Friday, May 1, 2009

Tie Goes to the Runner -- New York Court of Appeals Construes Settling or Cracking and Earth Movement Exclusions Narrowly

Pioneer Tower Owners Assn. v. State Farm Fire & Cas. Co.

(Ct. Apps., decided 4/30/2009)

When the New York Court of Appeals speaks on an insurance coverage issue, sit up and pay attention. This is only the eighth time in just over a year that our highest state court has issued a decision regarding insurance.

The case involved two property insurance policy exclusions: (1) the "earth movement" exclusion; and (2) the exclusion for "settling, cracking, shrinking, bulging or expansion". Plaintiff owned 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 that the underpinning was flawed, and that as a result earth slid away beneath plaintiff's building, causing damage.

State Farm denied coverage based on the policy's earth movement exclusion, which provided:
We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.
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.
But if accidental direct physical loss by fire, explosion other than explosion of a volcano, theft or building glass breakage results, we will pay for that resulting loss.
The motion court and Second Department, Appellate Division, found that the exclusions State Farm relied upon to deny coverage, including the earth movement exclusion, did not clearly and unambiguously apply to the plaintiff's loss to negate coverage. The parties stipulated to damages in the amount of $122,500 and judgment was entered in favor of plaintiff. The Court of Appeals granted leave to appeal.

On appeal, State Farm asserted and argued that several exclusions, including the earth movement exclusion, applied to negate coverage for plaintiff's loss. The Court addressed only two of those exclusions in its decision: the earth movement exclusion; and the policy's settling, cracking etc. exclusion, which provided:
We do not insure for loss either consisting of, or directly and immediately caused by, one or more of the following: ....
f. settling, cracking, shrinking, bulging or expansion.
But if accidental direct physical loss by any of the "Specified Causes of Loss" or by building glass breakage results, we will pay for that resulting loss.
None of the 14 "Specified Causes of Loss" was present in this case.

In AFFIRMING the declaration in favor of coverage, the Court of Appeals started with its well-established and longstanding rule for interpreting policy exclusions:
The law governing the interpretation of exclusionary clauses in insurance policies is highly favorable to insureds. We said in Seaboard Sur. Co. v Gillette Co. (64 NY2d 304 [1984]):
"[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."
(Id. at 311 [citations and internal quotation marks omitted; see also Cone v Nationwide Mut. Fire Ins. Co., 75 NY2d 747, 749 [1989] [exclusions from coverage "construed strictly against the insurer"]; Breed v Insurance Co. of N. Am., 46 NY2d 351, 353 [1978] ["ambiguities in an insurance policy are to be construed against the insurer, particularly when found in an exclusionary clause"].) We have enforced policy exclusions only where we found them to "have a definite and precise meaning, unattended by danger of misconception ... and concerning which there is no reasonable basis for a difference of opinion" (Breed, 46 NY2d at 355).
Acknowledging that "[t]his case is a close one", the Court was "unable to say that the event that caused plaintiff's loss was unambiguously excluded from the coverage of this policy."

State Farm had argued for a literal interpretation of the asserted exclusions, pointing out that plaintiff's own engineer had reported "that the left wing of the building ... had settled ... as evidenced by the cracking and lateral displacement of the structure."

Plaintiff argued, however, that a literal reading of the words would not give the meaning that an ordinary reader would assign to the exclusionary clauses. As to the earth movement exclusion, plaintiff stressed the examples of earth movement given in the policy — "earthquake, landslide, erosion and subsidence", and argued that an excavation — the intentional removal of earth by humans — is a different kind of event from an earthquake and the other examples given. Plaintiff contended that when specific examples of excluded causes are mentioned in a policy, those not mentioned should be understood to be things of the same nature or kind. Plaintiff argued that if the drafter of the policy had intended to bring excavation — an obvious and common way of moving earth — within the scope of the earth movement exclusion, why was it not listed as an example while less common events were listed?

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. Read literally, the exclusion would apply, for example, where a refrigerator fell over and cracked a wall, but that can hardly have been the intent of the policy's drafters, plaintiff argued.

