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By Michael C. Upshaw and Shannon M. O'Malley
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In 2001, Houston, Texas was in the path of the slow-moving, rain-heavy Tropical Storm Allison. That storm caused extensive flooding in downtown Houston and surrounding areas, ultimately dropping over 40 inches of rain in Southeast, Texas. And with that rain, and rain-caused flooding, people made insurance claims. Texas courts were therefore given the opportunity to analyze how water and flood in insurance policies should be interpreted under Texas law.

Sixteen years later, the Houston area again received unprecedented rainfall and subsequent flooding. In fact, the flood waters were more widespread and damaged areas that were not previously identified as in a flood plain. While the damage itself is still being evaluated, it is likely there will be insurance disputes as to whether claimed damage is excluded by an insurance policy’s water exclusion.

Policies typically define water as: “flood, surface water, waves, tides, tidal waves, overflow of any body of water, or the spray, all whether driven by wind or not.” But is rising rainwater considered flood under Texas law? The short answer is a qualified, yes.

Texas’ Distinction Between “Flood” and “Surface Water”

Texas courts define flood and surface water as:

Surface water is generally defined as that which is derived from falling rain . . . and is diffused over the surface of the ground . . . Floodwaters are those which, generally speaking, have overflowed a river, stream or natural water course and have formed a continuous body with the water flowing in the ordinary channel . . . Such waters are not divested of their character as surface waters by reason of their flowing from the land on which they first make their appearance onto lower land in obedience to the law of gravity.

Valley Forge Ins. Co. v. Hicks Thomas & Lilienstern, L.L.P., 174 S.W.3d 254, 258 (Tex. App.—Houston [1st Dist.] 2004, pet. denied). The chief characteristic of surface water is that it does not follow a defined course or channel and does not gather into or form a natural body of water. Texas Woman’s Univ. v. The Methodist Hosp., 221 S.W.3d 267, 278 (Tex. App.—Houston [1st Dist.] 2006, no pet.). Courts have clarified that surface water is “water which is diffused over the ground from falling rains or melting snows, and it continues to be such until it reaches some bed or channel in which water is accustomed to flow.” Dietrich v. Goodman, 123 S.W.3d 413, 417 (Tex.App.-Houston [14th Dist.] 2003, no pet.). Accordingly, when the rainfall becomes controlled, either by ditches, tanks, ponds, or pipes, it is no longer considered surface water. Id. For example, if surface water enters a creek, it is no longer considered “surface water”, but instead becomes part of the creek water. Courts make this distinction to contrast “surface water” from “flood water”, which has been recognized as “those [waters] which, generally speaking, have overflowed a river, stream or natural water course and have formed a continuous body with the water flowing in the ordinary channel.” Valley Forge, 174 S.W.3d at 258; see also Raburn v. KJI Bluechip Investments, 50 S.W.3d 699, 704 (Tex. App. 2001) (“Flood waters are waters above the regular flow of a stream”); Dalon v. City of DeSoto, 852 S.W.2d 530, 538 (Tex. App. 1992), writ denied (Apr. 21, 1993) (“If the floodwater forms a continuous body with the water flowing in the ordinary channel, or if it temporarily overflows presently to return, as by recession of the waters, it is to be regarded as still a part of the stream.”) (quoting 78 Am.Jur.2d Water § 225 at 670 (1975)).

Is rain water that flows on roofs, gutters, and other “non-ground” surfaces “surface water?”

Texas courts recognize that surface water is not limited to water that directly flows over the dirt of the earth. Texas Woman’s Univ., 221 S.W.3d at 279, (holding that water flowing through a garage, basement, and pedestrian tunnel retained its “surface water” status); Crocker v. Am. Nat. Gen. Ins. Co., 211 S.W.3d 928, 936 (Tex. App.—Dallas 2007, no pet.) (holding that rain falling on a patio and then leaking into a house was excluded under the policy as “surface water” damages).

The court addressed this very issue in Valley Forge, a case arising out of Tropical Storm Allison. In Valley Forge, the insured sustained property damage when, as a result of heavy rains associated with Tropical Storm Allison, Buffalo Bayou overflowed its banks and flooded the entire downtown area. Water rushed into the convention center, broke through an interior basement wall, flowed into and through a parking garage, and then entered the downtown Houston underground pedestrian tunnels. From there, the water entered the insured building’s basement, damaging the electrical equipment that supplied power to the high-rise. The property was closed for nearly a month, and the insured sustained business interruption losses.

