Zurich American Insurance Co. v. Medical Properties Trust, Inc. ( 2023 )

United States Court of Appeals
For the First Circuit
No. 23-1167
ZURICH AMERICAN INSURANCE COMPANY,
Plaintiff, Appellee,
v.
MEDICAL PROPERTIES TRUST, INC.,
Defendant, Appellant.
No. 23-1180
STEWARD HEALTH CARE SYSTEM, LLC,
Plaintiff, Appellant,
v.
AMERICAN GUARANTEE AND LIABILITY INSURANCE
COMPANY; ZURICH AMERICAN INSURANCE COMPANY,
Defendants, Appellees.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge]
Before
Gelpí, Montecalvo, and Rikelman,
Circuit Judges.
Creighton K. Page, with whom Martin C. Pentz, Laura D. Gradel,
Natalie F. Panariello, Foley Hoag LLP, Dale Jefferson, and Martin,
Disiere, Jefferson & Wisdom were on brief, for appellant Medical
Properties Trust, Inc.
Howard M. Cooper, with whom David H. Rich, Matthew S. Furman,
and Todd & Weld LLP were on brief, for appellant Steward Health
Care System, LLC.
Patrick F. Hofer, with whom Clyde & Co US LLP was on brief,
for appellees Zurich American Insurance Company and American
Guarantee and Liability Insurance Company.
December 19, 2023
MONTECALVO, Circuit Judge. This interlocutory appeal
requires us to decide whether under Massachusetts law the term
"surface waters" as used in a property insurance policy includes
rainwater that accumulated on a parapet roof one or more stories
above the ground. Indeed, the interpretation of "surface waters"
is dispositive of whether the insureds, appellants Medical
Properties Trust, Inc. ("MPT") and Steward Health Care System LLC
("Steward"), are subject to coverage limitations on "Flood" damage
in the policies issued by appellees Zurich American Insurance
Company ("Zurich") and American Guarantee and Liability Insurance
Company ("AGLIC").
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 ("SJC").
Furthermore, existing SJC case law does not point towards a clear
answer and deciding this question requires policy judgments on
applying Massachusetts law to this key insurance coverage issue.
Therefore, for the reasons below, we certify the issue to the SJC
pursuant to Massachusetts SJC Rule 1:03.
I. Background
On June 28, 2020, Norwood Hospital Facility ("the
Hospital"), a building owned by MPT and leased to Steward by MPT,
suffered significant damage after severe thunderstorms passed
through Norwood, Massachusetts. Torrential rain and strong wind
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gusts caused heavy flooding in the basement of the Hospital's two
main buildings. Rainwater also accumulated on the Hospital's roof
and a second-floor courtyard, eventually seeping into the
Hospital's upper floors. As relevant here, some of the Hospital's
buildings have "parapet roofs," meaning a roof enclosed by a wall
surrounding the roof's outer perimeter. Moreover, the rainwater
that inundated the Hospital's upper floors from the roof and
courtyard never reached the earth's natural surface nor any other
ground-level surface before entering the Hospital.
After the storms, MPT sought coverage from its property
insurer, Zurich. Likewise, Steward sought coverage from its
insurer, AGLIC. The Zurich and AGLIC policies contain
substantively identical language on the pertinent coverage and
limitation provisions at issue here. The Zurich policy provides
a total of $750 million in coverage for "damage caused by a Covered
Cause of Loss to Covered Property." The AGLIC policy provides a
total of $850 million in coverage for "damage caused by a Covered
Cause of Loss to Covered Property."
Both policies consider "Flood" a "Covered Cause of
Loss." In relevant part, the policies define "Flood" as:
A general and temporary condition of partial
or complete inundation of normally dry land
areas or structure(s) caused by:
The unusual and rapid accumulation or runoff
of surface waters, waves, tides, tidal waves,
tsunami, the release of water, the rising,
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overflowing or breaking of boundaries of
nature or man-made bodies of water; or the
spray there from all whether driven by wind or
not[.]
