Court Opinion

ID: 9911284
Source: CourtListenerOpinion
Date Created: 2023-12-19 20:01:02.553839+00
Date Added: 2024-06-11T12:57:51.904793
License: Public Domain

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

                                         - 9 -
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

                                  - 11 -
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

                                  - 12 -
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

                                     - 14 -
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

                              - 15 -
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

                                     - 16 -
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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