In the October 20, 2008 edition of the Insurance Advocate I wrote about the evolution of the earth movement exclusion in property insurance policies. I pointed out that insurance companies interpret the latest ISO version of the exclusion to exclude losses resulting from excavation work on adjoining premises that destabilizes the foundation of the insured’s building. The New York Court of Appeals (the highest court in the state of New York) has just weighed in on the issue when it decided Pioneer Tower Owners Association. v. State Farm Fire & Casualty. Co.,2009 NY Slip Op 03409 (Ct.App., April 30, 2009).
The court described the claim as follows: “Plaintiff (Pioneer Tower) is the owner of a condominium apartment building. After cracks began appearing in the building, a structural engineer was called in. He found a number of cracks, separations and open joints, and concluded that they were caused by work that was in progress on the lot next door. That lot was being excavated, and underpinning had been built to protect the foundation of plaintiff ’s building. The engineer concluded, and it is undisputed in this case, that the underpinning was flawed, and that as a result earth slid away beneath plaintiff ’s building, causing damage.”
The insurance company argued that the exclusion in its policy eliminated claims for damages due to earth movement. Earth movement was defined in the policy as follows: “b. earth movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, erosion, and subsidence but does not include sinkhole collapse. The insured argued that “that the…exclusion would not be thought, by an ordinary reader, to apply to settling or cracking that is the immediate and obvious result of some other event, such as the intentional removal of earth in the vicinity of the building.”
The court stated that both the insured’s and the insurance company’s interpretations were reasonable. Law in New York (and most other states) is clear that when policy wording is subject to two wordings, one favoring the insured and the other the insurance company, the wording favoring the insured prevails. The judges in this case wrote that “The law governing the interpretation of exclusionary clauses in insurance policies is highly favorable to insureds.” They cited a previous New York case, Seaboard Surety Co. v Gillette Co. (64 NY2d 304 [1984]), which reads as follows: “[W]henever an insurer wishes to exclude certain coverage from its policy obligations, it must do so in clear and unmistakable language. Any such exclusions or exceptions from policy coverage must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction. Indeed, before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation.”
The court unanimously ruled in the latest case that “…policy exclusions for ‘earth movement’ and ‘settling [or] cracking’ did not unambiguously remove this event from the policy’s coverage.” The wording in the State Farm policy is similar, but not identical, to the wording used the in the latest ISO commercial property forms. ISO wording excluding earth movement read as follows in CP 10 30 12 07 (the most recent form) Earth sinking (other than sinkhole collapse), rising or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations ditions include contraction, expansion, freezing, thawing, erosion, improperly compacted soil (emphasis added) and the action of water under the ground surface.
The emphasized words, “improperly compacted soil”, do not appear in the State Farm policy. I saw the report of this case in Tom Bower’s newsletter and I emailed him about ISO wording.1 He replied that he didn’t think it would affect a case based on these circumstances, but that we’d have to wait and see what a court does when faced with the issue.
Interestingly, the ISO Homeowners 3 form (HO 00 03 10 00) contains broader exclusionary language in its earth movement exclusion, as follows: caused by or resulting from human or animal forces or any act of nature (emphasis added) unless direct loss by fire or explosion ensues
There are two learning points for us:
1. When you’re faced with a declination for coverage based on the earth movement exclusion you want to alert the insured and the insurer to this case and similar ones that the Appeals Court cited.
2. Any coverage declination has to be looked at carefully. The insurance company may have a perfectly reasonable interpretation of the policy wording; nevertheless, if a different reasonable interpretation of the wording favors the insured, the insured is entitled to coverage. A client used a baseball analogy to clarify the ambiguity doctrine2 for himself when we were discussing a debris removal claim coverage issue. He said, “In c
