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By Lindsey P. Bruning
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May 2015 was a month of record rain for Texas. Meteorologists reported that in May alone, 37.3 trillion gallons of water fell in Texas — enough to cover the entire state with 8 inches of water.[1] The nonstop barrage has caused unprecedented flooding throughout the state — claiming 22 lives and causing severe property damage to countless homes and businesses. President Barack Obama has declared a major disaster.[2]

With the rain having finally subsided, Texas home and business owners are now inspecting the damage caused by the onslaught of water. For some, the damage is extensive. And now, everyone is asking the same question — will insurance respond?

Standard Property Insurance Coverage for Flood Damage

Flood damage is not typically covered in an insurance policy. In fact, most property insurance policies — homeowners and commercial — specifically exclude property damage caused by flood. Most policies contain provisions excluding loss caused by “flood, surface water, waves, tides, tidal waves, overflow of any body of water or their spray, all whether driven by wind or not.”[3]

The flooding throughout Texas over the last several weeks would fall within the language of these common exclusions. For example, Texas case law defines the terms “flood” or “flood water” to mean “that water which is above the highest line of the regular flow of a river, stream or natural water course.”[4] This definition requires a pre-existing body of water to overflow, and the waters exceeding the regular depth are flood waters — ”Flood waters 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.”[5]

Certainly much of the flooding falls within this definition. The Brazos River in Central Texas overflowed its banks. The Trinity River in Dallas reached historic highs. The Buffalo Bayou in Houston flowed well beyond its banks. All of these involved waters flowing from an ordinary channel and are likely included within the common flood exclusion.

Other damage would likely fall within the definition of “surface waters." Texas has time after time defined “surface water” as “water or natural precipitation diffused over the surface of the ground until it either evaporates, is absorbed by the land or reaches channels where water naturally flows.”[6] Heavy precipitation not absorbed by the ground, or directed to a natural or man-made body of water is surface water:

Surface waters are those which are produced by rainfall, melting snow or springs, and which in the case of the two first-mentioned sources are precipitated, and in the case of the last-mentioned source, rise upon the land. ... 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.[7]

Courts from other jurisdictions have also found that when a surface drain or storm sewer is not sufficient in size to carry away all the water from a storm, the collecting ground water is “surface water.”[8]

Reports of accumulated water in low-lying areas far from any stream or river would qualify as surface water.

Flood Insurance

Because flood damage is generally excluded under standard property policies, flood coverage must be separately acquired. For homeowners, such coverage typically must be purchased through the government sponsored flood insurance program. Commercial property owners can obtain coverage for flood damage by endorsement from their commercial property insurer. For example, ISO Form CP 10 65 10 12, provides coverage for “Flood, meaning a general and temporary condition of partial or complete inundation of normally dry land areas due to: 1. The overflow of inland or tidal waters; 2. The unusual or rapid accumulation or runoff of surface waters from any source …” An endorsement with these terms would likely respond to damage resulting from the recent flooding throughout Texas. But policyholders should take note, because not all policies are equal — for example, where an endorsement covers “flood," but not “surface waters," some of the damage caused by the recent flooding may not be covered.[9]

Unfortunately, the 2015 Texas floods brought damage to homes and businesses in locations where it was never expected that such water damage would occur. Absent a separate flood policy or specifically purchased flood coverage endorsement in the commercial context, many Texans will now be left without insurance coverage for their damage.

Business Income Coverage Issues

What about insurance coverage for other losses, such as business income? Many businesses were closed for several days due to water in or around their buildings. Access to businesses was also cut off due to flooded roads or collapsed bridges.

Business owners’ property insurance policies often contain additional coverage provisions that cover loss of business income, to indemnify the insured for loss of income it would have earned had no interruption occurred. Standard coverage forms state as follows:

A.  Coverage

1.  Business Income

Business Income means the:

a.  Net Income (Net Profit or Loss before Income Taxes) that would have been earned or incurred; and

b. Continuing, normal operating expenses incurred, including payroll.

                                                            ***

"We will pay for the actual loss of Business Income you sustain due to the necessary 'suspension' of your 'operations' during the 'period of restoration.' The 'suspension' must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss."[10]

                                                            ***

"[T]he purpose of a business interruption policy is to indemnify the insured for loss caused by the interruption of a going business due to the destruction of the building, plant or parts thereof.”[11]

Per the terms outlined above, to establish coverage for a business income loss, an insured must establish that it sustained property damage that is covered under the policy; that there was a suspension of operations caused by that property damage; and that the insured sustained an actual loss of business income during the period necessary to restore the property.

Particularly relevant to the analysis is the requirement that the physical loss or damage result from a covered cause of loss, meaning that business income losses caused by flood are not covered unless the policy itself provides coverage for flood. For example, in Valley Forge Insurance Co. v. Hicks Thomas & Lilienstern LLP, the court held that loss of business income and extra expense were not covered under the policy because flood and surface water were not covered.[12] Accordingly, if a business did not have flood coverage in the first instance, any loss of income due to flooding would also not be covered.

A recent news story highlights a common situation. This story involved a gas station whose business had been affected by the floods. The gas station itself did not sustain any physical damage, but, as the business owner explained, access to the gas station was hindered as one of the roads leading up to the gas station was barricaded due to flooding.

Most business owners’ policies include coverage for loss of business income caused by action of civil authority that prohibits access to the insured premises. The typical coverage provides as follows:

When a Covered Cause of Loss caused damage to property other than property at the described premises, we will pay for the actual loss of business income you sustain caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply: 

1)      Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage and the described premises are within that area but are not more than one mile from the damaged property; and 

2)      The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.

