Is a groundwater breach at a construction site considered an "insurance event"?
Dec 10, 2017
By: John Geva and Shlomi Hadar – Attorneys and Mediators
The Supreme Court reviewed an appeal and a cross-appeal by Ayalon Insurance Company Ltd. (“the Appellant” – “the Respondent in the Cross-Appeal” – “Ayalon”) against Malibu Construction Ltd. (“the Respondent” – “the Appellant in the Cross-Appeal” – “Malibu”). The judgment was delivered in November 2017 by Honorable Justices Y. Danziger, N. Handel, and E. Fogelman.
Case Facts: The appeal concerned work carried out by Malibu for the construction of an underground road, during which groundwater breached the underground construction site, flooding it and causing various expenses and damages.
Claims of the Parties: Malibu argued that these expenses and damages were covered under the insurance policy it purchased from Ayalon Insurance – the Appellant and Respondent in the cross-appeal – the insurer.
Malibu contended that it was not obligated to prevent every possible intrusion of groundwater and that no scenario of groundwater breaching the excavation, however exceptional, could have been foreseen. The groundwater that flooded the site was of a special and unusually strong type that was not expected in the soil even according to preliminary assessments, and the pumping and sealing operations required under the tender conditions could not have prevented the intrusion and flooding.
Ayalon, on the other hand, argued that no insurable event occurred that would entitle the insured to benefits, and therefore it was not liable for the expenses and damages incurred by Malibu.
Ayalon further claimed that Malibu had undertaken the responsibility to pump all groundwater found in the soil, and therefore all risk associated with groundwater intrusion and the need to pump it lay with Malibu, unless such events constituted an insurable event. In addition, Ayalon argued that an “insurable event” is defined as damage that is unforeseen, and that the scenario of the construction site being flooded by groundwater was foreseeable, and therefore not covered by the policy.
District Court Decision
The district court accepted Malibu's principled position and awarded it compensation for most of the damages it claimed.
Ayalon appealed on the basis of her actual liability and the amount of damages, while Malibu appealed on the basis of some of the elements of her claim that were rejected.
The Supreme Court's ruling: It was determined that the heart of the dispute between the parties is the question of whether the water breach at the work site is an "insurance event" according to the contract entered into between them.
This question has two aspects: One aspect is the interpretation of the contract – what are the cases that constitute an insurance case. The second aspect is the factual question: What is the reason for the groundwater breaching the project site carried out by Malibu? Is this an unusual event according to the data that was known at the time the contract was concluded, or is the groundwater that penetrated the excavation nothing more than the same water that Malibu undertook to “degrade” in a way that would allow the underground construction work to be carried out when the ground was dry, and whose existence it was aware of in principle?
The court noted that a contract expresses, among other things and as a rule, the manner in which the parties divided the various risks between them, more clearly in relation to an insurance contract.
Such a contract is designed to deal with risk sharing, in which the insurance company assumes the risk of the insured events occurring, while the insured assumes the risk of causing damages not covered by the policy. In interpreting the contract, it is necessary to examine the risks assumed by each party.
The main difficulty in the case lies in the second aspect – what is the reason for the groundwater breach at the project site carried out by Malibu. The basis for the interpretative dispute between the parties is found in the definition of an "insured event" according to the contract: "Sudden and unforeseen physical loss or damage to the work site for the project or part thereof, for any reason not excluded under this policy."
A necessary condition for the insurer to be liable for the flooding that occurred and the damages that were caused is that they were " sudden and unforeseen in advance, " and the question is whether the events that are the subject of the appeal were sudden and unforeseen, or not.
The court rejected Ayalon's interpretation, according to which, in terms of groundwater, even the unexpected is considered expected. The wording of the circular does not support the interpretation that Malibu assumed the risk of any groundwater intrusion, even if it is exceptional and extremely rare. In contrast, the language of the contract is consistent with Malibu's interpretation, according to which it assumed the risk only with respect to groundwater intrusion that was explicitly discussed at the time the contract was concluded, but not with respect to exceptional and rare scenarios of groundwater intrusion into the project site.
The Supreme Court noted that the District Court's conclusions regarding the acceptance of the opinion of Malibu's experts are well-founded in the factual foundation presented. The District Court determined that the work carried out by Malibu to degrade the groundwater met the required standards, and there is no reason to interfere with the District Court's factual determinations in this matter.
The Supreme Court concluded that the relevant professional authorities believed that the work carried out to deal with the groundwater situation met the established professional standard, and if water nevertheless broke out – in a significant and destructive manner – this must be attributed to an exceptional event that was not anticipated at the time of planning and carrying out the work. Therefore, the water breaking event amounts to an "insurance event", which is included in the insurance policy that Malibu had.
Ultimately, the court dismissed the appeal and the cross-appeal without an order as to costs.
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