FERNDALE DEVELOP. CO., INC. v. Great American Ins. Co.
527 P. 2d 939, 34 Colo. App. 258 (1974)
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Rule of Law:
Ambiguous terms within an insurance policy's exclusion clause must be construed narrowly and against the insurer, particularly when general terms like "flood" or "surface water" traditionally refer to natural phenomena rather than damage from man-made infrastructure failures.
Facts:
- Ferndale Development Co., Inc., and Shroyer Construction Co., Inc. were constructing partially completed condominiums.
- Ferndale Development Co., Inc. and Shroyer Construction Co., Inc. were insured under an "all risks" property damage insurance policy issued by Great American Insurance Company.
- A valve on a city water line ruptured near the construction site.
- The rupture caused water to inundate the footings and foundations of the partially completed condominiums.
- The insurance policy contained an exclusion in Paragraph 3C for losses "caused by, resulting from, contributed to or aggravated by any of the following—(1) flood, surface water..."
- The issue of whether the loss fell within the "flood" or "surface water" exclusion was the only question concerning coverage.
Procedural Posture:
- Ferndale Development Co., Inc., and Shroyer Construction Co., Inc. (plaintiffs) sought recovery in the district court (trial court) under an insurance contract issued by Great American Insurance Company (defendant).
- The district court denied the plaintiffs' claim, finding that the loss fell within an exclusion to coverage.
- Plaintiffs appealed the district court's decision to the Colorado Court of Appeals.
- The Colorado Court of Appeals reversed the district court, ruling that Great American Insurance Company had failed to plead the specific exclusion relied upon by the trial judge.
- Great American Insurance Company appealed the Colorado Court of Appeals' decision to the Colorado Supreme Court.
- The Colorado Supreme Court reversed the Colorado Court of Appeals, holding that the issue of the applicability of the exclusion had been tried by consent under C.R.C.P. 15(b).
- The Colorado Supreme Court remanded the case to the Colorado Court of Appeals for a decision on the merits of the plaintiffs' appeal regarding the applicability of the exclusion.
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Issue:
Is damage caused by water escaping from a ruptured city water main excluded from coverage under an "all risks" insurance policy that contains an exclusion for loss resulting from "flood" or "surface water"?
Opinions:
Majority - Pierce, Judge
No, damage caused by water escaping from a ruptured city water main is not excluded from coverage under an "all risks" insurance policy by an exclusion for "flood" or "surface water." The court concluded that the terms "flood" and "surface water," as used in the policy's exclusions, do not include water escaping from burst water mains. The court noted that these terms have varying "plain" meanings, with some cases and commentators defining them exclusively in terms of natural water sources (e.g., Hatley v. Truck Insurance Exchange, Appleman's Insurance Law and Practice § 3145). While acknowledging that one court (Mateer v. Reliance Insurance Co.) construed "flood" to include a bursting water pipe, that interpretation was applied to an insuring clause (granting coverage) rather than an exclusion, where the rule of construction favors the insured. Colorado law, like the general rule, dictates that ambiguities in an insurance contract are construed against the insurer (Coxen v. Western Empire Life Insurance Co.). Furthermore, terms of an exclusion, if ambiguous, are to be construed narrowly and in favor of the insured (Beeson v. State Auto and Casualty Underwriters). The court reasoned that if Great American Insurance Company wished to exclude losses from burst water mains, it needed to adequately define the terms "flood" and "surface water" to explicitly include such cases. In the absence of such clear definitions, the ambiguity was construed against the insurer.
Concurring - Silverstein, C. J.
Concurring.
Concurring - Enoch, J.
Concurring.
Analysis:
This decision significantly clarifies the interpretation of general exclusionary language in "all risks" insurance policies, particularly regarding water damage. It reinforces the principle that insurers bear the burden of clearly and unambiguously defining the scope of their exclusions, especially when using terms that can be interpreted in both natural and man-made contexts. The ruling provides a legal precedent that may expand the de facto coverage for certain types of infrastructure failures, requiring insurers to either specify such exclusions or risk broader liability. This case serves as a critical reminder for policy drafters to be meticulous in their language to avoid adverse constructions against them.
