Quote from @Greg M.:
State and local laws will apply. Generally you would not have liability since there was no negligence on your part. You didn't know of the leak and had no reasonable suspicion that there was a leak. This is one of those "no one is to blame" things that happen in life.
My guess is that their insurance company is missing some facts. This wasn't an issue that went uncorrected and caused a problem. This was an issue that was undetectable and unforeseeable to the average person and it caused damage. They need to appeal the decision with clearer facts.
Their losses appear limited to the moving expenses. Their temp housing was already covered by you not charging rent. If they spent more, that's on them.
Assuming their insurance company refuses to pay, you can try submitting their expenses to your insurance company and see if they will pay. If it's not too much and they are good tenants, you can offer to split the expenses with them as a gesture of good will.
@Greg M., thank you for your reply. I spoke with their insurance after the tenants moved back in. They wanted a report from my plumber which basically said it was a faulty drain(not sure why they didn’t ask for that before the tenants moved out). He wanted to know if it was due to a leak in the wall with the a water pipe, which it was not. The largest part of the bill not covered was the moving of their furniture in and out. I believe it was roughly $6,000.00. Early on, I spoke with our insurance company and our policy did not cover the tenant’s moving expenses or temporary housing. I had our tenants confirm with their insurance company that they covered moving expenses and temporary housing as soon as I found out we would need to have the floors replaced. They did get confirmation prior to moving out and they filed a claim. A little over a month after they moved back in, their insurance company said they needed more information to finalize the claim, which is when they requested the report from our plumber.
