Is a Flooding of Groundwater a Foreseen Event in a Construction Policy?

C.A 8776/15 Ayalon Insurance Company Ltd v. Malibu Construction Company (December 2017).

Background

In 2006, the Malibu Construction Company (hereinafter – “the contractor“) won a tender for the construction of an underground passage under the railway tracks in Akko.  Attached to the tender there was a professional opinion of a soil engineer stating that groundwater might be found at the worksite, and after trial drillings next to the work site, groundwater was found at a certain depth. Therefore, prior to paving the road, the tender related specifically to work which should be carried out aiming at “lowering” the groundwater level. The contractor carried out the above work, but in April 2009, during excavations 10 meters below ground level, ground water suddenly flooded vigorously into the work site, and the contractor was required to re-pump the groundwater. In November 2009 additional damage occurred as a result of the infiltration of groundwater through the sealing layers that were built. This led the contracting company to carry out many repairs, amounting to a total damage of approx. NIS 13.3 million as assessed by the loss adjuster.

Prior to the commencement of the work, an insurance contract was issued by Ayalon, the Insurer of Malibu. The contract stipulated that the Insureds will be entitled to insurance benefits following an insurance event, which was defined in the policy, as: “sudden and unforeseeable physical damage”. The Insurer argued that as part of the allocation of risks between the Insurer and the insured, the contractor should be responsible for any damage caused by the flooding of groundwater. According to the Insurer, prior to the commencement of the construction work it was known that groundwater existed and therefore any damage caused as a result thereof is foreseeable and not covered. The Insured denied the above and claimed that the policy did not include any exclusion for groundwater damage. Moreover, the event of the breakthrough of the groundwater was a specific, sudden event that caused unforeseen physical damage. The Lod Central District Court (Judge Oren Schwartz) determined that the controversy lies in the interpretation of the insurance contract, and it should be interpreted in a manner that is consistent with the object of the insurance policy. Based on expert opinions presented, the court found in favor of the Insured. The court accepted most of the heads of damage and ruled that Ayalon should indemnify Malibu in the amount of NIS 7.3 million. Following the above judgement, Ayalon appealed to the Supreme Court.  Supreme Court Decision The Supreme Court Judges unanimously decided to decline the appeal. Their ruling was based on the “contract language”, which reflects the manner in which the parties allocated the risk. The District Court found as a fact, based on the evidence and the documents presented by the parties, that the contractor’s work to reduce the groundwater in 2006 had met the required standards. Hence, the outbreak of the water afterwards, was unexpected. The Supreme Court accepted said ruling and confirmed the conclusion that that the underground water flooding was unforeseeable. The Supreme Court noted that the professional bodies of the contractor thought that the works performed for handling the groundwater problem were appropriate, the risk of groundwater flooding in 2006 was removed and the additional damage caused by the groundwater in April 2009 and November 2009 was unforeseen and therefore covered. The Court therefore declined the appeal.  Conclusion  When the court examines whether the insurance event had occurred, it examines first of all the language of the contract in search for purpose of the contract according to the parties’ intention prior to the occurrence. The court also declined the Insurer’s allegation that the flooding damage was not physical and ruled that in the absence of any indication in the policy or in the circumstances prior to its conclusion, the simple meaning of the term “physical damage” includes also flooding damage.