Frozen Pipes Insufficient to Prove Insured Failed to Heat Building

When a major water damage loss occurred after freezing allegedly caused pipes to burst, conflicting expert testimony disputed what caused the pipes to freeze, making it impossible to grant summary judgment on an exclusion for failure to maintain heat.

In Henlopen Hotel, Inc. v. United National Insurance Company, C.A. No. N18C-09-212 PRW, Superior Court Of The State Of Delaware (January 10, 2020) Henlopen Hotel sued its insurer, United National Insurance Company for contract breach and insurance bad-faith following a coverage denial for water damage caused by a ruptured pipe in January 2018. United National denied coverage based on its factual conclusion that the pipe burst due to freezing and its interpretation of Helopen Hotel’s policy.

THE DISPUTE

United National supports its conclusion that the pipe burst due to freezing with the expert analysis of J. Frank Peter (“Peter”). Henlopen Hotel seeks to admit the testimony of its own expert witness, Mervin T. Thomas (“Thomas”), to rebut this factual conclusion and give support to Henlopen Hotel’s alternative hypothesis that the pipe failed due to accumulated wear and age.

In Henlopen Hotel’s Motion for Partial Summary Judgment, it seeks the Court’s determination that the water damage is covered under the policy based on either of two theories:

  1. that its undisputed efforts to keep the pipes heated satisfied the terms of the policy’s Heat Requirement Endorsement and therefore make the damage compensable irrespective of whether those efforts successfully prevented freezing.
  2. Alternatively, that United National has failed to produce admissible evidence that freezing occurred and caused the damage.7

In United National’s Motion for Summary Judgment, the insurer argued that the Heat Requirement Endorsement creates an ipso facto coverage exclusion for frozen pipes, and that the record shows beyond all genuine dispute that the pipe ruptured due to a freeze. Similarly, United National argued that because the policy unambiguously denies coverage, there was no breach of the covenant of good faith and fair dealing.

In the alternative, United National argues that even if a triable issue exists as to coverage, the exclusion and factual record demonstrate that United National’s behavior shows neither bad faith nor maliciousness and so require entry of summary judgment as to the insurance bad faith count and prayer for punitive damages.

DISPUTED FACTS PRECLUDE SUMMARY JUDGMENT FOR BREACH

United National’s coverage denial is based solely on the Heat Requirement Endorsement. Under a light most favorable to Henlopen Hotel, the Court must credit Expert Thomas’s opinion that the pipe did not suffer a freeze-related failure. When the Court does so, and should the jury follow, Henlopen Hotel would be found to have satisfied any possible reading of the Heat Requirement Endorsement and is entitled to have the claim paid.

Conversely, on Henlopen Hotel’s motion, viewing the record in a light most favorable to United National requires crediting Mr. Peter’s expert analysis and opinion that the pipe failed because it froze in the cold weather. From that, of course, the fact finder could reasonably infer the freeze was caused by Henlopen Hotel’s failure to maintain heat in the building as required. And, under such circumstances, the coverage exclusion created by the Heat Requirement Endorsement would apply.

Thus, each of the parties’ cross-motions for summary judgment as to Count I (Breach of Contract) must be denied.

UNITED NATIONAL HAS A BONA FIDE BASIS TO DISPUTE LIABILITY.

To establish bad faith, an insured must show that the insurer’s refusal to honor its contractual obligation was clearly without any reasonable justification. Where an insurer’s denial of coverage is premised on a theory sufficiently well-supported as to resist summary judgment, they are entitled to contest coverage and cannot be subject to an “extra-contractual” claim for bad faith or punitive damages.

United National’s refusal to pay has at all times been based on the theory that the damage was caused by Henlopen Hotel’s failure to keep the pipes heated and prevent a freeze. As that theory is sufficiently supported to preclude summary judgment in Henlopen Hotel’s favor, United National’s motion for summary judgment as to Count II (Bad Faith) should be granted.

UNITED NATIONAL BEARS THE BURDEN OF SHOWING AN EXCLUSION.

An insured bears the initial burden of showing that a loss is within the coverage provisions of an insurance policy. Once this burden is met, the insurer bears the burden of proof that a policy exclusion applies to the loss.

United National argues that the Heat Requirement Endorsement phrases itself as “a condition of this insurance” and therefore shifts the burden to Henlopen Hotel to prove that the included exceptions do not apply. The cardinal rule of contract construction is that where possible, a court should give effect to all contract provisions. United National’s desired reading of the Heat Requirement Endorsement as an ipso facto exclusion for frozen pipes cannot be reconciled with the document’s plain language.

The Heat Requirement Endorsement informs Henlopen Hotel that it is “required to maintain heat at a level sufficient in buildings and other structures covered by this policy to prevent freezing of plumbing, heating, air conditioning and fire protection systems.” This precludes United National’s reading for two reasons. First, the compulsory action the Heat Requirement Endorsement obligates the insured to undertake is to maintain heat. Second, the exclusion is a consequence if the insured does not comply with the requirement.

The focus of the language of the Heat Requirement Endorsement is at all times with the actions taken by the insured and under its control. Resting a determination of coverage entirely on whether a freeze occurs—no matter the steps and precautions taken by the insured to prevent such freeze—would likewise negate this operative language rendering it meaningless.

Whether Henlopen Hotel maintained heat is a disputed question of fact. United National can show that the exclusion of the Heat Requirement Endorsement applies and acts to preclude recovery under the policy by showing both that the pipe failed due to a freeze during the relevant cold spell, and that the freeze occurred because Henlopen Hotel failed to adequately maintain heat in the hotel building. The mere fact of a freeze might, on its own, be sufficient to permit a jury to infer that the cause of the freeze was Henlopen Hotel’s failure to maintain heat. However, proving a freeze is not per se conclusive, as the fact finder could determine that the freeze occurred due to a supervening cause so extreme and unpredictable as to excuse the failure of Henlopen Hotel’s efforts to overcome and prevent such an occurrence.

Since Count II (Breach of the Implied Covenant of Good Faith) relates to an obligation addressed by an express term of the contract, the implied covenant is displaced and United National’s motion for summary judgment on that count was granted.

ZALMA OPINION

The Delaware Superior Court disposed of the bad faith claim easily since it was clear the insurer acted upon a reasonable interpretation of its policy based upon the expert reporting of a qualified expert. The fact that another qualified expert opined the exact opposite established that there was disputed facts that could not be resolved at summary judgment. The conclusion, with regard to breach of contract, seems to be a stretch by calling into play a Deus ex Machina – a supervening cause so extreme and unpredictable as to excuse the failure to prevent the freezing. This issue will be resolved at trial but probably should have considered the fact that pipes don’t freeze if they are kept warmer than the freezing point of water – 32 degrees.


© 2020 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the Insurance Claims Library 

Subscribe to e-mail Version of ZIFL, it’s Free!

Read last two issues of ZIFL here.

Go to the Barry Zalma, Inc. web site here.