When the earth shifts
Courts rule on earth movement exclusion in cases of broken water pipes
By Donald S. Malecki, CPCU
The exclusion of earth movement under both commercial and personal property policies has a meaningful purpose, but nonetheless it can be especially troublesome when insurers rely on it to deny coverage in cases where it does not apply.
If one were to trace the development of this exclusion, one would see that what is intended to be within the realm of this exclusion has been those natural events that are capable of being catastrophes, commonly earthquakes but also any type of earth movement as well as volcanic eruption.
It was not until insurers found themselves confronted with claims for earth movement caused by man-made activities, such as mine subsidence and construction-related soil subsidence that the exclusion was expanded, primarily in relation to commercial property policies.
This is not to say that earth movement, such as earthquakes, landslides, and subsidence is totally uninsurable. Over the years, various coverage combinations have become available for an additional cost. The issue today, however, is just how broad and all-encompassing the type of earth movement can be with the additional complication today of the courts introducing temporal aspects. In other words, whether earth movement is covered or excluded hinges on how fast it occurs.
It is unlikely that these problematic issues will go away anytime soon because many arguments hinge not only on what the policy says, but also on the facts of case. Some courts also have been known to take a more liberal view of the issues when the underdog is a consumer.
What is particularly advantageous about some court cases, however, is that all of the arguments raised and the rationale for many of them can be used in furtherance of seeking coverage by insureds or denying coverage by insurers.
A case favorable to a home owner that comes to mind is Mildred Powell v. Liberty Mutual Fire Insurance Co., 127 Nev. Adv. Op. NV., (Sup. Ct. NV. 2011). Briefly, what happened here was that a water pipe in the home owner's residence exploded, flooding the dirt sub-basement.
The home owner made a claim to her insurer because her house had suffered a shift in the foundation and had sustained extensive cracking and separation in the wall and ceiling in the area of the entryway, kitchen, and two bedrooms. She attributed the damage to the burst water pipe.
An expert chosen by the home owner and paid for by the insurer concluded: "After many years of relative foundation stability, [the house] is currently being affected by the expansion of supporting clay soils. This expansion, while likely present in lesser degrees in the past, has been severely aggravated by the intrusion of a significant amount of water a short time ago."
The insurer denied the claim based on the earth movement exclusion in Powell's policy.
The home owner then hired two professors of civil engineering who concluded that there was "no evidence of earth movement, subsidence, mudflow, earth sinking, rising, or shifting." They concluded that the structural cracking was caused by swelling of foundation clay facilitated by the access to water resulting from the water damage. The home owner asked her insurer to reconsider the claim but the insurer refused.
At this juncture, the home owner filed a suit against her insurer. Finding that the homeowners policy explicitly excluded coverage for any damage caused directly or indirectly by soil movement, the district court found for the insurer. In making that decision, the district court relied on the case of Schroeder v. State Farm Fire and Cas. Co., 770 F. Supp. 558. Here, a pipe ruptured, saturating the soil with water and causing the soil to settle, which ultimately damaged the insured building.
The policyholder's claim was denied under the earth movement exclusion, which stated in part: "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:…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 policy here concluded that earth movement could include non-natural events and that no matter what the cause, if earth movement is involved, coverage was denied. The state supreme court, in overruling the district court in the Powell case, rejected the Schroeder court's decision. In doing so, the court in the Powell case stated in part that simply because damage sustained by the home owner in the Powell case might be excluded under the Schroeder's policy did not mean it was also excluded under the homeowners policy at issue in the Powell case.
In this appeal of the Powell case, the state supreme court also stated that had the insurer intended for this exclusion to preclude coverage for damage caused by soil movement from a ruptured pipe, the insurer would have had to clearly include that in the earth movement definition and show that the earth movement exclusion applied to the damage here.
Examining the exclusion
The state supreme court stated that, historically, earth movement exclusions were included in insurance policies to protect insurers from having to pay claims when a catastrophic event caused damage to numerous policyholders. (Producers who have taken any basic insurance courses will recall that one of the requisites of an insurable risk is that the loss be noncatastrophic.)