With little analysis, and relying on two First and Second Department decisions, as well as one from the federal District Court of Minnesota, the Court of Appeals held:
We conclude that both plaintiff's and defendant's readings of the clauses are reasonable. Our precedents require us to adopt the readings that narrow the exclusions, and result in coverage. As to the earth movement exclusion, our holding is also supported by precedent which, though not binding on us, is directly on point. Two Appellate Division cases and one federal district court decision have held that earth movement exclusions using identical language are not applicable to losses caused by excavation (Lee v State Farm Fire & Cas. Co., 32 AD3d 902 [2d Dept 2006]; Burack v Tower Ins. Co. of N.Y., 12 AD3d 167 [1st Dept 2004]; Wyatt v Northwestern Mut. Ins. Co. of Seattle, 304 F Supp 781 [D Minn 1969]). The parties have cited no case, and we have found none, applying the earth movement exclusion to intentional earth removal.
Like in baseball, a tie goes to the runner. If an exclusion is subject to two, competing but equally reasonable interpretations, a New York court will construe it narrowly in favor of coverage.

Policy drafters, such as the Insurance Services Office, reacted years ago to case law construing the earth movement exclusion not to apply to man-made causes. The October 2000 edition of the HO-3 form, for example, provides:

A. We do not provide insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area.

2. Earth Movement

Earth movement means:

a. Earthquake, including land shock waves or tremors before, during or after a volcanic eruption;
b. Landslide, mudslide or mudflow;
c. Subsidence or sinkhole; or
d. Any other earth movement including earth sinking, rising or shifting;
caused by or resulting from human or animal forces or any act of nature unless direct loss by fire or explosion ensues and then we will pay only for the ensuing loss.
As always, check your policies.


Roy A. Mura said...

Although I had already seen this decision on the New York Official Reports website, plaintiff's counsel, Lawrence Kushnick, of Melville, New York, discussed and summarized the decision and his assessment of its impact about it yesterday afternoon in a long comment attached to an unrelated post. I did not publish that comment because it would have been out of place. Instead, I invite Mr. Kushnick, if he would like to add anything to my summary of this decision, to comment here.

Anonymous said...

I don't get it - The courts expect a contract dumbed down to be unambigous to the level of someone not competent to enter a contract in the first place.

Why go after the property policy anyway - why not those responsible for the deliberate excavation and/or design/installation of the underpinning?

Lawrence Kushnick said...

It has been recognized that the genesis of the "earth movement exclusion" was to protect carriers from coverage from large scale natural disasters from which there was no suborgation opportunity to recoup the covered loss. Interestingly, if an insured wants to remove the "earth movement exclusion" and the carrier agrees, the insured is offered the opportunity to purchase an "earthquake endorsement". The exclusion was never intended to exclude man-made losses. State Farm attempted to stretch this excusion via the utilization of "lead-in" or anti-concurrent cause language, thus attempting to take the question of proximate cause out of the equation and excuding coverage "regardless of cause." This modification and interpreation was too broad. It comes down to the reasonable expectations of an ordinary reader. Twisting an earthquake/natural disaster exclusion to cover man-made causes was outsie the bounds of reasonable expectations.

Roy A. Mura said...

I understand the point, but that's not exactly what the Court of Appeals held, Lawrence. It did not find State Farm's proposed interpretations to be unreasonable, but instead found that "both plaintiff's and defendant's readings of the clauses are reasonable[.]" Ruling went against State Farm because, as the title to this post indicates, a tie (in competing reasonable interpretations) goes to the runner (insured).

max gershweir said...

The Court's determinations as respects the earth-movement and settling exclusions, although disappointing from my point of view, did not surprise me. What did surprise me in this case was the insurer's failure to more assertively rely on the faulty-workmanship exclusion. I believe it made passing reference to that exclusion in its initial moving papers, abandoned it in the App Div, failed to cite it explicitly in its motion for leave and again referred to it only in passing in its brief to the Court of Appeals. The Court of Appeals' decision is not clear as to whether it declined to address that exclusion on preservation grounds (the insured did argue it was unpreserved). The Court states in that regard, "In litigation, defendant and amici supporting it rely not only on the earth movement exclusion but on several others, of which we think only one [the settling exclusion -- which the insurer raised throughout the litigation] requires discussion." Perhaps Mr. Kushnick can illuminate us on what he thinks the Court meant by that.