(emphasis added). But both policies limit the amount of coverage
for damage found to be caused by "Flood." Specifically, Zurich
limits its "Flood" coverage to $100 million, while AGLIC limits
its "Flood" coverage to $150 million.
In their initial evaluations issued in August 2020,
Zurich and AGLIC determined that water damage in the Hospital's
basement was caused by "Flood," and would be subject to the
policies' respective coverage limits. As for the damage on the
upper floors of the Hospital, Zurich and AGLIC explained that such
damage "appears to have resulted from water intrusion caused by
wind driven rain and/or overflow of roof drains and parapet
flashings." Accordingly, Zurich and AGLIC indicated that they
would "separate the flood damage sustained on the basement and
ground floors . . . from the water intrusion property damage
sustained on the first, second[,] and third floors."
A few months later, MPT and Steward submitted proof of
loss claims to Zurich and AGLIC that each exceeded $200 million.
On December 23, 2020, Zurich responded to MPT's submission by
recognizing that MPT claimed "the full $100 million Flood sublimit
. . . plus an additional $121,033,890 for what MPT identifies as
'Storm'" damage. Contrary to its initial evaluation from August
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2020, however, Zurich stated that it "believes that substantially
all of the building damages that occurred on June 28, 2020 are
subject to the Flood sublimit." In other words, rather than
"separat[ing]" the "Flood" damage in the basement from what it
previously construed as non-"Flood" damage on the upper floors,
Zurich now maintained that "damage from water which entered the
building at ground (or below) levels is subject to the Flood
sublimit, as is water that accumulated on roof areas and then
entered the building." And with respect to the water damage from
the roof, Zurich characterized the cause as "surface water
accumulating on roof areas and subsequently flowing into the
building interior." (emphasis added). Zurich thus interpreted
MPT's claim for $121,033,890 in "Storm" damage as an improper
attempt to circumvent the $100 million "Flood" damage sublimit and
refused to accept the full value of MPT's claim submission.
AGLIC mirrored Zurich's approach in denying Steward's
claim for "$112,218,364 for what [Steward] terms 'Flood' and a
further $90,265,515 for what is termed 'Storm.'" Using the same
language contained in Zurich's response to MPT, AGLIC informed
Steward that it concluded that the water damage was entirely
attributable to "Flood," and it would enforce the policy's $150
million "Flood" sublimit for all damage throughout the Hospital.
On October 4, 2021, Zurich filed suit against MPT seeking
a declaratory judgment that "MPT’s recovery under the Policy cannot
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exceed the Policy’s $100 million sublimit applicable to Flood"
because the damage was caused by "surface water" accumulation.
Meanwhile, on November 23, 2021, Steward sued AGLIC seeking a
declaratory judgment that the $150 million "Flood" coverage limit
did not apply to all of its losses.
Soon after the lawsuits were filed, the district court
held a scheduling conference where the parties agreed that
interpreting the term "surface waters" contained in the policies'
"Flood" definitions should be resolved in early cross-motions for
partial summary judgment. On August 10, 2022, during the hearing
on the partial summary judgment motions, the district court
requested that the parties brief whether its impending decision
should be certified for interlocutory appeal pursuant to 28 U.S.C.
§ 1292(b). The parties jointly agreed that the district court's
ruling on the "surface waters" issue was appropriate for
interlocutory appeal.
On October 19, 2022, the district court issued its order
in Zurich's case against MPT. In granting Zurich's motion for
partial summary judgment, the district court rejected MPT's
argument that "'surface water' is limited to waters flowing
naturally and spreading diffusely over surfaces at ground level."
Instead, the district court concluded that "the term 'surface
waters' is not limited to the accumulation of water on the ground."
As will be explained in further detail below, the district court
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held that "the SJC did not define 'surface waters' to exclude
accumulation of surface waters that are 'constrained' before
flowing on the ground," like water enclosed within the walls of a
parapet roof. A few weeks later, in an order adopting by reference
its decision in Zurich's case, the district court granted AGLIC's
motion for partial summary judgment against Steward.
