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

PROPERTY– EARTH MOVEMENT EXCLUSION – SETTLING OR CRACKING EXCLUSION
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:

SECTION I – EXCLUSIONS

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.