Water, Water Everywhere, but not a Drop to Drink

By Stephen P. Groves, Sr.

In M & M Corporation of South Carolina v. Auto-Owners Insurance Company, ___ S.C. ___, ___ S.E.2d ___ (2010) (Sup. Ct. Op. No. 26883, filed 11 October 2010), a divided South Carolina Supreme Court (3-2), answered several certified questions from the United States District Court for the District of South Carolina. The Supreme Court determined Auto-Owners was required to provide property damage insurance coverage to its insured hotel for damages caused by overflowing water.
Auto-Owners issued M&M Corporation a commercial all-risk insurance policy for its hotel property located in Blythewood, South Carolina. In August 2006, the South Carolina Department of Transportation (“SCDOT”) initiated a road improvement project near the hotel which involved, in part, installation of a new underground stormwater drainage system. Before the system could be completed the Blythewood area sustained a significant rain event during which more than four inches of rain fell in a single day. As noted by the Supreme Court:

The incomplete stormwater drainage system comprised 1,600 feet of pipes and collected water from an area of approximately 15.9 acres, terminating at an exposed, above-ground [30]-inch pipe [50’] from the edge of the hotel property line and [150’] from [the] hotel building. The total volume of water discharged from the pipe on the day at issue was over 830,000 gallons at a rate of 6.3 feet per second.

Unfortunately, the discharged water filled the hotel’s parking lot to a level sufficient to allow water to enter into the interior of the hotel building and, in turn, cause significant property damage. M&M Corporation sued Auto-Owners for the damages. Auto-Owners denied and defended the claim on the basis of the insurance policy’s “flood” and “surface water” exclusions. After the parties filed their respective cross-summary judgment motions, the District Court certified three questions to the Supreme Court.

1. Under an all-risk Commercial Property Policy of insurance, does "surface water" encompass rainwater collected and channeled in a stormwater collection system?

The Supreme Court noted that since the insurance policy did not define either the term “surface water” or “flood water” then it was free to use the “plain, ordinary, and popular meaning[s]” of those terms. Moreover, the Supreme Court noted insurance policies are construed in favor of coverage with all exclusions, such as those asserted by Auto-Owners, interpreted against the insurer.

Looking to a definition of “surface water” reached in 1901, the Supreme Court concluded that “[o]nce surface water is deliberately contained, concentrated, and cast onto an adjoining landowner's property, it is no longer naturally flowing, diffuse water. Water spewing in an unnatural concentration from a stormwater drainage system lacks the identifiable characteristics of surface water . . . .” . The Supreme Court therefore answered the first certified question with a rather emphatic “No”.

2. If the answer to Question I is no, can such non-surface water reacquire its classification as surface water upon exit from the stormwater collection system and, if so, under what circumstances?

Following, in essence, the same 100+ year old definition, the Supreme Court also answered the second certified question with a similar rather emphatic “No”. The Court stated once the rampaging waters had lost their “surface water” characteristics when expelled from the pipe, the unnatural flow cannot be transformed back into “surface water”.

3. Under an all-risk Commercial Property Policy of insurance, does "flood water" encompass water discharged from a stormwater collection system in concentrated form, pooled, and that thereafter enters a building?

Finally, interpreting Auto-Owners’ “flood water” exclusion, the Supreme Court noted South Carolina had not yet defined the term. Looking to an Idaho case, the Supreme Court impliedly approved a definition reading “ ‘[f] waters are waters which escape, because of their height, from the confinement of a stream and overflow adjoining territory; implicit in the definition is the element of abnormality.’ ” See Milbert v. Carl Carbon, Inc., 406 P.2d 113, 117 (Idaho 1965). Since the waters in this case did not “breach” the containment of a stream or other natural land formation, but was intentionally channeled, then the waters cannot be defined as “flood waters”.

Chief Justice Toal authored the opinion and was joined by Justices Beatty and Kittredge. Justices Pleicones authored a dissenting opinion joined in by Justice Hearn.

1. See Lawton v. South Bound Railroad Co., 61 S.C. 548, 39 S.E. 752 (1901). The Supreme Court defined “surface water” as:

waters of a casual and vagrant character, which ooze through the soil or diffuse or squander themselves over the surface, following no definite course. They are waters which, though customarily and naturally flowing in a known direction and course, have nevertheless no banks or channels in the soil, and include waters which are diffused over the surface of the ground, and which are derived from rains and melting snows . . . .

Lawton v. South Bound Railroad Co., 61 S.C. 548, 552, 39 S.E. 752, 753.