The policy excluded losses due to flood, surface water, overflow of any body of water, or from water under the ground surface. Despite the exclusion, however, the insured sought coverage on the basis that “the water mutated from flood water to generic water after it entered the convention center, collapsed a wall, and flowed into the pedestrian tunnel, i.e., the source of the water at that point was not from Buffalo Bayou, but from an artificial source.” Valley Forge at 258. The court rejected the insured’s attempt to reframe the water exclusion, however.

The court recognized that under certain specific circumstances, Texas courts have found that water could lose its status as flood or surface water. “At times, Texas courts have held that flood or surface water, by the time it causes property damage, is no longer flood or surface water. See, e.g., Transamerica Co. v. Raffkind, 521 S.W.2d 935, 936 (Tex.Civ.App.-Amarillo 19785, no writ) (holding that surface runoff absorbed into the ground and circulating as vapor in homeowner's air-conditioning ducts had lost status as surface water); see also State Farm Lloyds v. Marchetti, 962 S.W.2d 58, 61 (holding that losses sustained by homeowner were caused by water that had lost its status as surface water after flowing into underground sewer lines).” Id. at 258. The Valley Forge court distinguished these two cases, though, finding their facts to be distinguishable. For example, the Raffkind court recognized that surface water is “natural precipitation coming on and passing over the surface of the ground until it either evaporates, is absorbed by the land, or reaches channels where water naturally flows.” Raffkind, 521 S.W.2d at 939. The damage in that case was caused when run-off surface water ponded next to a home’s foundation. The water eventually seeped into the home’s non-watertight ducts in the home’s foundation. The natural process of evaporation, which was accelerated through use of the home’s heating system, caused the water to transform into a vapor, which was discharged into the home, causing water damage to the interior and furnishings. The court concluded that the water lost its status as surface water after it was absorbed into the ground and caused damage as water vapor.

The Marchetti court analyzed whether the back up of water and water sewage through a drain opening in a home’s utility room caused excluded damage. The policy excluded loss caused by “flood, surface water” etc., but covered accidental discharge, leakage or overflow of water or steam from within a plumbing, heating or air conditioning system. Focusing on causation, the Marchetti court held that though surface water caused the plumbing system to back up, it was the sewage that caused the actual damage. Marchetti, 962 S.W.2d at 61 (“water and raw sewage discharged or overflowed from within the plumbing system of their home. The policy describes the coverage with sufficient particularity to compel the conclusion that the damage resulting from the accidental discharge or overflow of water and sewage through the drain opening in appellees' utility room was covered by the insuring clause”).

Ultimately, the Valley Forge court determined that the water essentially obeyed the laws of gravity and thus maintained its character as flood and surface water. These courts’ discussions demonstrate that courts look very closely at the nature of the water claimed to damage property and apply the policy exclusions practically, with an eye to the policy’s specific wording when applying both grants and exclusions of coverage.

Anti-concurrent causation clauses also apply to increase the breadth of water exclusions.

Two recent Texas cases provide additional guidance on how courts apply water exclusions where lead-in anti-concurrent causation clauses (“ACC” Clause”) are present.

Typical ACC Clauses in all-risk insurance policies provide:

PROPERTY LOSSES WE DO NOT COVER

We [Safeco] do not cover loss caused directly or indirectly by any of the following excluded perils. Such loss is excluded regardless of the cause of loss or any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

Safeco Ins. Co. of Indiana v. Moss, 03-16-00879-CV, 2017 WL 2856750, at *4 (Tex. App.—Austin June 29, 2017, pet. filed). In Moss, the Austin Court of Appeals recently had an opportunity to analyze Raffkind and Marchetti and noted that the policies in each case failed to contain an ACC Clause. The Moss court effectively indicated that the outcome in those matters would have been different with an ACC Clause.

