The Eighth Circuit Court of Appeals, applying Minnesota law, recently held “leakage” is not “seepage” and found a homeowner had coverage for water damage caused by a broken drain pipe. In Syfco v. Encompass Indemnity Co., — F.3d —, 13-2903 (8th Cir. July 31, 2014), policyholder Jessica Sysco sued Encompass to recover repair costs to her home resulting from a broken drain pipe in her basement.
In 2011, Syfco had noticed an odor emanating from her basement. A contractor discovered standing water and mold between the foundation and false floor. After the contractor declared the home uninhabitable, Syfco reported the water damage to Encompass. With Encompass’s approval, the contractor discovered a break in the basement shower drain pipe. The contractor then removed the rest of the false floor, cleaned the basement, removed portions of the walls, and constructed a new floor and partial walls. The broken drain pipe identified as the source of the problem was thrown away. The contractor stated the water “leaked” from a crack in the drain pipe. Encompass ultimately denied the claim.
The parties’ communications after the adjuster’s initial inspection were hotly disputed. Syfco claimed Encompass stonewalled and kept her from occupying her home. Encompass interpreted Syfco’s urgency as deception, a perception initially spurred by a legitimate but ultimately unfounded belief Syfco might not have had an insurable interest in her home.
Encompass moved for summary judgment based on “seepage” and mold exclusions. Syfco responded the water “leaked,” rather than “seeped.” Both terms were used in the policy, which did not define either term. The district court granted Encompass’s motion, finding damage was caused by “seepage” and therefore barred by the exclusion.
The Eight Circuit reversed. The court noted the policy used both “seepage” and “leakage” to describe damage caused by water, which the court interpreted to mean the terms have distinct meanings. The court relied on dictionary definitions to find “seepage” means “to pass, flow, or ooze gradually, as through a porous substance”; “leakage” means “an unintended hole, crack, or the like, through which liquid … escapes.” Relying on the testimony of the contractor, the Court held the ordinary meaning of “leakage” more aptly described the way the water flowed through the cracked drain pipe. The court also noted Encompass authorized the adjuster to investigate and identify the source of the water damages on its behalf.
The court then found the “seepage or leakage” exclusion for mold remediation under the additional coverage part did not apply. The coverage part did not cover the cost to repair or replace property damaged by mold, it only applied to the cost of removing the mold itself. The court found the “seepage or leakage” exclusion did not apply to the cost to repair or replace otherwise covered property under the primary policy. The court held the exclusion would only limit the contractors’ cleaning efforts to remove mold, and did not apply to the remainder of the claim for covered remediation.
This case is significant not only for its distinction between the terms “seepage” and “leakage” under the homeowner policy, but for an example of the nuanced concepts sometimes dispositive of coverage questions. We will continue to monitor state and federal decisions involving insurance coverage disputes. If you have any questions about this, or any other matter, please contact us.