Shortly thereafter, the district court certified the
present cases for interlocutory appeal under 28 U.S.C. § 1292(b).
These timely appeals followed.
II. Discussion
The SJC permits federal courts to certify questions of
Massachusetts law "which may be determinative of the cause then
pending in the certifying court and as to which it appears to the
certifying court there is no controlling precedent in the decisions
of [the SJC]." Mass. S.J.C. R. 1:03.
Here, it is clear that whether rainwater pooled on a
parapet roof constitutes "surface waters" in the policies' "Flood"
definition is determinative of this interlocutory appeal. But our
conclusion that we lack controlling precedent from the SJC requires
further explanation.
A. This Court's Decision in Fidelity Co-operative Bank v.
Nova Casualty Co.
On appeal, MPT and Steward insist that the district court
made two main errors. First, they argue that the district court
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wrongly treated this court's decision in Fidelity Co-operative
Bank v. Nova Casualty Co., 726 F.3d 31 (1st Cir. 2013) -- where
the parties did not dispute that water accumulated on a parapet
roof was "surface water" under a substantively similar property
insurance policy -- as binding precedent when the "surface water"
discussion in Fidelity was merely dicta. Second, they contend
that the district court adopted an unreasonable interpretation of
"surface waters," contrary to the SJC's definition and precedent,
and wrongly rejected MPT and Steward's plausible interpretation of
the term.
In Fidelity, this court was presented with an "unusual"
circumstance where the insureds' property insurance policy
contained two amendatory endorsements providing coverage for water
damage that would have otherwise been excluded. 726 F.3d at 33,
37. Under the first amendatory endorsement (the "Habitational
Program" endorsement), the policy was amended to cover damage
caused "directly or indirectly, by water that backs up or overflows
from a drain 'regardless of any other cause or event that
contributes concurrently or in any sequence to the loss or
damage.'" Id. at 37. The second amendatory endorsement (the
"Flood" endorsement) "added flood coverage for loss attributable
to '[f]lood, meaning a general and temporary condition of partial
or complete inundation of normally dry land areas due
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to: . . . [t]he unusual or rapid accumulation or runoff of surface
waters from any source.'" Id. at 33 (alterations in original).
The insureds' building was damaged during a storm that
"overwhelmed the rooftop drain, causing the water to pool on the
roof and eventually leak through the building's two skylights."
Id. This court first considered the district court's rejection of
the insureds' argument that water damage from the rooftop drain
failure was covered by the Habitational Program endorsement. Id.
at 35-38. The district court agreed with the insurer that the
policy's "rain limitation," which excluded coverage for damage
"caused by rain," barred coverage despite the Habitational Program
endorsement. Id. at 35. "[B]ecause the water that pooled on the
roof became 'surface water,' that was 'caused by rain,'" the
district court reasoned that the rain limitation precluded the
insureds from invoking the Habitational Program endorsement's
drain failure coverage. Id. at 35-36.
This court held that "it was error for the district court
to conclude that the interior damage was 'caused by rain' and was
excluded from coverage under the rain limitation provision." Id.
