In places like New York City where buildings can sometimes be built virtually on top of each other, it is not uncommon for construction on one property to cause damage to a neighboring property. Of course, when this happens, the damaged party always has the option of suing the tortfeasor directly. But what happens if the tortfeasor is judgment proof (and has no insurance) and you simply want to submit the claim to your insurance provider? Up until recently, your insurance carrier most likely would have denied coverage for the loss based upon one or more policy exclusions. The exclusion could have been the "cracking and settling" exclusion, the "damages arising out of construction activities" exclusion or, more often, the now infamous "earth movement" exclusion, among others. However, in a 2006 decision by the Appellate Division, Second Department, the "earth movement" exclusion - a common component of most property insurance policies - was deemed not to apply to damage caused by negligent and improper underpinning and excavation activities on an adjacent site. The decision represented a significant change in the type of damage that courts will deem to be included within the scope of property insurance coverage and signals an historic change in New York law regarding the scope and application of the earth movement exclusion. The Second Department recently had another opportunity to review the classic earth movement exclusion and determine whether it applied to damage caused by negligent excavation and underpinning on an adjacent property and, again, found that this type of damage simply is not earth movement and, therefore, found that denial of coverage was improper. The second decision, coming in Pioneer Tower v. State Farm, was affirmed by the Court of Appeals in 2009. The Pioneer decision, which in the interests of full disclosure was a case handled by the author of this article, may have definitively settled the issue in New York - at least until insurance companies find new and creative ways to word their exclusions based upon the Court's ruling in Pioneer.
What is Underpinning?
In layman's terms, underpinning is the process of strengthening and stabilizing the foundation of a building by extending the foundation in depth and breadth. Within the City of New York, in order to maintain structural integrity, underpinning is required any time a construction operation exposes or breaches an adjoining wall. Underpinning is typically necessary when the excavation of an adjoining property is deeper than the existing foundation of a neighboring property.
Reading Policy Exclusions
In any insurance coverage dispute, courts are required to give insurance policy exclusions strict and narrow construction with any ambiguities being resolved against the insurer. The language of the policy exclusion must be specific and clear in order to be enforced by the courts. This is especially true when the ambiguous language appears in an exclusion limiting an insurer's exposure. The insurer has the burden4 of establishing that the exclusion states in clear and unmistakable language that a specific event is excluded under the policy and that the exclusion is not subject to any other reasonable interpretation.
A typical earth movement exclusion reads as follows:
No coverage shall be provided for loss based on 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, mudflow, sinkhole, subsidence and erosion.5
Interpreting The Earth Movement Exclusion
To avoid coverage, an insurer must show that its interpretation of the earth movement exclusion is the only reasonable reading of the exclusion. Until recently, insurance carriers have been able to convince courts that any movement of the earth - regardless of cause - is "earth movement" within the meaning of the exclusion and therefore have been able to successfully disclaim coverage.
However, in Lee v. State Farm Fire & Casualty Co., 32 A.D.3d 902, 822 N.Y.S.2d 559 (2nd Dept. 2006), the Appellate Division held that an earth movement exclusion does not apply where the damage caused to the property was the result of improper and negligent underpinning and excavation activities on an adjacent property. In Lee, the plaintiffs' building was damaged when soil underneath the building was removed during excavation and underpinning activities on a lot adjacent that was adjacent to Lee's. As a result of the improper underpinning and excavation, Lee's property was damaged. When Lee filed a claim with State Farm Fire & Casualty Co., the claim was denied based upon an earth movement exclusion in the policy. While the trial Court agreed with State Farm, the Appellate Division disagreed with the position that the earth movement exclusion was unambiguously applicable and held that the earth underneath Lee's property was excavated (i.e. it was removed; it did not move). This was a significant factor for the Court, which stated that "the physical removal by excavation of earth from underneath the plaintiffs' dwelling, does not fall squarely within the language of the exclusion . . ."
In Pioneer Tower Owners Association v. State Farm Fire & Casualty, a case almost identical to Lee, the Nassau County Supreme Court, citing to the new precedent set forth in Lee, affirmed that it is now clear that an earth movement exclusion in a property insurance policy does not serve to exclude damage caused by improper and negligent excavation and underpinning activities on an adjacent property. In Pioneer Tower, Judge Thomas Feinman held that because the earth underneath the claimant's building was physically removed by a third party, it did not fall within the earth movement exclusion. In doing so, Judge Feinman noted that case law which held that the earth movement exclusion applied to situations where damage was caused by decomposing organic matter under a foundation or by the erosion of soil underneath a foundation due to a ruptured water pipe were fundamentally different situations than where damage was caused by the intentional removal of soil by a third party.
Reasoning Behind the Lee Decision
A typical property insurance policy's earth movement exclusion "includes, but is not limited to, earthquake, landslide, erosion, and subsidence." Clearly these enumerated events are all naturally occurring phenomenon - not events caused by human, or unnatural acts. In fact, at least one New York Court has applied the doctrine of ejusdem generis to earth movement exclusions like the one at issue in the Policy and determined that the exclusion can only apply to natural causes of movement. Because the specifically enumerated events in the earth movement exclusion are all naturally occurring, the ambiguous term "earth movement" must be interpreted to only include other events similar to those specifically listed in the exclusion - specifically, natural events. The Court of Appeals in affirming Pioneer acknowledged this and essentially ruled that the policy at issue could reasonably interpreted to include intentional removal of earth and to exclude intentional removal of earth. However, the Court ruled that, as in baseball, a tie goes to the runner (the insured).
Accordingly, the law in the State of New York is now correctly beginning to recognize that an earth movement exclusion does not apply to damage caused by negligent construction activities on adjacent sites.
Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law. He can be reached at (631) 752-7100 or email@example.com