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Amish Connection, Inc. v. State Farm Fire & Cas. Co.

Supreme Court of Iowa

March 20, 2015


Page 231

On review from the Iowa Court of Appeals. Appeal from the Iowa District Court for Black Hawk County, Kellyann M. Lekar, Judge. Property insurer seeks further review of court of appeals decision reversing summary judgment upholding denial of coverage for damage from rainwater spilling from corroded drainpipe that failed during storm.


Samuel C. Anderson and Joseph G. Martin of Swisher & Cohrt, P.L.C., Waterloo, for appellant.

Mark W. Thomas of Grefe & Sidney, P.L.C., Des Moines, for appellee.

All justices concur except Hecht, Wiggins, and Appel, JJ., who dissent. HECHT, Justice (dissenting).


Page 232

WATERMAN, Justice.

In this appeal, we must decide whether a business insurance policy covers water damage inside a building resulting when a corroded interior drainpipe bursts during a summer rainstorm. The pipe carried rainwater from the roof to a storm sewer. The policy only insures damage " caused by rain" if an insured event first ruptures the roof or exterior walls to allow the rain to enter or if the damage results from melting ice or snow. The district court granted summary judgment for the insurer, concluding the water damage was caused by rain. The court of appeals reversed, concluding that damage from " rainwater" flowing from the broken interior drainpipe is not damage " caused by rain." We granted the insurer's application for further review.

This case presents our first opportunity to adjudicate coverage claims under a rain limitation in an insurance policy. For the reasons explained below, we conclude the unambiguous language of the rain limitation precludes coverage for the damage caused by the rainwater escaping the ruptured interior drainpipe. We, like the district court, also reject the insured's alternative argument that coverage is available because the damage resulted from the " breaking or cracking of any part of a system containing water or steam." That argument fails because the policy does not provide coverage for damage " caused by rain," even if a system containing water was involved. We therefore vacate the decision of the court of appeals and affirm the district court's summary judgment in favor of the insurer.

I. Background Facts and Proceedings.

Amish Connection, Inc. leased space in Crossroads Shopping Mall in Waterloo, where it operated the Amish Connection Store. In 2008, Amish Connection moved into Suite 102. This litigation arises from the failure of a leaky four-inch cast-iron drainpipe that ran above the ceiling tiles

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and along the interior back wall. This pipe connected to the rooftop drains and carried rainwater down and through the interior of the building to a storm sewer. During heavy rains, leaking rainwater routinely ran down the back wall of the suite. To address the leakage, mall management installed a makeshift wooden trough to catch the rainwater from the back wall and direct it toward a drain. The drainage tile and pipe system in Suite 102 showed " trails of rust left by years of water leak issues." The drainpipe was hidden from the tenant's view by ceiling tiles and wallboard, and Amish Connection was unaware that it leaked. The drainpipe itself was " extremely rusty" before it failed. Subsequent photos show extensive corrosion on the pipe, especially where it joined the wall.

In May 2010, the owner of Amish Connection approached the mall manager about closing the store until November " because business was bad." New lease contracts were prepared to allow Amish Connection to close its business to the public through October and reopen November 1. During that period, Amish Connection would continue paying rent for Suite 102 and store property there. On June 14, the new lease agreements were executed. It rained heavily that night. The rainstorm caused no damage to the roof, windows, or exterior walls of the building. The next morning, however, the mall maintenance staff discovered the interior drainpipe had failed, flooding the back room of Suite 102 with up to several inches of rainwater and soaking the carpet in much of the front showroom. The rainwater caused substantial damage to Amish Connection's office, bathroom, and property stored there, including its samples, inventory, office supplies, and business records.

Amish Connection promptly submitted a claim under its business insurance policy with State Farm Fire and Casualty Company (State Farm). Section I of the policy, entitled " LOSSES INSURED AND LOSSES NOT INSURED," provides:

We insure for accidental direct physical loss to property covered under this policy unless the loss is:
1. limited in the PROPERTY SUBJECT TO LIMITATIONS section; or
2. excluded in the LOSSES NOT INSURED section that follows.

