A builders risk policy, subject to specific exclusions, insured against "all risks" of direct physical loss of or damage to the property insured from any external cause." It excluded, among other contingencies, loss or damage "caused by or resulting from....extremes of temperature" or "caused by....freezing." The basement of the covered building filled with 13 feet of water when a sprinkler head froze and ruptured in December. Mechanical and electrical equipment was damaged and there was structural damage to the building.

The insured sued the insurer when it denied liability on the basis of the freezing exclusion. A trial court granted summary judgment in favor of the insured. The New York Supreme Court, Appellate Division reversed in favor of the insurance company, determining that the loss was caused by freezing. The issue as to whether or not the exclusion was applicable was presented to the New York Court of Appeals.

The court said that "....a reasonable business person would conclude in this case that the plaintiff's loss was caused by water damage and would look no further for alternate causes." In support of the conclusion, the court stressed that the pertinent exclusion specifically applied to damage "caused by" freezing. It was not broadened by terminology such as "arising directly or indirectly from" or "resulting from."

With dissenting opinion, the court reversed in favor of the insured and against the insurance company.

(ALBUM REALTY CORPORATION ET AL., Appellants v. AMERICAN HOME ASSURANCE COMPANY, Respondent. New York Court of Appeals. November 24, 1992. CCH 1993 Fire and Casualty Cases, Paragraph 4193.)