The New York Court of Appeals held, in Pioneer Tower Owners Association v. State Farm Fire & Casualty Company et al., No. 63, 2009 WL 1148649 (Apr. 30, 2009), that an insurance policy’s earth movement and settling or cracking exclusions did not preclude coverage for property damage caused by excavation on an adjacent lot, even where that excavation resulted in a partial collapse of the insured property.
After discovering cracks in its condominium apartment building, plaintiff Pioneer Tower Owners Association engaged a structural engineer to determine the cause of the cracks. The engineer concluded that the cracks, separations and open joints that occurred in the building were the result of excavation work that was being performed on a neighboring lot. The engineer determined that the underpinning being utilized to protect the foundation of Pioneer’s building was flawed. The flawed underpinning permitted the earth beneath Pioneer’s building to slide away, resulting in damage to the property.
Pioneer submitted a claim to State Farm Fire & Casualty Company (“State Farm”), under its contract for property insurance.
According to its terms and exclusions, the insurance policy covered property owned by Pioneer against “accidental direct physical loss.” Among other things, however, the State Farm policy expressly excluded coverage for loss caused by earth movement. The exclusion provided in pertinent 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. . . .
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.
State Farm, therefore, disclaimed coverage for Pioneer’s claim, basing its decision on the language of the policy’s earth movement exclusion, which excludes loss caused by the movement of earth, and specifically by its “sinking” and “shifting” beneath the plaintiff’s building. State Farm also based its disclaimer on the settling or cracking exclusion, which provides in pertinent part:
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.
State Farm applied this exclusion as well because it contended that 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), and because none of the “Specified Causes of Loss” — a 14-item list, including fire, windstorm and water damage among other things, had occurred.
Pioneer argued that the exclusions should not be construed according to their plain meaning, since a literal reading of the words does not yield the meaning that an ordinary reader would assign to the exclusionary clauses. As to the earth movement exclusion, Pioneer stressed the examples of earth movement given in the policy — “earthquake, landslide, erosion and subsidence” — arguing that an excavation — the intentional removal of earth by humans — is a different kind of event from an earthquake and the other examples given. Pioneer argued that, when specific examples are included in an exclusionary provision, other examples that are not mentioned should be understood to be things of the same kind.
Similarly, Pioneer 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 as Pioneer argued, that could hardly have been the intent of the policy’s drafters.
The court concluded that the arguments advanced by both Pioneer and State Farm were reasonable. The court explained, however, that under New York law, where policy language is susceptible to two reasonable meanings, the language is ambiguous and construed in favor of coverage. That was particularly the case here, where the ambiguous language existed in the form of an exclusion that, under New York law, is typically construed narrowly and in favor of coverage, even where it is not ambiguous.
In addition, the court stated that decisions from other jurisdictions supported its conclusion that earth movement exclusions do not apply to losses caused by improper excavation. The court also noted that neither party could cite to a case in which the earth movement exclusion was applied to intentional earth removal.
In holding that the earth movement and settlement exclusions do not bar coverage when the earth movement and resulting cracking were caused by a man-made event — such as excavation, the New York Court of Appeals reiterated that exclusions will be construed narrowly and in favor of coverage. The decision also reiterates the need for insurers to be precise in their wording, particularly when utilizing lists of examples. Here, the court refused to expand the stated scope of the exclusion to apply to loss resulting from a man-made excavation when the policy’s listed examples all consisted of naturally occurring events.