at 38. In reversing, we pointed out that the insurer's "own
experts determined that the blocked or inadequate roof drain caused
the 'water to accumulate on the flat roof trapped at the perimeter
by parapet walls.'" Id. Consequently, we held that the damage
was covered under the Habitational Program endorsement, as "[t]he
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failure of the drain must properly be deemed the 'efficient
proximate cause' of the damage, not the rain." Id.The Fidelity court's interpretation of the term "surface
water" was somewhat intertwined with its opening analysis on
whether the rain limitation nullified coverage under the
Habitational Program endorsement. At the outset, the district
court described the rainwater pooled on the parapet roof as
"surface water." Id. at 35, 39. But it contradictorily maintained
that the insureds were not entitled to coverage because it failed
to account for the Flood endorsement's applicability. Id. at 39-
40. This court concluded that, even setting aside the Habitational
Program endorsement, damage caused by "surface water" was covered
under the Flood endorsement and pointed out the district court's
error in neglecting to "consider[] the language of the [Flood]
amendatory endorsement." Id.Here, Zurich and AGLIC reasonably point to Fidelity as
substantive support for their contention that rainwater pooled on
a parapet roof is surface water. MPT and Steward respond by
presenting several compelling reasons for deeming Fidelity's
interpretation of "surface water" to be dicta. For example,
neither party in Fidelity disputed that water pooled on a parapet
roof constituted "surface water." Id. at 39. Relatedly, the
district court's conclusion that the water on the roof was "surface
water" was made "sua sponte" and in a barebones manner. Id. But
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this court saw "no reason to disturb" the district court's "surface
water" ruling, instead reversing because the district court failed
to consider the impact of the Flood endorsement's coverage of
"surface water" damage. Id. So, according to MPT and Steward,
the Fidelity court's interpretation of "surface water" and its
conclusions related to coverage under the Flood endorsement did
not provide direct grounds for its only dispositive holding that
the Habitational Program endorsement covered damage caused by
drain failure.
B. The SJC's Decisions in Boazova v. Safety Insurance Co.
and Surabian Realty Co., Inc. v. NGM Insurance Co.
Regardless of whether we deem Fidelity's discussion of
surface waters to be dicta, a close look at SJC precedent on
"surface waters" makes clear that the present issue is one of first
impression under Massachusetts law. In fact, it is determining
that we lack sufficient guidance from the SJC that leads us to
certify the question. Cf. McKesson v. Doe, 141 S. Ct. 48, 51
(2020) (recognizing that "[t]he Louisiana Supreme Court . . . may
announce the same [conclusion] as the Fifth Circuit," but holding
that the Fifth Circuit erred in failing to certify the question in
the first place).
In Fidelity, this court highlighted two SJC cases
interpreting "surface waters" that were decided during the
appeal's pendency: (1) Boazova v. Safety Insurance Co., 968 N.E.2d
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385 (Mass. 2012), and (2) Surabian Realty Co., Inc. v. NGM
Insurance Co., 971 N.E.2d 268 (Mass. 2012). In both cases, the
SJC held that water pooled on an artificial surface, either at
ground level (rainwater on a paved parking lot in Surabian Realty)
or slightly elevated above the ground (rain and melted snow on a
low backyard patio in Boazova), constituted "surface waters."
Surabian Realty, 971 N.E.2d at 271–72; Boazova, 968 N.E.2d at 393.
As the Boazova court explained, the SJC has defined
"surface waters" as: "waters from rain, melting snow, springs, or
seepage, or floods that lie or flow on the surface of the earth
and naturally spread over the ground but do not form a part of a
natural watercourse or lake." 968 N.E.2d at 392 (quoting DeSanctis
v. Lynn Water & Sewer Comm'n, 666 N.E.2d 1292, 1295 n.6 (Mass.
1996)). In Boazova, the insured's home was "built against the
side of a hill and supported by a concrete foundation, with a full
basement and garage below the house." Id. at 387. The insured's
backyard patio "was built along the rear wall of the house at a
grade that was higher than the home's foundation." Id. at 387–
88. Because "the patio was higher than the grade of the house's
foundation, the water that accumulated thereon . . . flowed along
the patio and seeped into [the insured's] house." Id. at 393.
