On August 29, 2016, the U.S. Court of Appeals for the Tenth Circuit affirmed a Colorado district court ruling that the sudden obliteration of a building in a 2013 mudslide did not constitute an “explosion” under a commercial property policy. Accordingly, coverage for the loss was barred under the policy’s “Water Exclusion Endorsement,” which excluded coverage for, among other perils, “[m]udslide or mudflow.” Although the exclusion contained an exception for resulting losses caused by “fire explosion, or sprinkler leakage,” the Tenth Circuit held that the destruction of the building did not constitute an explosion as used in the exception to the exclusion. In construing the meaning of “explosion” as used in the water exclusion, the court emphasized that “context matters,” and holding otherwise would eviscerate the exclusion for “tidal waves, tsunamis and mudslides, which all typically produce extreme forces that can smash anything in their paths . . . .” See Paros Properties LLC v. Colorado Cas. Ins. Co., 2016 WL 4502286 at *8 (10th Cir. Aug. 29, 2016).
In September 2013, torrential rainfall triggered a violent flow of water, mud, and debris to careen down a hillside into a commercial building owned by the insured, Paros Properties LLC (“Paros”). After Paros submitted a claim to its insurer, Colorado Casualty Insurance Company (“CCIC”), for roughly $1.3 million in damages, CCIC denied the claim citing the policy’s “Water Exclusion Endorsement.” In particular, CCIC took the position that the damages were caused by a mudslide, and “mudslide or mudflow” were specifically excluded by the policy.
Paros hired counsel along with an engineer to challenge the denial. Ultimately, the engineer concluded that the impact of the comingled mud, water, and debris sliding down the hill into the building caused it to break apart, or “literally, to explode.” CCIC agreed to further investigate the claim and scheduled an inspection of the building by its own engineer. Upon arrival, however, the engineer found that Paros had already demolished the building and there was nothing to inspect. Accordingly, CCIC maintained its denial. Paros filed suit in Colorado state court, and CCIC removed the lawsuit to federal court.
CCIC moved for summary judgment, arguing that the cause of the loss to the building was mudslide, not explosion, and thus the loss fell within the scope of the exclusion for mudslide or mudflow, and not the exception for resulting explosion. The district court agreed and granted summary judgment for CCIC, following which, Paros appealed to the Tenth Circuit.
In considering the merits of CCIC’s denial, the Tenth Circuit began its analysis with the language of the policy’s “Water Exclusion Endorsement,” which barred coverage for any damage caused by the following water-based perils:
1. Floods, surface water (including tidal wave and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind (including storm surge);
2. Mudslide or mudflow;
3. Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment;
* * *
The exclusion was, however, subject to the following exception: “But if any of the above, in Paragraphs 1. through 5., results in fire, explosion or sprinkler leakage, we will pay for the loss or damage caused by that fire, explosion or sprinkler leakage (if sprinkler leakage is a Covered Cause of Loss).”
Consequently, as summarized by the Tenth Circuit, “the Policy does not cover damage caused by water, but does cover damage caused by an explosion caused by water.” Paros did not dispute that mudslide caused the damage. Instead, Paros argued that (1) the loss was not caused by surface water and, therefore, was not excluded by the exclusion; and (2) the loss was not caused by the mudslide itself, but by a resulting explosion.
The Tenth Circuit first addressed the surface water argument, which was “easily resolved.” Paros relied on a Colorado Supreme Court opinion dealing with a specific surface water exclusion, and “dramatic” diversion of the water through manmade means. The exclusion there defined “surface water,” in part, as water that “follows no defined course or channel.” The Tenth Circuit quickly distinguished that decision, explaining that the exclusion before it encompassed “surface water,” but also included “mudslide or mudflow.” Based on the policy language, it made no difference whether any water causing the mudslide had been diverted by manmade features, because mudslide damage was excluded whether the mudslide “‘is caused by an act of nature or is otherwise caused.’”
Next, the Tenth Circuit considered Paros’s explosion argument, and began by noting that the policy did not define the term explosion. “But that does not mean that the term must be construed to encompass all possible meanings, even if found in the dictionary.” Rather, “[c]ontext matters.” The court explained that the “Water Exclusion Endorsement” included tidal waves, tsunamis, and mudslides, and adopting Paros’s construction “would be to read those exclusions out of the Policy,” because each typically produces enough force to destroy anything in its path.
Accordingly, the court interpreted the term consistent with the “classical” notion of an explosion, involving a “buildup of internal pressure and sudden bursting outward in all available directions.” The exception would apply where, for instance, a mudslide damaged a gas pipe, which created a leak of gas that was ignited and exploded. Paros’s own engineer, however, opined that the mudslide displaced the building’s walls upon impact, and not by any internal buildup of pressure within the building caused by the mudslide entering the building. As such, there was no evidence that the damage to the insured building resulted from “explosion” falling within the exception to the exclusion for mudslide or mudflow. Thus, the Tenth Circuit affirmed the district court’s grant of summary judgment in CCIC’s favor.
In Paros Properties, the Tenth Circuit took a common sense approach to policy construction and applied two significant interpretation principles seen in jurisdictions across the country. First, the court refused to apply a construction of the “explosion” exception that swallowed the exclusion whole. Second, and perhaps most significantly, the court bluntly stated “[c]ontext matters.” In other words, the Tenth Circuit refused to interpret the “explosion” exception in a vacuum, without considering the specific categories of losses excluded by the “Water Endorsement Exclusion.”