Coverage Excluded Cannot be Changed to Coverage Provided

Barry Zalma
Nov 28, 2023

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An insurance coverage dispute that involved a commercial insurance policy (“the Policy”) that plaintiff, Winfire Management, LLC (“Winfire”) held with defendant, Massachusetts Bay Insurance Company (“Mass Bay”). The trial court concluded that the Policy covered Winfire’s business-income losses that resulted from a sewer backup and entered judgment in Winfire’s favor. Mass Bay appealed.

In Winfire Management, LLC v. Massachusetts Bay Insurance Company, No. 362960, Court of Appeals of Michigan (November 21, 2023) the Court of Appeals read the policy as written and resolved the dispute.

BACKGROUND

Winfire’s claim for lost rental income following a July 2020 sewer backup at one of Winfire’s commercial properties was refused by Mass Bay. Winfire sued Mass. Bay for breach of contract for refusing to cover these business-income losses. Soon after, Mass. Bay moved for summary disposition arguing that the Policy did not provide business-interruption coverage for losses from a sewer backup.

Mass Bay conceeded that the Policy covered physical damage from sewer backups it explained that taking together the policy provisions in the Business Income (And Extra Expense) Coverage Form (“the BI Form”) and the Causes of Loss -Special Form (“the CL Form”), the Policy excluded coverage for lost business income from a sewer backup.

In response, Winfire disputed Mass. Bay’s interpretation of the Policy. Winfire argued that, because the Policy covered property damage from sewer backups under the Gold Property Broadening Endorsement (“the GP Endorsement”), a sewer backup was a covered loss triggering business-income loss coverage under the BI form.

The trial court agreed with Winfire . Accordingly, the court held, as a matter of law, that the Policy covered Winfire’s business-income losses from the July 2020 sewer backup.

PRINCIPLES OF LAW

The sole issue on appeal is whether the Policy covered Winfire’s business-income losses resulting from the sewer backup. When an insurance company argues that a policy exclusion negates coverage, the insurance company has the burden to prove that one of the policy’s exclusions applies. Consistent with the rules of interpretation, clear and specific exclusions will be enforced as written so that the insurance company is not held liable for a risk it did not assume.

ANALYSIS

Winfire’s commercial property insurance policy with Mass. Bay provided blanket building coverage, blanket business-income coverage, and blanket personal property coverage. There is no dispute that evaluating Winfire’s claim for business-income losses begins with the BI form. The BI form governs business-income coverage and states that a claimed business income loss “must be caused by or result from a Covered Cause of Loss.”

The BI policy provided that:

"Exclusions

"We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

"Water

"(3) Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment …."

The Policy explicitly excluded coverage for business-income losses from a sewer backup. The CL form controls what constitutes a Covered Cause of Loss to trigger business-income coverage under the Policy. Per the CL form, a Covered Cause of Loss under the BI form excludes losses caused directly or indirectly by water that backs up, overflows, or is discharged from a sewer.

The amendment providing property coverage for sewer backup amendment was added to “Additional Coverages” in the “Building and Personal Property Coverage Form.” It was not added to the BI form. That change explains why Mass. Bay covered the “direct physical loss or damage” to Winfire’s property that resulted from the sewer backup. The GP Endorsement did not amend the sewer backup exclusion referenced in the CL form that precludes coverage for business-income losses.

The Policy unambiguously excluded coverage for Winfire’s business-income losses stemming from the sewer backup. The Court of Appeals noted that a court must enforce insurance policy exclusions that are clear and specific exclusions.

Therefore, the trial court’s judgment for Winfire was reversed and remanded for entry of an order granting summary disposition for Mass. Bay.

ZALMA OPINION

The insured tried to convince the Court of Appeals that when an insurer changes a policy to provide sewer backup coverage for property damage it must also provide similar coverage for BI losses. Although the imaginative and well presented argument convinced the trial court the Court of Appeal read the entire policy and noted that the amendment only applied to property damage and not to BI losses. Failure to read the full policy caused Winfire and the trial court to err and caused the trial court’s order to be reversed.
(c) 2023 Barry Zalma & ClaimSchool, Inc.

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