When Is A Leak Not A Leak?

Recently, in Federal Bake Shop v. Farmington Cas. Co., No. 97-476 (Sup. Ct. N.H. July 16, 1999), the Supreme Court of New Hampshire reversed the trial court's dismissal of a declaratory judgment action, concluding that the cause of the loss, a malfunctioning toilet fixture that caused an overflow of the septic system, was covered under the first-party property insurance policy at issue because the policy language regarding leakage was ambiguous.

The plaintiff owned a commercial building in Bedford, New Hampshire. The plaintiff obtained a first-party property insurance policy for the premises from the Farmington Casualty Company. In April 1996, the plaintiff discovered that a toilet installed by one of its tenants was "sticking," and that the malfunctioning toilet fixture caused a large amount of water to flow into the septic system. Consequently, the septic tank became overloaded and failed.

Plaintiff learned that in one fifteen-hour period approximately five thousand gallons of water had drained into the septic system, more than four times the system's capacity. The plaintiff also determined in its investigation that the excess water flow had continued for over fourteen days. As a result of the excess water flow, the plaintiff was caused to incur various expenses.

The plaintiff filed a timely claim with the defendant. The defendant subsequently denied the plaintiff's claim on the basis of an exclusion for leaks that occur over a period of fourteen days or more.

Plaintiff instituted an action in the New Hampshire Superior Court. Defendant filed a motion for summary judgment on the ground that the cause of the plaintiff's loss was specifically excluded from coverage by the terms of the policy.

The exclusion in the defendant's policy stated: "We will not pay for loss or damage caused by or resulting from . . . [c]ontinuous or repeated seepage or leakage of water that occurs over a period of 14 days or more . . . ." The trial court held that the exclusion was clear and unambiguous, and that the plaintiff's alleged loss resulted from "leakage" that occurred over a period of at least fourteen days. The plaintiff appealed the trial court's decision to the New Hampshire Supreme Court.

The plaintiff's appeal was based on the trial court's interpretation of the term "leakage." The plaintiff argued that "leakage" could not be fairly interpreted to mean "an excessive overload of liquid into the system due to plumbing fixture malfunction." The plaintiff contended that an insured of ordinary intelligence would interpret the term "leakage" to mean "a low volume movement of water." The defendant argued that the continuous leakage exclusion was clear and unambiguous and that the trial court properly interpreted the exclusion.

The New Hampshire Supreme Court began its analysis by noting that in interpreting the policy the court would "take the plain and ordinary meaning of the policy's words in context, and [would] construe the terms of the policy as would a reasonable person in the position of the insured based on more than a casual reading of the policy as a whole." Deyette v. Liberty Mut. Ins. Co., 142 N.H. 560, 561, 703 A.2d 661, 662 (1997).

The court then looked to the dictionary definition of "leakage." According to the dictionary, "leakage" is "the act ... of leaking" and "leak" as "to enter or escape through a hole, crevice, or other opening [usually] by fault or mistake." Webster's Third New International Dictionary 1285 (Unabridged Ed. 1961). The court acknowledged that the definition seemed to support the defendant's interpretation of the exclusion. However, the court said, when reading the policy as a whole a reasonable person in the position of the insured could interpret the exclusion as the plaintiff argued.

The Supreme Court focused on an exclusion that immediately followed the continuous leakage exclusion. The exclusion the court relied on precluded coverage for damage caused by "[w]ater ... that leaks or flows from plumbing ... caused by or resulting from freezing." Webster's definition of "flow" is "to issue in a stream: GUSH, SPRING, WELL." Id. at 875. The court concluded that the plaintiff's loss was more akin to a "flow" than a "leak."

The court also said that because the frozen pipe exclusion used the terms "flow" and "leak" disjunctively, a reasonable person in the position of the insured could understand the term "leak" to mean, as the plaintiff argued, a low volume movement of water. The court also took note that one other court had interpreted "leakage or seepage of water" to connote "a gradual and slow moving event." Primm v. State Farm Fire & Cas. Co., 426 So.2d 356, 360 (La. Ct. App. 1983). Because of the ambiguity in the continuous water exclusion, the Supreme Court reversed the trial court's decision and remanded it for further proceedings.

As a result of the decision in Federal Bake Shop, it should be clear to both insureds and insurers that a "leak" is a low volume movement of water, at least in New Hampshire and Louisiana. While the New Hampshire Supreme Court's opinion is somewhat extreme, insurers should be aware of the extraordinary steps taken by this court to extend coverage to an insured.