“Earth Movement” Exclusion Ambiguous

In Pioneer Tower Owners Ass'n v. State Farm Fire & Cas. Co., 2009 WL 1148649 (N.Y.), the plaintiff, the owner of a condominium apartment building, sought recovery under an insurance policy for damage to its building that resulted from an excavation on an adjacent lot.

After cracks began appearing in the building, a structural engineer was called in and found a number of cracks, separations, and open joints. The engineer concluded that they were caused by work that was being performed on the lot being excavated next door. According to the engineer, the underpinning which had been built to protect the foundation of plaintiff's building was flawed, and, as a result, earth slid away beneath the plaintiff's building, causing damage.

Plaintiff submitted a claim for the damage to defendant State Farm Fire & C1asualty Company, which had insured the building against “accidental direct physical loss.” Defendant disclaimed coverage, relying on the “earth movement” exclusion in its policy.

The supreme court ruled in the plaintiff's favor on the issue of liability, and, after a stipulation as to the amount of damages, entered judgment for plaintiff. The Appellate Division modified the judgment to add a declaration in plaintiff's favor, and otherwise affirmed. The appeals court granted leave to appeal.

In its holding, the appeals court began by explaining that the law governing the interpretation of exclusionary clauses in insurance policies was highly favorable to insureds, and before an insurance company was permitted to avoid policy coverage, it must satisfy the burden of establishing that the exclusions or exemptions apply in the particular case, and that they were subject to no other reasonable interpretation.

The defendant argued that the literal language of the exclusions described what happened here, and the earth movement exclusion applied because the loss was caused by the movement of earth, specifically by its “sinking” and “shifting” beneath plaintiff's building. And, according to the defendant, the settling or cracking exclusion applied because the loss consisted of cracking that was directly and immediately caused by the settling of the building (which was in turn caused by the excavation).

The plaintiff argued, however, that a literal reading of the words did not give the meaning that an ordinary reader would assign to these exclusionary clauses. As to the earth movement exclusion, the plaintiff stressed the examples of earth movement given in the policy-“earthquake, landslide, erosion and subsidence.” Plaintiff argued that an excavation—the intentional removal of earth by humans—was a different kind of event from an earthquake and the other examples given, and that when specific examples were mentioned those not mentioned should be understood to be things of the same kind.

Similarly, plaintiff argued that the settling or cracking 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 concluded that it could not definitely say that the event that caused the plaintiff's loss was unambiguously excluded from the coverage of this policy. Therefore, the court affirmed the lower court's judgment, holding that the “earth movement” and “settling [or] cracking” exclusions in the plaintiff's coverage were ambiguous and thus required narrow constructions resulting in coverage, as both the insured's narrow construction and the insurer's broader literal reading were reasonable.