The relevant provisions of those two sections state:

We will not pay for loss:
. . . .
6. to the interior of any building or structure, or the property inside any building or structure, caused by rain, snow, sleet, ice, sand, or dust, whether driven by wind or not, unless:
a. the building or structure first sustains damage by an insured loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters; or
b. the loss is caused by thawing of snow, sleet or ice on the building or structure . . . .
. . . .

. . . .

2. We do not insure for loss either consisting of, or directly and immediately caused by, one or more of the following:

. . . .

d. smog, wear, tear, rust, corrosion, fungus, mold, decay, deterioration,

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hidden or latent defect or any quality in property that causes it to damage or destroy itself.
But if accidental direct physical loss by any of the " Specified Causes of Loss" or by building glass breakage results, we will pay for that resulting loss . . . .

The definitions section of the policy defined " Specified Causes of Loss" to include:

14. water damage, meaning accidental discharge or leakage of water or steam as the direct result of the breaking or cracking of any part of a system or appliance containing water or steam.

On June 16, State Farm declined Amish Connection's claim based on the rain limitation in paragraph 6 of the property subject to limitations section. On December 27, Amish Connection filed a civil action against its landlord and the mall operator alleging they had concealed the water infiltration problem the tenant discovered when ceiling tiles were removed after the drainpipe failed. Amish Connection alleged those defendants " took insufficient efforts to remedy the water infiltration problem and Defendants' actions caused further water damage to the lower level unit #102." The lawsuit further alleged the mall owner and operator " were guilty of gross negligence and willful misconduct by renting [Suite 102] while knowing of, not disclosing, and not taking remedial action to resolve the significant long-standing water problems."

On November 23, 2011, counsel for Amish Connection wrote to State Farm asking it to reconsider its denial of the claim and provide coverage for the water damage. State Farm responded on December 22 that it would investigate further and cited paragraph 2(d) excluding coverage for " rust, corrosion, . . . and deterioration," in addition to the rain limitation in paragraph 6. On January 3, 2012, State Farm sent another letter confirming its denial of coverage based on both provisions. On January 20, Amish Connection moved to amend its petition to add State Farm as a defendant to a claim of breach of its insurance contract. Amish Connection later dismissed its claims against the mall owner and operator. The lawsuit proceeded against State Farm alone.

On July 27, State Farm filed a motion for summary judgment based on paragraph 6 excluding coverage for " damage caused by rain." Amish Connection resisted, arguing that the water damaging the interior of Suite 102 was no longer " rain," and the actual cause of the loss was the failure of the drainage pipe, falling within coverage under paragraph 14. On October 18, the district court granted State Farm's motion based on paragraph 6, stating " as a matter of law the water running through the pipe which caused the loss was rainwater." Amish Connection moved for a more specific ruling to address its alternative argument under the exception to the rust-and-corrosion exclusion for water damage resulting from the " breaking or cracking of any part of a system or appliance containing water or steam." State Farm resisted, arguing that the ruling on the rain limitation was dispositive under the language of the insuring agreement that provides coverage for accidents " unless the loss is: 1. limited [by the rain limitation]; or 2. Excluded in the Losses Not Insured section." On December 20, the district court agreed with State Farm's interpretation and denied Amish Connection's motion, stating:

The policy reads that " We insure for accidental physical loss to property covered under this policy unless the loss is: 1) Limited in the PROPERTY SUBJECT TO LIMITATIONS section; or 2)

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Excluded in the LOSSES NOT INSURED section that follows." (Emphasis Added). Therefore, if a loss is excluded under either the PROPERTY SUBJECT TO LIMITATIONS section or the LOSSES NOT INSURED section, then it is excluded, and analysis under the other section is not necessary. Therefore, the Court declines to rule on whether the LOSSES NOT INSURED provision applies, as the loss is already excluded by the other section.

