New York Court of Appeals rejects State Farms use of Earth Movement and Settling and Cracking exclusions to bar coverage related to construction

In an "earth moving" decision, on April 30, 2009, the New York Court of Appeals unanimously affirmed the Appellate Division Second Departments decision which upheld the lower court’s decision directing State Farm to provide coverage to a Condominium apartment building. The Condominium, located in the booming construction zone of Flushing, Queens, New York had been severely damaged by improper excavation and underpinning activity from a construction project on a lot next door. The Condominium Board placed a claim with State Farm who denied coverage citing the policies "Earth Movement” exclusion which excludes from coverage damage caused by "earth movement, meaning the sinking, rising, shifting, expanding or contracting of earth." The policy defined earth movement as "including but not limited to earthquake, landslide, and erosion”. State Farm also cited the policies “settling and cracking” exclusion.

The Condominiums attorney argued that the literal reading of the words in the exclusion did not give the meaning that an ordinary reader would assign to the exclusionary clauses. State Farm denied coverage, attempting to claim that no matter what the cause that any time a building moved, settled or cracked, coverage would be excluded and denied. The Condominiums attorney argued that such a view was an attempt to twist a pure earthquake and other natural disaster occurrence exclusion, to exclude man made damage, which is not the wording nor the intent of the insurance policy. In agreement, the Court of Appeals recognized that if State Farm’s reasoning was followed, the exclusion would apply “where a refrigerator fell over and cracked a wall”, which as obviously not the intent of the policy.

The court held that as to the "earth movement" exclusion, there was no mention of excavation or other man made causes of earth removal. As to the "settling and cracking" exclusion", the ordinary reader would not consider that the exclusion would apply for such things as the intentional removal of earth in the vicinity of the covered building.

The decision has a wide spread impact on insurance coverage throughout the United States as many courts have been waiting for direction from the New York Court of Appeals. There has been a divergent view as to the allowance of the expansion of the earthquake earth movement exclusion to also exclude man made earth movements, which issue the New York Court of Appeals has now put to rest. It is believed that State Farm and other carriers have denied 100’s of millions of dollars of claims using the “earth movement” and “settling and cracking exclusions”. Insured’s may have as little as two years from the date of loss to demand coverage for claims that have been denied under these exclusions.

Vincent T. Pallaci is a New York construction lawyer.  He can be reached at vtp@nyconstructionlaw.com