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(Article from Insurance Law Alert, March 2020)

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A New Jersey appellate court ruled that the “named perils” clause in a property policy did not cover water leak damage and that policy exclusions could not create ambiguity where the coverage provision was clear.  Cusamano v. New Jersey Ins. Underwriting Assoc., 2020 WL 1026748 (N.J. App. Div. Mar. 3, 2020).

Homeowners filed a claim with their property insurer for water damage caused by a leaking pipe.  A plumber determined that the leak was caused by a “rotted connection” in the drain line.  When the insurer denied coverage, the homeowners filed suit, alleging breach of contract and bad faith.  A trial court ruled that the policy was ambiguous because it listed several excluded perils, which did not include water damage (except as to breakage of water pipes by explosion).  The trial court reasoned that because the policy failed to list water damage from leaking pipes as an excluded peril, the homeowners had a “reasonable expectation of coverage” for such losses.

The appellate court reversed, ruling that the trial court erred by considering exclusionary clauses in order to find ambiguity when the coverage-granting clause unambiguously did not encompass the water damage at issue.  The appellate court emphasized that an exclusion operates to limit or restrict the insuring clause, and “does not extend or grant coverage.”  The court stated:  “the covered perils defined the outer bounds of coverage.  The exclusions pertain only to what is covered. . . .  Because water damage was not a covered peril, there was no reason to consider the policy’s exclusions.”