Civil Authority Coverage will begin 72 hours after the time of the first action of civil authority that prohibits access to the described premises and will apply for a period of up to four consecutive weeks from the date on which such coverage began. [13]

A key issue with regard to potential coverage under the civil authority provision is whether the access to the property was actually “prohibited.” In the example above, were there other open roads that could be used to access the business? Courts have held that civil authority coverage is triggered only where the civil authority entirely prevents access to the business. For example, in Dixson Produce LLC v. National Fire Insurance Co., an Oklahoma court determined the civil authority provision was inapplicable where an insured claimed loss of business income resulting from the city's closure of several streets following a tornado, reasoning that, although access to the insured’s building was made less convenient, it was not prohibited.[14]

Moreover, like the business income coverage discussed above, the civil authority provision is applicable only if the action of the civil authority was due to loss or damage to property caused by or resulting from any Covered Cause of Loss. Accordingly, a policy will only provide coverage through the civil authority provision if the policy provides coverage for flood.

Road closures or other physical impairments to access also potentially implicate ingress/egress provisions, another business income coverage extension contained in some insurance policies which provides coverage for losses “sustained during the period of time when, as a result of a peril insured against, … ingress to or egress from real or personal property is thereby impaired in whole or in part.”[15] Like the civil authority provision, coverage under this provision also requires that the loss be caused by a peril insured against — a covered cause of loss. Accordingly, coverage will only be provided if the policy provides coverage for flood or if access is impaired due to another covered cause of loss.

Like the gas station scenario mentioned above, many affected businesses were likely in locations that their owners believed would never be affected by flooding, and thus they would not have obtained flood coverage.

Unfortunately, these insurance issues are only the tip of the iceberg. Review of the specific policy provisions and coverages provided and/or excluded is necessary to determine whether coverage will be afforded. And, of course, the facts of each situation can greatly impact the outcome.

How will insurance policies respond to the 2015 Texas Flood? Only time will tell.

—By Lindsey Bruning, Zelle Hofmann Voelbel & Mason LLP

Lindsey Bruning is a senior associate in Zelle Hofmann's Dallas office.

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.

[1] http://www.cnn.com/2015/05/31/us/severe-weather/index.html

[2] Id.

[3] ISO Form CP 10 30 06 07.

[4] State Farm Lloyds v. Marchetti, 962 S.W.2d 58, 61 (Tex. App.–Houston [1st Dist.] 1997, no pet.); see also, Lewis v. Texas Utils. Elec. Co., 825 S.W.2d 722,724 (Tex. App.–Dallas 1992, writ denied); Employers’ Fire Ins. Co. v. Howsley, 432 S.W.2d 578, 580 (Tex. Civ. App.–Amarillo 1968, no writ); El Paso County Water Improvement Dist. No. 1, L.D. v. City of El Paso, 133 F.Supp. 894, 909 (W.D.Tex. 1955), modified on other grounds, 243 F.2d 927 (5th Cir. 1957); Sun Underwriters Ins. Co. of New York v. Bunkley, 233 S.W.2d 153, 155 (Tex. Civ. App.–Fort Worth 1950, writ ref’d), distinguished on other grounds, 309 Ill. App. 3d 566, (2000); Motl v. Boyd, 286 S.W. 458, 470 (Tex. 1926), disapproved of by, 163 Tex. 381, (1962).

[5] Sun Underwriters, 233 S.W.2d at 155.

[6] State Farm Lloyds, 962 S.W.2d at 61. See also Transamerica Ins. Co. v. Raffkind, 521 S.W.2d 935, 939 (Tex. Civ. App.–Amarillo 1975, no writ), distinguished on other grounds, 211 S.W.3d 928 (Tex. App. 2007); Employers’ Fire Insurance, 432 S.W.2d at 580; Lewis, 825 S.W.2d at 724; Sun Underwriters, 233 S.W.2d at 155; Dalon v. City of DeSoto, 852 S.W.2d 530, 538 (Tex. App.–Dallas 1992, writ denied); Mitchell v. Blomdahl, 730 S.W.2d 791, 792 (Tex. App.–Austin 1987 writ ref’d n.r.e.).

[7] Sun Underwriters, 233 S.W.2d at 155.

[8]. Urse v. Md. Cas. Co., 58 F.Supp. 897 (N.D. W.Va. 1945); Fenmode v. Aetna Cas. & Sur. Co. of Hartford, Conn., 6 N.W.2d 479 (Mich. 1942).

[9] Sun Underwriters, 233 S.W.2d at 156 (holding that the policy did not cover a claim for 4,176 chicks that drowned when heavy rain caused water to run into a chicken barn as the damage was caused by “surface water”, not “flood”, and the policy only covered “flood”).

[10] ISO Form CP 00 32 06 07

[11] Quality Oilfield Prods., Inc. v. Michigan Mut. Ins. Co., 971 S.W.2d 635, 638 (Tex. App.—Houston [14^th Dist.] 1998, no pet.) (citation omitted).

[12] 174 S.W.3d 254, 258 (Tex.App.—Houston [1st Dist.] 2004).

[13] ISO Form CP 00 32 06 07

[14] Dixson Produce LLC v. National Fire Insurance Co., 99 P.3d 725, 728 (Okla. Civ. App. 2004).

[15] Houston Cas. Co. v. Lexington Ins. Co., No. CIV.A. H-05-1804, 2006 WL 7348102, at *6 (S.D. Tex. June 15, 2006)