Amish Connection appealed, and we transferred the case to the court of appeals. The court of appeals reversed the summary judgment, concluding the " district court erred by finding the rain limitation [in paragraph 6] was applicable to this case." The court of appeals, citing dictionaries and cases from other jurisdictions, distinguished " rain" from " rainwater" :

The definitions of " rain" and " rainwater," although similar, encompass two different points in time. As water is falling, it is considered " rain." After it has fallen--and, as here, been collected on a rooftop and channeled into pipes for transport to a storm sewer--it is considered " rainwater." . . . While the water emitting from the burst pipe may fall within the definition of " rainwater," it does not fall within the definition of " rain" . Because loss caused by " rainwater" is not excluded or otherwise limited under the policy, the district court erred in interpolating the term " rainwater" into the policy and concluding the interpolated term was unambiguous.

The court of appeals further concluded to the extent the limitation of coverage for damage " caused by rain" in paragraph 6 is ambiguous, it must be construed against State Farm. The court of appeals determined the parties' arguments under other terms of the policy " are best addressed by the district court in the first instance" on remand. We granted State Farm's application for further review.

II. Standard of Review.

We review a district court's summary judgment ruling that interprets an insurance policy for correction of errors at law. Boelman v. Grinnell Mut. Reins. Co., 826 N.W.2d 494, 500 (Iowa 2013). Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Id. at 501 (citing Iowa R. Civ. P. 1.981(3)). We may affirm summary judgment on a conflict " concerning only the legal consequences of undisputed facts." Id. We examine the record in the light most favorable to the nonmoving party. Id.

III. Analysis.

This case presents our court's first opportunity to adjudicate an insurance claim under a policy limiting coverage for losses " caused by rain." The facts are undisputed as to the source of the water damage--a corroded interior drainpipe burst during a rainstorm, flooding the rooms inside with rainwater. The fighting issue is whether the damage was " caused by rain" within the meaning of paragraph 6 of the limitations of coverage. Neither side has offered any extrinsic evidence on the meaning of the insurance contract. Accordingly, its interpretation is for the court to decide. See id. ( " Policy interpretation is always an issue for the court, unless we are required to rely upon extrinsic evidence or choose between reasonable inferences from extrinsic evidence." ). We conclude State Farm was entitled to summary judgment in its favor based on the limitation of coverage. Our holding is consistent with the decisions of other courts construing equivalent policy language.

Page 236

Our rules governing the construction and interpretation of insurance policies are well-settled. " The cardinal principle . . . is that the intent of the parties at the time the policy was sold must control." LeMars Mut. Ins. Co. v. Joffer, 574 N.W.2d 303, 307 (Iowa 1998). Except in cases of ambiguity, we determine " the intent of the parties by looking at what the policy itself says." Boelman, 826 N.W.2d at 501. If a term is not defined in the policy, we give the words their ordinary meaning. Id. " We will not strain the words or phrases of the policy in order to find liability that the policy did not intend and the insured did not purchase." Id.

" [A] policy is ambiguous if the language is susceptible to two reasonable interpretations" when the contract is read as a whole. Id. " If the policy is ambiguous, we adopt the construction most favorable to the insured." Id. at 502. " An insurance policy is not ambiguous, however, just because the parties disagree as to the meaning of its terms." Id. Moreover, " '[a]mbiguity is not present merely because the provision " could have been worded more clearly or precisely than it in fact was." '" Am. Family Mut. Ins. Co. v. Corrigan, 697 N.W.2d 108, 114 (Iowa 2005) (quoting Cairns v. Grinnell Mut. Reins. Co., 398 N.W.2d 821, 824 (Iowa 1987)). " If an insurance policy and its exclusions are clear, the court 'will not " write a new contract of insurance" ' for the parties." Boelman, 826 N.W.2d at 502 (quoting Thomas v. Progressive Cas. Ins. Co., 749 N.W.2d 678, 682 (Iowa 2008)). We construe exclusions strictly against the ...

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