In fact, in the Powell case, the supreme court cited the case of Peters Tp. School District v. Hartford A&I Ins. Co., 833 F.2d 32 (3d Cir 1987) as proof that it was not alone. The Peters court noted that the reason for insertion of the exclusionary clause…in all-risk insurance policies is to relieve the insurer from occasional major disasters that are almost impossible to predict and, therefore, to insure against. When this happens, the court explained, the very basis upon which insurers operate is said to be destroyed.
In considering earth movement exclusions, the Powell court also stated that other jurisdictions have concluded that there is often an ambiguity as to the type of damage to which earth movement exclusions apply. The reason, the court explained, is that such exclusions typically list only naturally caused events in their definitions of what constitutes earth movement.
Earth movement, however, can be caused by unnatural events as well. Here the Powell court cited a number of cases, including Fayad v. Clarendon Nat. Ins. Co., 899 So. 2d 1082 (FL 2005). (In the wake of these kinds of cases, insurers have since broadened their exclusions to include man-made earth movement as well, which goes beyond the historical intent of these exclusions.)
The earth movement exclusion in the Powell case also listed mine subsidence, earth sinking, rising, and shifting as examples of earth movement. The court explained that because mine subsidence is caused by human intervention from previous years, a generalized reference to earth sinking, rising and shifting, without clarifying the cause for such events, could include both natural and human-caused events.
As a result of the foregoing, the Powell court stated that the earth movement exclusion was even less clear than most earth movement exclusions regarding what was excluded because earth movement exclusions have historically applied to natural catastrophes.
The insurer, in this case, however, included a list of examples of mostly naturally occurring events, as well as possible human-caused events. As a result, the insurer's policy, the court said, was ambiguous as to what precisely earth movement was when it was not a type of widespread, calamitous event.
Complicating the situation
Not unexpectedly, the insurer in the Powell case also relied on the exclusion of damage caused by or resulting from settling, shrinking, bulging or expansion. (When insurers rely on the earth movement exclusion, one can count on their also relying on the settling exclusion. It is a double-whammy that does not always work.)
When the insurer raised the settling exclusion in the Powell case, the state supreme court stated that the district court based its decision on the earth movement exclusion, not the settling exclusion. Even so, the court explained that that the other jurisdictions have interpreted similar settling exclusions as referring to gradual, natural processes that cause damage. (In other words, what is intended by the exclusion is the nonfortuitous event that is likely to happen over a period of time. Settling, cracking, and bulging often are inevitable over time.)
In light of the interpretation of these other jurisdictions having to do with the settling exclusion, the Powell court stated that the language in the homeowners policy appeared to support an interpretation that the earth movement exclusion applied only to naturally occurring events, instead of clarifying that it applied to both naturally occurring and man-made events.
In its conclusion, the Powell court stated that the earth movement exclusion was ambiguous and that the settling exclusion did not help to clarify that ambiguity. If the insurer had wished to exclude damage sustained as a result of soil movement from a burst pipe under its earth movement exclusion, the court explained, it should have drafted a more explicit exclusion.
For example, the court added, some policies of insurers preclude coverage from whatever caused the earth movement; if the earth moves, the damage is excluded. See, for example, State Farm Fire and Cas. Co., 850 P.2d 1272 (UT 1993).
Based on the facts of this case, reliance on the earth movement exclusion appeared to be the wrong choice by the insurer. Of course, if there is nothing better to rely on, and the insurer does not want to pay the claim under any circumstances, it has to take its chances—at the risk of creating bad law.
It is very encouraging to see producers seeking out cases involving these kinds of claims. Those who are in this category should keep this case in mind to aid attorneys who may not be as well versed in insurance matters as insureds would like.
Producers, however, need to keep in mind that not all policy language is the same, and there are likely to be significant differences between personal and commercial insurance policies. Interestingly, many attorneys will cite cases in support of their arguments involving personal policies in cases dealing with commercial risks. Many courts also do not seem to mind these differences and will take into consideration all that are cited.
What is especially helpful in this case is the court's rationale for rejecting the settling exclusions. Even though it makes sense that these settling exclusions are intended for the gradual damage that will likely take place over time, some insurers will grasp and rely on them if it means they can win their case.