Although the water on the patio did not reach the earth's natural
surface before entering the home, the court held that "[t]he mere
migration of water from the patio into the wooden sill, floor
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joists, and wall studs did not change its essential character as
'surface water.'" Id.Similarly, in Surabian Realty, "heavy rains collected in
the parking lot" of a commercial building "and seeped under the
door of the building, flooding its lower level." 971 N.E.2d at
270. Citing Boazova and the SJC's definition of "surface waters,"
the Surabian Realty court concluded that "[r]ain that collects on
a paved surface, such as a parking lot, retains its character as
surface water[,] . . . even when, but for an obstruction, the water
would have entered a drainage system." Id. at 272. As such,
because the insurance policy excluded "surface water" damage, the
Surabian Realty court held that the insurer properly denied
coverage. Id. at 274-75.
The Fidelity court relied on Boazova and Surabian Realty
to bolster its decision not to disturb the district court's
conclusion that rainwater pooled on a parapet roof was also
"surface water." But the extent to which the Fidelity court
actually analyzed (or needed to analyze) the underlying facts and
reasoning in those cases is debatable. As detailed above, the
insured in Fidelity conceded that the water on the roof was
"surface water," and this court's determination that the Flood
endorsement covered "surface water" damage was ancillary to its
initial holding that the Habitational Program endorsement covered
drain failure damage. More importantly, the SJC has not addressed
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whether rainwater that collects on a roof without reaching the
earth's natural surface constitutes "surface water."
And despite Boazova and Surabian Realty, "we cannot say
that the course that the SJC would take is reasonably clear."
Easthampton Sav. Bank v. City of Springfield, 736 F.3d 46, 51 (1st
Cir. 2013). For example, courts in other jurisdictions that have
encountered the question of whether water pooled on a roof -- as
opposed to other artificial surfaces at ground level -- is "surface
water" have reached divergent conclusions. Compare Cochran v.
Travelers Ins. Co., 606 So. 2d 22, 24 (La. Ct. App. 1992) (holding
that "surface water" does not "encompass . . . rainwater, falling
from the sky, overflowing the rooftop and seeping into the interior
of the building from the 'roof, its gutters, and the metal capping
on the roof'"), with Martinez v. Am. Fam. Mut. Ins. Co., 413 P.3d
201, 206 (Colo. App. 2017) (concluding that a rooftop is "a mere
continuation of 'the earth's surface,'" such that water pooled on
the roof is "surface water" under a similar definition to the one
adopted by the SJC (quoting Heller v. Fire Ins. Exch., 800 P.2d
1006, 1008 (Colo. 1990))).
Given that interpreting "surface waters" in the context
of water pooled on a roof is determinative of the case and it is
not clear from existing case law how the SJC would resolve this
issue, we are well within our discretion to order certification.
See Easthampton Sav. Bank, 736 F.3d at 51 ("The course that the
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state court would take is not reasonably clear when a case
'presents a close and difficult legal issue.'" (quoting In re
Engage, Inc., 544 F.3d 50, 53 (1st Cir. 2008))); Bos. Gas Co. v.
Century Indem. Co., 529 F.3d 8, 15 (1st Cir. 2008). But we also
think certification is warranted for an additional reason. In
particular, "resolution may require policy judgments about the
applicability of Massachusetts law that the SJC is in the best
position to make." In re Hundley, 603 F.3d 95, 98 (1st Cir. 2010).
Therefore, the certification mechanism prudently allows us to
provide the SJC with an opportunity to apply its law and policy
judgments on this important, undecided issue.
III. Conclusion
The question below will be certified to the
Massachusetts SJC for its consideration:
Whether rainwater that lands and accumulates on
either (i) a building's second-floor outdoor rooftop
courtyard or (ii) a building's parapet roof and that
subsequently inundates the interior of the building
unambiguously constitutes "surface waters" under
Massachusetts law for the purposes of the insurance
policies at issue in this case?
We welcome any further guidance from the SJC on any other
relevant aspect of Massachusetts law that it believes would aid in
the proper resolution of the issues presented here.
The clerk of this court is directed to forward to the
Massachusetts SJC, under the official seal of this court, a copy
of the certified question, this opinion, the district court's
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opinion, and the merits briefs and appendices filed by the parties.
We retain jurisdiction over this case pending resolution of this
certified question.
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