Words matter: a series of leaks constitutes a single occurrence under particular policy language

March 24, 2023

In a recent decision from the United States District Court for the Middle District of Florida, Tampa Division, styled KT State & Lemon, LLP et al. v. Westchester Fire Ins. Co. et al.,[1] the Court granted summary judgment to the Plaintiffs and held that a series of leaks occurring over a three-month period constituted a single “occurrence” under a specific Builder’s Risk Policy.

Westchester Fire Insurance Company and North American Capacity Insurance Company issued a policy for a mixed-use residential and commercial construction project in Sarasota, Florida. The policy originally provided coverage through November 30, 2019, with a $50,000.00 “per occurrence” deductible. The parties negotiated an extension of coverage through January 30, 2020, but with a $250,000.00 “per occurrence” deductible. The series of events overlapped those two policy periods.

The plaintiff general contractor hired a third party to install and test the fire suppression sprinkler system for the project.  During the installation and testing phases, the sprinkler system leaked on six different occasions spanning from September 20, 2019, through December 23, 2019, causing water damage, delays in construction, extra expenses for supervision/management costs, and even the imposition of a contractual delay penalty. Plaintiff sought to recover all of these expenses, with a single, $50,000.00 deductible applied.

The insureds argued that the six sprinkler leaks were a single “occurrence,” while the carriers contended that each separate leak (on a separate date) was a separate “occurrence”. The Court analyzed whether a single $50,000 deductible applied to the entire series of leaks and how the change in deductible after the policy extension affected the outcome.

Applying a “common-sense” approach to the definition of “series,” the Court found that multiple leaks from the same sprinkler system in the same general location, occurring one after the other in a relatively short span of time, constituted a single “occurrence.” Therefore, only one $50,000 per-occurrence deductible was applied to all of the losses prior to November 2019. After that time, because the policy terms were renegotiated, the new deductible of $250,000 would apply for those losses under the modified policy, as a single occurrence.

Key to this decision was the specific definition of “occurrence” under that policy. It specifically contemplated a series of events and read as follows:

“All loss attributable directly or indirectly to one originating cause, event, incident or repeated exposure to the same originating cause, event or incident, or to one series of similar originating causes, events, incidents or repeated exposures …”[2] (Emphasis added.)

The carriers also argued, with no success, that each leak was an “occurrence” because each failure and leak of the sprinkler system on a different date was the immediate proximate cause of the damage for each instance. Rejecting Plaintiff’s argument, the federal court distinguished the ruling of the Florida Supreme Court in Koikos v. Travelers Ins .Co., 849 So. 2d 263 (Fla. 2003).

In Koikos, a fraternity party brawl resulted in a restaurant shooting, injuring at least two patrons. The carriers argued that two rounds injuring two different individuals were part of a single shooting and a single “occurrence.” This impacted the application of the $500,000.00 per occurrence policy limit.

Under that liability policy, the term “occurrence” was defined as an “accident,” but “accident,” in contrast, was not defined. The Court, applying the tort “cause theory,” found that each shot was an immediate act that caused an injury and as such, was individually subject to the policy’s per-occurrence limit. The policy language was critical in the ruling that each bullet caused an injury to the two restaurant patrons. The Court explained that if the carriers wanted a different outcome, they should have drafted the definitions of occurrence and accident to reflect the intent of a series of events as a single occurrence.

On another issue, the KT State court also found that the list of possible “extra expenses” was a non-exhaustive one. The insureds sought summary judgment stating that they were entitled to recover all the extra expenses incurred as a result of the sprinkler system loss. The Court did not grant that relief but noted that the policy language stating that “Extra Expense shall include equipment rental, emergency expenses, temporary use of property, demobilization and remobilization of equipment and facilities and other expenses necessarily incurred to reduce the loss….” did not exclude other types of expenses. Ruling that “shall include” is different from “limited to,” the Court opened the door to items not included in the list if they were an appropriate extra-expense.

The takeaway from this recent decision is clear: policy language is key. The interpretation of whether a series of similar events constitutes one loss or, to the contrary, as many losses as there are events, will depend on the policy language. In KT State, the Court explained that the policy clearly included a series of events as being a single occurrence. In Koikos, in contrast, if the carrier wanted its policy to include several events as one single occurrence, it could have defined “occurrence” to include “one series of similar causes,”[3] which is similar language as the one in KT State. The single occurrence dilemma and exposure hinge on the precision of the applicable policy language and the thoroughness of the definitions.

[1] 2023 WL 2456499 (MD. Fla. March 10, 2023).

[2] As to whether the different leaks were, in fact, “similar”, while the Court acknowledged the term was ambiguous, applying Florida law, it ruled in favor of coverage and granted summary judgment in favor of the Plaintiffs.

[3] Id, at 273, citing to SR International Business Insurance Co. v. World Trade Center Properties LLC, 222 F.Supp.2d 385 (S.D.N.Y.2002) (holing that under policy language defining “occurrence” as including “one series of similar causes”, the two planes hitting the World Trade Center within 16 minutes of each other was one occurrence).