A South Dakota agent has the following claim:

The insured has an artesian well that is a primary source for heating all of his buildings. Water, far warmer than the air temperature on a January South Dakota night, is pumped underground. During one particularly frigid spell, the underground lines froze and burst. The cost to replace these lines is significant, but the value of these pipes was included in the replacement cost of buildings and structures. The insurer has cited the Property Not Covered (“underground pipes, flues, or drains”) provision in the ISO CP 10 10 06 07 form as the basis for denying the claim, though they say if the pipes had been above ground, they would have been covered (assuming the account was still acceptable to the underwriter).

The agent is incredulous that if the lines were above ground (and more susceptible to freezing) they would be covered. Unfortunately, logic and insurance coverage don’t always go together.

In my book When Words Collide: Resolving Insurance Coverage and Claims Disputes,” I write about insurance coverage not always being logical and give three actual claims examples involving frozen outdoor hot tub water pipes and equipment, a building burglar alarm system, and a vandalized wood chipper. In the hot tub example, there is coverage but logic would imply that there shouldn’t be. In the other two examples, the claim was denied based on unambiguous policy language but such denial made no sense at all under the circumstances of each claim. You can find this discussion on pp. 238-239 of the book.

I’m told that legendary coverage wonk Bob Smith of the Florida Association of Insurance Agents would advise:

“If you can’t argue the form, argue logic; if you can’t argue logic, argue the form.”

The agent can try to argue the logic that underground piping is better than above ground piping, so if the latter is covered, so should be the former. The “When Words Collide” book makes a similar argument that an open perils policy should never provide lesser coverage than a named perils policy and that argument is based on a 1991 ISO Homeowners filing that is discussed in the book on pp. 250-251.

Another extracontractual argument is that the value of the underground piping was included in the property valuation and as part of the limit of insurance chosen. A copy of the valuation that substantiates this would be needed. The logic of that argument is that a premium is paid on property that the carrier says is NEVER covered (“Property Not Covered”).

That being said, the insurer’s argument is probably going to be that the policy form unambiguously excluded underground piping. Depending on case law in South Dakota (something I’ve not researched), under the parol evidence rule, that extrinsic evidence might not be legally admissible if the policy language clearly and unambiguously excludes that property. In some states it could be used but not in others.

But this brings me to my main point. I also write in the “When Words Collide” book about the best way to resolve coverage disputes…PREVENT them before they ever happen via exposure analysis with the insured, followed by properly insuring or risk managing the exposures. I give an example involving boat docks on pp. 275-276 of the book that analogously applies in this case.

The best way to avoid this claim dispute would have been to use the ISO CP 14 10 – Additional Property Coverage endorsement which says, “The following is withdrawn from Property Not Covered and added to Covered Property.” Early editions of the form included a list followed by blank space to add items and included on the list was underground property. More recent editions of the endorsement allow anything listed under Property Not Covered on the CP 00 10 to be shown on the endorsement.

If this strategic equipment was identified and discussed with the underwriter prior to policy exception, the current dispute could possibly have been avoided, assuming the underwriter would have issued the endorsement.

So, sometimes arguing logic works, but rarely would that be the case if a claim is litigated. The best way, by far, to resolve coverage and claims disputes is to PREVENT them by ascertaining the exposures to loss then properly insuring them. Knowing what forms are available means engaging in quality education.


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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information