“Sewage” is included under an insurance policy exclusion that prevents coverage for damage caused by “water that backs up or overflows from a sewer,” the Ohio Supreme Court ruled today.

An exclusion written into a United Specialty Insurance Co. policy provides that damage suffered by the Bank Nightclub in Akron in 2014 is not covered, the Supreme Court ruled.

The 5-2 ruling reversed a decision of the Ninth District Court of Appeals.

The Court also noted that this case marked the first time it had been asked to interpret a water exclusion provision found in “just about every commercial and personal-property insurance policy issued in Ohio.”

Writing for the Court majority, Justice Patrick F. Fischer rejected the argument that the exclusion applies only to pure forms of water like rainwater, and noted that water that backs up from a sewer is obviously going to contain sewage. While the exclusion is included in nearly all policies, consumers can protect themselves from sewage damage by purchasing readily available additional coverage from insurers, the Court majority observed.

Chief Justice Maureen O’Connor and Justice Sharon L. Kennedy, R. Patrick DeWine, and Michael P. Donnelly joined Justice Fischer’s opinion.

In a dissenting opinion, Justice Melody J. Stewart maintained the exclusion language is not as clear-cut as the majority concluded, noting that United Specialty itself cited another policy provision, a pollution exclusion, as the reason to deny the nightclub’s cleanup claim. She would find the case was improvidently accepted because the case does not involve a question of public or great general interest and, because of the lack of clarity by the lower courts, she would allow the Ninth District’s decision to stand.

Justice Jennifer Brunner joined Justice Stewart’s dissent.

Cleanup Company Seeks Payment
After sewage backed up from Akron’s sewer system into the Bank Nightclub, the bar hired AKC Inc., doing business as Cleantech, to clean up the site. The bar was insured by United Specialty and submitted a claim to the insurer.

Citing an exclusion in the policy for damage caused by water that backs up or overflows from a sewer, United Specialty denied the claim. Rather than contest the insurance company’s denial, the bar assigned its rights to AKC to challenge the decision. AKC instituted a breach-of-contract lawsuit
against United Specialty.

United Specialty asked the trial court for summary judgment. The court sided with United Specialty, and AKC appealed to the Ninth District. The Ninth District reversed the trial court’s decision. United Specialty appealed to the Supreme Court, which agreed to hear the case.

Supreme Court Analyzes Water Backup Provision
Justice Fischer explained the primary issue in the case was whether United Specialty’s policy provides coverage for property damage caused by sewage that backs up or overflows from a sewer.

United Specialty argued that the water-backup and pollution exclusions do not provide coverage for the type of damage the nightclub sustained. AKC argued the policy excludes water such as rainwater from a storm sewer, but not sewage that typically flows through a sanitary sewer line and can spill over into storm sewers.

The majority opinion stated the Court only needed to review the water-backup exclusion, which states United Specialty “will not pay for loss or damage caused directly or indirectly by … [w]ater that backs up or overflows from a sewer, drain or sump.”

The Court stated it applied the plain and unambiguous terms of the policy, rather than a “hyperliteral” definition of the term “water.” Citing Webster’s Third New International Dictionary, the Court noted that a “sewer” is defined as a “conduit to carry off water and waste matter,” and “sewage” as “refuse liquids or waste matter carried off by sewers.”

The opinion stated water backing up or overflowing from a sewer is going to contain sewage. Because sewage is in the sewer, the Court concluded the water-backup exclusion bars coverage from damage caused by sewage.

The opinion asserted the Ninth District created ambiguity in the policy by trying to make a distinction between water and sewage, and that courts are not allowed to claim ambiguity because the parties could have included different or more express language in their agreements.

The Court indicated when other courts around the nation have been confronted with similar insurance policy disputes, they have “rather uniformly held that damage from sewage is excluded under the standard water-backup exclusion.”

The opinion noted while the exclusion seems harsh, there are standard endorsements available for purchase that remove the water-backup exclusion from the policy and protect property owners.

“For whatever reason, though, the insured in this case did not purchase that coverage. And while that is unfortunate for AKC, who is standing in the shoes of the insured here, that is not something we can change or overlook,” the opinion stated.

Policy Language Could Be Clearer, Dissent Maintained
In her dissent, Justice Stewart stated the Court should not have accepted United Specialty’s appeal because the issue does not concern a question of public or great general interest, but rather is a typical insurance policy dispute clouded by a lack of clarity in the lower court decisions.

Justice Stewart noted the confusion created by the lower courts. The dissent explained that United Specialty requested summary judgment from the trial court, arguing its pollution-exclusion provision, not the water-backup provision, barred coverage. The trial court’s decision reasoned that the pollution exclusion did not apply, but then concluded that the pollution exclusion barred recovery.

Relying on the trial court’s reasoning that the pollution exclusion did not apply, the Ninth District ruled that provision did not exclude coverage for the nightclub. And the appellate court found the water-backup exclusion was “reasonably susceptible to more than one interpretation,” the dissenting opinion explained.

The dissent noted the Court has generally ruled when an insurance policy’s language is “reasonably susceptible to more than one interpretation,” the policy should be read in favor of the insured.

The Ninth District ruled that United Specialty could have added the word “sewage” to the water-backup exclusion to provide clarity to its policyholders. The appellate court ruled the policy was ambiguous because it did not spell out whether the exclusion referred to water from a storm sewer or if it also included sewage that overflows into the storm sewer or backs up from a sanitary sewer, the dissent noted.

Because of the lack of clarity, the trial court should conduct further proceedings to consider whether sanitary sewage that damaged the nightclub should be considered backed-up water, the dissent concluded.

2020-0405. AKC, Inc. v. United Specialty Ins. Co., Slip Opinion No. 2021-Ohio-3540.

View oral argument video of this case.

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