Mass. high court asked to define ‘surface waters’ in storm damage case

In a ruling that will determine coverage for a hospital’s storm-related water damage, a federal appeals court is asking Massachusetts’ high court to define “surface waters” in property policies.

Norwood Hospital Facility, in Norwood, Massachusetts, a building owned by Birmingham, Alabama-based Medical Properties Trust Inc. and leased to Dallas-based Steward Health Care System, Ltd., suffered significant damage in June 2020  from severe thunderstorms, according to Tuesday’s ruling by the 1st U.S. Circuit Court of Appeals in Boston in Zurich American Insurance Co. v. Medical Properties Trust Inc., and Steward Health Care System LLC v. American Guarantee and Liability Insurance Co.; Zurich American Insurance Co.

In addition to flooding in the hospital’s two main buildings, rainwater also accumulated on the hospital’s roof and second-floor courtyard, eventually sweeping into the hospital’s upper floors.

Zurich American’s policy provided for $750 million in coverage for property damage, including a $100 million sublimit for flood caused damage, while American Guarantee’s provided $850 million in coverage and a $150 million flood sublimit.

Both insurers’ policies defined “flood” in part as the accumulation or runoff of “surface waters.”

After the storms, MPT and Steward submitted proof of loss claims to both insurers that each exceeded $200 million.

While initially both insurers concluded the roof-related damage did not fall under the flood sublimits, they later changed their stance, and said this damage came under the policies’ flood sublimits, refusing to accept the full value of the claims submissions.

In subsequent litigation, the U.S. District Court in Boston ruled in the insurers’ favor in both cases, concluding the term “surface waters” is not limited to water that accumulates on the ground.

In asking Massachusetts’ top court to rule on the issue, a three-judge panel said, “The definition of ‘surface waters’ in this particular context presents a novel issue of Massachusetts law not previously addressed by the Massachusetts Supreme Judicial Court.”

Furthermore, existing case law by the state high court “does not point towards a clear answer and deciding this question requires policy judgments on applying Massachusetts law to this key insurance coverage issue.”

Howard M. Cooper, founding partner with Todd & Wald LLP in Boston, who represents Steward, said in a statement, “Steward appreciates the great care with which the First Circuit is proceeding in this case to get the answer to the legal issues right. Steward is confident that its view of the policy language, which mirrors AGLIC’s initial reading of the language, is correct.”

Zurich’s attorney had no comment and MPT’s did not respond to a request for comment.