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Ninth Circuit Rules that Insurer Properly Denied Coverage for Loss Falling Under the Surface Water Exclusion

Blogs, Insurance Coverage

Lucky Leather v. Mitsui Sumitomo Ins. Grp., No. 14-55019, 2016 WL 2866056 (9th Cir. May 17, 2016). Applying California Law, the Ninth Circuit held that Mitsui Sumitomo Insurance Group properly denied coverage to Lucky Leather Incorporated, a Los-Angeles based retailer of leather goods, after water from a rainstorm pooled in its basement and damaged merchandise. Lucky Leather filed a claim under its commercial insurance policy with Mitsui. Mitsui denied coverage, arguing that the claim fell under a policy exclusion precluding coverage for damage caused by the pooling of surface water. Lucky Leather sued Mitsui for breach of contract and the covenant of good faith and fair dealing, requesting punitive damages. The district court ruled that Mitsui was correct in determining that the damage fell under the surface water exclusion, and Lucky Leather appealed. On appeal the Ninth Circuit upheld the district court’s decision, dismissing Lucky Leather’s arguments that the damage fit into an exception to the surface water exclusion because the water had flowed from a neighbor’s drainage pipe. The court found that the exception to the exclusion only applied where the surface water accumulated as a result of a drainage pipe backing up or overflowing. The neighbor’s pipe appeared to have functioned properly, however, so the exception to the exclusion did not apply. Furthermore, the fact that the water accumulation originated from the neighbor’s drainage pipe was irrelevant. Thus, Mitsui was not required to provide coverage for the damaged merchandise.