PF&M at a Glance

Mandatory water exclusion endorsement

Many readers will recall the wind vs. flood disputes that arose following Hurricane Katrina. To avoid future misunderstandings ISO revised the water damage exclusions in all of its forms.

CP 10 32—Water Exclusion Endorsement is mandatory effective January 2009 or whenever a particular state approves it and the issuing insurance carrier adopts it. The stated intent is to clarify the current exclusion, not to broaden or restrict it.

The Water Exclusion Endorsement is not specific to a particular Covered Cause of Loss form but instead applies to the entire Commercial Property Coverage Part. This means that the current water exclusion is replaced with this new exclusion. This is not the way ISO typically adds exclusions and reveals that ISO wants this exclusion to be uniform throughout all of its property coverage forms and policies.

The first part of this exclusion contains four terms that are unchanged, three modified terms and one new term compared to the exclusion being replaced. The terms that are unchanged are “flood,” “surface water,” “tides” and “overflow of any body of water.” The new term is “tidal water.” The modified terms are:

• “waves” which is broadened to be “waves, including tidal wave and tsunami.” “Tidal wave” was included in the version being replaced but as a stand-alone term, not as part of the term “waves.”

• “or their spray” is broadened to “or spray from any of these.”

• “all whether driven by wind or not” is broadened to “all whether or not driven by wind, including storm surge.”

“Tsunami” and “storm surge” are new descriptions. Because they are not defined within the policy, judicial interpretation will be based on common usage, dictionary definitions and court precedent.

The second part of this exclusion is unchanged. Mudslide or mudflow are not covered and were not covered previously.

The third part of the exclusion is broadened in two ways. The first is the “how” and the second is the “what.” In the version being replaced, water had to back up or overflow. In this new version, the water can be discharged in other ways and those other ways are not described. In the version being replaced, the water came from a sewer, drain or sump. In this new version, it can also come from a sump pump or related equipment. The related equipment is also not described.

The fourth section is unchanged and describes the exclusion of damage from underground water seeping through doors, foundations, basements, etc.

The new exclusion introduces a section five. This section introduces the term “waterborne material.” Damage caused by this material carried by waters described in sections 1, 3 and 4 above, or by any material moved or carried by mudslides or mudflow described in section 2 above, is not covered.

ISO adds a paragraph to explain how the entire water exclusion applies. It states that it applies whether any of the events are caused by an act of nature or “otherwise.” In order to clarify the term “otherwise,” ISO provides an example that uses the terms “dam,” “seawall,” “levee,” “boundary” or “containment system” and states that failure of any of them to contain the water would be an “otherwise” type situation. However, it is important to note that by using this example format, ISO does not limit the exclusion to failure of only those specific items. The goal is to define the term “otherwise” as broadly as possible.

The last paragraph in the new exclusion is similar to the exclusion being replaced and states that loss or damage caused by or resulting from fire, explosion or sprinkler leakage is covered.

This endorsement can and will be added to all editions of ISO property forms. Because it is filed as mandatory, its being attached should be expected, whether the carrier has adopted the latest edition of the ISO property forms or not.