Whether damage caused by rainwater escaping from a drainage system was excluded as "surface water" or flood was the issue before the court in M  and M Corp v. Auto-Owners Ins. Co., 2010 S.C. LEXIS 326 (S.C. Oct. 11, 2010).

   The insured owned a hotel located along a street that was being improved by the installation of a new underground storm water drainage system.  Heavy rains hit before construction was completed, causing significant water damage to the insured's hotel due to the rainwater exiting the drainage system.  As water left the drainage system, it pooled in the hotel parking lot, reaching sufficient depth to enter the hotel and cause damage.

   The insurer denied coverage based on surface water and flood exclusions.  Consequently, the insured filed suit in federal court.  The district court certified the following questions to the South Carolina Supreme Court:

   1.  Under an all-risk policy, does "surface water" encompass rainwater collected and channeled in a storm water collection system?

   2.  If the answer to Question 1 is no, can such non-surface water reacquire its classification as surface water upon exit from the storm water collection system and, if so, under what circumstances?

   3.  Under an all-risk policy, does "flood water" encompass water discharged from a storm water collection system in concentrated form, pooled, and that thereafter enters a building?

    The South Carolina Supreme Court answered all certified questions in the negative.  Addressing whether the collected water was "surface water," the court noted that while the water was surface water before it was collected in the storm water system, it then was concentrated and cast onto the insured's property.  Once surface water was deliberately contained, concentrated, and cast onto an adjoining landowner's property, it was no longer naturally flowing, diffuse water.

   Second, the water did not become surface water again under the policy once it was discharged from the pipe. 

   Finally, the water was not "flood water."  Flood water meant the waters had to breach their containment, either as a result of a natural phenomenon or a failure in a man-made system such as a levee or a dam.  The water here did not breach containment, but instead was deliberately channeled and cast upon the insured's land.