While the First Dep't, in 242-44 East 77th Street, LLC v. Greater New York Mutual Insurance Co., 31 A.D.3d 100 (1st Dep’t 2006), found the exclusion applies only to work by or for the insured, e.g., not third-party excavation work on neighboring property, that decision was one of the most poorly reasoned I've encountered, and it conflicts with published decisions in four foreign jursidictions -- including two decided after 242-44 -- and two NY Supreme Court decisions from 2d Dep't counties, not to mention the exclusion's plain language. Given that, I think it was mistake for the insurer in this case not to rely just as heavily on the faulty-workmanship exclusion as it did on the earth-movement exclusion.

DLev said...

It doesn't even need to be a tie before the insured (runner) wins. The "no other reasonable interpretation standard" does not consider reasonableness to be a matter of degree. The insurance company's interpretation seems the more reasonable one. Nothing outside of the language of the exclusion is needed to justify the denial, and the full context of the exclusion does not manifest an intent that it apply only to naturally caused earth movement and not to man made caused earth movement. The insured's argument adds a causal inquiry that is not compelled by the context, but which could be found to exist without violating any rules of logic or language. I wouldn't call that a tie. A horseshoes analogy better assesses the situation. If the exclusion is not a "ringer", an insured's throw that is "close enough" will beat a "leaner."

Raymond Zuppa said...

Every insurance company knows that the tie will go to the insured. The insurance company is sophisticated party [cite] The insurance company is in the best position to bear the burden [cite]

Believe it or not I worked for a year at MetLife's Legal Division. Pretty high up. All transactional work. I handled the company's group policies: long term care, disability and dental products. My clients were AARP and fortune 500 companies like Raytheon. These were big contracts. A word or two had big ramifications. There was meeting after meeting over a word or two. It is drilled into your head day in and day out -- make it clear because if its not clear you lose.

My point -- it could have been clearer on SF's part.

A good decision. Pay the man. Your actuary has accounted for this in your premiums. "Like a good neighbor" we try to punk out.

Anonymous said...

It seems a fair amount of you believe the SF language was clear. From a practical stand point, don't you think the average person that buys a home owner's policy expects damage caused to the building by someone else to be a covered loss? Is there not a legitimate difference between the movement of earth and the "removal" of earth by a third party? If so, doesn't that mean the policy reasonably could be interpreted as not applying to "removal"?

DLev said...

Re Anonymous 5/10/09

State Farm’s language is not perfectly clear, but it is clear enough to resolve the very real issue presented in favor of the exclusion applying. A difference exists between the movement of earth caused by force of nature and caused by removal of earth by a third party. But does that difference affect whether the earth movement exclusion applies? Under the standard applied by the court, it does affect the outcome – not because State Farm’s argument is worse or equal in force to the insured’s argument, but because the argument for the exclusion not applying is a reasonable one. My take on the situation is slightly different than Roy’s. Linguistically, I think State Farm has the better of the argument. Nevertheless, the insured wins. Language can be clear, but still be subject to “danger of misconception” and subject to a “reasonable basis for a difference of opinion.” An insured’s argument against an exclusion applying only needs to clear a low threshold. It does not need to equal the quality of the argument in favor of the exclusion applying. Larry Kushnick makes the point that the lead-in language to the exclusion is needed to complete the argument that the exclusion applies to earth movement caused by human action. Quite true. Without the lead-in language there is lack of clarity. All of the examples of excluded earth movement in the non-exclusive list are naturally caused events. Without the lead-in language, the conclusion that man-made earth movement is not excluded may be the more reasonable one. However, the lead-in language says the exclusion applies “regardless of the cause of the excluded event.” If I read Larry Kushnick’s comment correctly, he does not say that the lead-in language is unclear. Rather, he argues that it is overly broad as applied to the earth movement exclusion. Specifically, his argument implies that natural causation is inherent in the earth movement exclusion, and the “regardless of the cause of the excluded event” language should apply only to other exclusions that do not contain an inherent causation requirement. That’s a reasonable argument, and that’s why the court found in favor of coverage.

Zuppa said...

In other words tie goes to the runner.