On April 30, 2009, the New York Court of Appeals (New York’s highest state court) in Pioneer Tower Owners Assoc. v. State Farm Fire & Cas. Co., et al., 2009 NY Slip Op 3409, narrowly construed the “earth movement” exclusion and the exclusion for “settling [or] cracking,” variations of which are often found in property insurance policies, and held that the exclusions did not exclude coverage for property damage where the event giving rise to the earth movement, settling and cracking was human excavation. The Court ruled against the insurer despite finding that the insurer’s interpretation of the exclusions was reasonable.

Background

The plaintiff was the owner of a condominium apartment building. After cracks began appearing in the building, the plaintiff called in a structural engineer. The structural engineer discovered a number of cracks, separations and open joints and concluded that they were all caused by excavation taking place on the adjacent lot. Although underpinnings had been built to protect the foundation of plaintiff’s building, the structural engineer concluded that the underpinnings were flawed and, as a result, earth slid away beneath plaintiff’s building, causing damage.

The plaintiff submitted a claim to defendant State Farm Fire & Casualty Company which insured the building against “accidental direct physical loss.” State Farm denied coverage based on the policy’s “earth movement” exclusion:

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.

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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 also relied on the exclusion for “sinking [or] cracking:”

We do not insure for loss either consisting of, or directly and immediately caused by, on or more of the following:

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f. settling, cracking, shrinking, bulging or expansion.

But if accidental direct physical loss of any of the ‘Specified Causes of Loss’ or by building glass breakage results, we will pay for the resulting loss.

None of the Specified Causes of Loss were present.

Contentions

State Farm argued for a literal interpretation of the exclusions. State Farm argued that because the loss was caused by the movement of earth, and specifically by its sinking and shifting beneath plaintiff’s building, the earth movement exclusion applies. State Farm further argued that because the loss consisted of cracking that was directly and immediately caused by the settling of the building, the settling and cracking exclusion applies.

Plaintiff responded that the literal reading advanced by State Farm would not give the meaning that an ordinary reader would assign to these exclusions. As to the earth movement exclusion, plaintiff argued that the examples in the policy — namely earthquake, landslide, erosion and subsidence — do not include excavation which is an “obvious and common way of moving earth.” With regard to the “settling [or] cracking” exclusion, that exclusion, the plaintiff argued, would not be thought to apply to settling or cracking that is the immediate and obvious result of other events, such as the intentional removal of earth in the vicinity of the building.

Holding

The New York Court of Appeals acknowledged that this case was “a close one” and that “both plaintiff’s and defendant’s readings of the clauses are reasonable.” However, an insurer’s reasonable interpretation is not enough to carry the day where the policyholder’s interpretation is equally reasonable. There must be “no other reasonable interpretation,” according to the Court. The Court further stated that “[o]ur precedents require us to adopt the readings that narrow the exclusions, and result in coverage.”

In this case, the Court credited the plaintiff’s arguments and concluded that the event that caused the plaintiff’s loss was not unambiguously excluded from coverage. As to the “earth movement” exclusion, the Court said “if the drafter of the policy intended to bring excavation ... within the exclusion, why was it not listed as an example while less common events were listed?” The Court also commented on the strain presented by the insurer’s reading of the “settling [or] cracking” exclusion which “[r]ead literally ... would apply where a refrigerator fell over and cracked a wall, but that can hardly have been the intent of the policy’s drafters.”

Commentary

Underwriters and claims professionals should be mindful that a literal reading of their policy exclusions — even if reasonable — may not be enough to secure the result the insurer intended. Property insurers should reexamine their “earth movement” and “settling or cracking” exclusions to satisfy themselves that they “clearly and unmistakably” exclude coverage for property damage caused by human excavation if that is indeed what the insurer intends to exclude. In addition, all insurers should be mindful that even their reasonable and literal interpretation of their policies’ exclusions (whether “earth movement,” “settling or cracking,” or any other type of exclusion) may not be enough to attain their intended result if their reasonable and literal interpretation is not the only reasonable interpretation of the language.