$3.7 million pool damage claim not insured because of business risk and professional liability exclusions (US case)

An insurance coverage dispute arose out of the construction of a “disappearing floor pool” at a residential home in Montana, US. The pool and spa included several water features such as an infinity edge, a basin to catch water overspilling the edge (a “vanishing edge basin”), a movable and disappearing pool and spa deck, a waterslide and a firepit. The insurance claim by the constructor was rejected because the insured designed the system. It was not covered because of a business risk exclusion for “property damage to that particular part of real property on which you are performing operations if the property damage arises out of those operations”. The claim was also excluded because of a professional liability exclusion of cover “arising out of the rendering of or failure to render any professional services by you, but only with respect to your providing engineering, architectural or surveying services in your capacity as an engineering, architect or surveyor”.

Extraordinarily, the insured had not previously built a floating floor pool and to avoid paying an engineer, designed a nine-ballast-tank system based on information found on YouTube. The design failed immediately. The floor would not raise or lower evenly and jammed inside the pool shell, damaging the pool shell and wood flooring. The aluminium tanks began to corrode due to contact with chlorine, 15 000 gallons of water were released down the hillside below the pool every time the floor was moved, eroding the soil and requiring the installation of riprap.

The court rejected the submission that the insured was not performing engineering services because they took the design off YouTube. It also rejected the argument that the “particular part” that was worked on at the time the damage occurred was the floating floor. The pool shell, aluminium tanks, spa frame, and deck floor were all part of the floating floor pool system on which the insured continued to work when the damage occurred. The floating pool floor could not be separated from its component parts and was therefore “your work”. The insured succeeded in getting coverage for the hillside erosion. The court rejected the insurer’s submission that the erosion was excluded by a subsidence exclusion. On the plain language of the exclusion, coverage was excluded if the property damage alleged was caused by subsidence, natural or manmade. But here, the damage was not caused by subsidence. The damage was the subsidence. The flooding caused the soil below the pool to erode. It was not the case where erosion of the hill below the pool caused damage to the pool foundation. The exclusion did not bar coverage.

A similar decision is likely to be reached on similar facts by a South African court.

[Nautilus Insurance Co v Farens and Others, case no 9:22-cv-00193 in the US District Court for the District of Montana (01 March 2024)]

First published by: Financial Institutions Legal Snapshot