In Moss, surface water ran off into an uncovered electrical basin filling it with water, then drained through an electrical conduit outlet downward to the insured’s residence. Pressure in the electrical conduit forced the water up the riser and out of the service entrance into the master closet and then throughout the house. Safeco Insurance denied Moss’s claim citing the policy’s exclusion for damage caused by surface water. Both sides filed for summary judgment pointing to the same definition of surface water in the policy. Moss argued that, as a matter of law, “the water lost any status it may have had as surface water once it entered the electrical conduit,” which he contended, citing Marchetti, is a “channel where water naturally flows.” Id at *3.

Though the trial court agreed with Moss and granted summary judgment in his favor, the Austin Court of Appeals reversed, noting, “the water originated as surface water and did not co-mingle with non-surface water or change in form before entering Moss’s home.” The court cited Valley Forge and Crocker to contradict the assertion that the rain water lost its status as surface water when it traveled through the electrical conduit. Notably, however, the court ultimately decided the case on the grounds that, regardless of whether the water lost its status as surface water, the insurance policy contained an ACC Clause and evidence established that the surface water at least indirectly caused the loss claimed by Moss. Id.

The Houston Court of Appeals came to a similar conclusion in Tsai v. Liberty Mut. Ins. Co., 01-14-00677-CV, 2015 WL 6550769, at *7 (Tex. App.—Houston [1st Dist.] Oct. 29, 2015, no pet.). In Tsai, the plaintiff’s home suffered damage to its wood floors after prolonged exposure to rain and sprinkler water seeping from a neighbor’s flower bed. Tsai argued, among other things, that despite the policy language excluding damage from surface water, the water lost its character as surface water because it was absorbed into the ground prior to leaking into the house. The evidence showed that the water, after falling on the planter’s surface, did not follow a defined path or channel. It passed freely, moving through a few inches of mulch and into the plaintiff’s home. As such, the court concluded that the water was not “absorbed” by land and retained its character as surface water. The court further noted however that due to the ACC Clause the damage would be excluded under the policy because “the loss would be either directly or indirectly caused by surface water.” Id.  

Water released from a reservoir is “flood”

Another issue involved with Hurricane Harvey damage is the intentional release of flood waters. In the midst of the storm, the Addicks and Barker reservoirs in the western part of Houston began to reach their capacities. The U.S. Army Corps of Engineers, in an attempt to control the flooding associated with the heavy rain, released the water through two different dams, flooding businesses and residences downstream. This is not an uncommon act and is done to prevent greater catastrophic loss. Courts have specifically found that water intentionally or negligently released from dams and levees are still flood waters or as the result of surface waters. See, e.g., James v. United States, 740 F.2d 365, 370 (5th Cir. 1984), on reh'g, 760 F.2d 590 (5th Cir. 1985) (stating, “Whether waters are retained behind a dam, break through a dam, or are released through a dam, they are flood waters” for the purposes of the Mississippi Flood Control Act); Tarrant Reg’l Water Dist. v. Gragg, 151 S.W.3d 546, 551 (Tex. 2004) (consistently referring to water intentionally released from dam as “flooding” in the context of inverse condemnation suit); Cortina Realty Tr. v. Pac. Ins. Co., No. 09896A, 2010 WL 5188442, at *4 (Mass. Super. Sept. 27, 2010) (holding that the opening of a flood valve was deemed a necessary decision caused by and resulting from actual surface flooding, and thus, not covered under the policy); In re Katrina Canal Breaches Litig., 495 F.3d 191, 223 (5th Cir. 2007) (stating that “when the inundation [of water] results from the overflow of a body of water, whether natural or artificial, the event is a flood.) Under these courts’ analysis, water released from the reservoirs will be considered “flood” and subject to policies’ water exclusions. Regardless, if a policy has an ACC Clause, that provision will likely preclude coverage where surface water filled a reservoir and then flooded an insured property, regardless of whether the subsequent water release was intentional, negligent, or natural.

Texans still do not have a complete view of the scale of damage caused by Hurricane Harvey and there is sure to be litigation to recover the immense costs associated with this tragedy. However, “flood water” and “surface water” have established definitions in Texas courts and the anti-current causation clause has clear precedent to help guide courts, insurers, and insureds in deciding whether these exclusions apply to insurance claims.  

Michael C. Upshaw is a law clerk and Shannon O'Malley is a partner with Zelle LLP in Dallas.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.