“Universal”).5
As part of its insurance claim, Universal claimed damages for expenses it incurred when it moved production of the television series Dig (starring Anne Heche) from Israel amid the conflict between Israel and Hamas in June 2014, just after the show’s pilot was filmed in Jerusalem. At that time, the United States State Department issued warnings about worsening conditions in and around Israel due to the conflict. Universal claimed it incurred costs for a breach of contract and bad faith in the amount of at least $6.9 million when Atlantic denied their claim.
The policy held by Universal covered losses caused by terrorism, unless the loss was not otherwise excluded, and in this case, the relevant provisions were exclusion by:
- War, including undeclared or civil war, or,
- Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents;…
These terms were drafted by Universal, which is part of the reason why Contra Proferentem (holding that terms be construed against the party drafting them) did not apply to this case.6
Prior to the June 2014 incidents, Universal’s insurance broker and Atlantic discussed potential issues that may arise on the production of the show Dig as a result of filming in Israel. After these discussions, Atlantic confirmed it would not be changing the policy’s terms or adding exclusions, or even charge any additional premium. Even though the parties had these discussions, Atlantic rejected the claim on the two exclusions for losses related to “war” and “warlike actions by a military force.” Originally, the lower court held that the war exclusions should be understood in their ordinary and plain sense, instead of applying the special meaning of the terms in the insurance context of which Atlantic had notice. However, the Ninth Circuit reversed these rulings holding that both of the war exclusions describe only conflicts between two or more sovereign or “quasi-sovereign” movements. However, the court reasoned that Hamas was neither a sovereign or quasi-sovereign movement, and thus the exclusion should not have applied.7 8
In making its ruling, the appellate court noted that Universal presented compelling information from another leading insurance reference, Appleman on Insurance, which defines “war” as a course of hostility between states or state-like entities.9
Like with “surface water,” the court went through the process of defining “war” by using the most applicable treatises and case law in reaching its conclusion.
Should your claim be denied due to a policy term you believe to be ambiguous or undefined, contact a Merlin Law attorney for a consultation.
1 Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.
2 Id.; California Civil Code § 1644.
3 First, a policy provision needs to be found to be ambiguous – that is, when the provision is capable of two or more constructions, both of which are reasonable. Bay Cities Paving Grading, Inc. v. Lawyers’ Mutual Insurance Co. (1993) 5 Cal. 4th 854, 867.
4 E.M.M.I Inc. v. Zurich Am. Ins. Co. (2004) 32 Cal.4th 465, 471.
5 Following Nat’l Am. Ins. Co. of Cal. v. Certain Underwriters at Lloyd’s London (1996) 93 F.3d 529, 537.
6 Even though the provisions were proposed by Universal, they were common form language used in many insurance policies.
7 A third exclusion based on losses due to “insurrection, rebellion or revolution” was also relied upon by Atlantic but was not at issue in the appeal. The district court will need to rule on this exclusion on remand.
8 The Ninth Circuit based its finding on facts that United States has never recognized Palestine or Gaza as sovereign territorial nations nor Hamas as a sovereign or quasi-sovereign (i.e., a de jure or de facto government – a government having significant attributes of sovereignty).
9 Universal Cable Productions, LLC, et al. v. Atlantic Specialty Insurance Company, Case No. 17-56672 (Central District of California Case No. 2:16 cv-04435 PA), page 21.