Earthquake Insurance: What's Your Exposure



...interpretation of insurance policy exclusionary clauses is highly favorable to insureds, and cited Seaboard Sur. Co. v. Gillette Co . 64 NY2d 304 1984 which said essentially that:

Whenever an insurer wishes to exclude certain coverage from its policy, it must do so in clear and unmistakable language and any exclusions must be accorded a strict and narrow construction and must not be subject to another reasonable interpretation.

State Farm argued that the earth movement exclusion applied because the loss was caused by the movement of earth, and specifically by its sinking and shifting beneath the plaintiff’s building. It also contended that the settling or cracking exclusion applied because 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).

The plaintiff, on the other hand, contended that a literal reading of the words does not give the meaning that an ordinary person would assign to these exclusionary clauses. As to the earth movement exclusion, plaintiff pointed to the examples of earth movement given in the policy of earthquake, landslide, erosion and subsidence. The plaintiff’s position was that an excavation — the intentional removal of earth by humans — is a different kind of event from an earthquake and the other examples given, and suggested that when specific examples are mentioned, those not mentioned should be understood to be things of the same kind (ejusdem generis).

The plaintiff contended that if the drafter of the policy language in question intended to bring excavation within the exclusion, it should have been listed as an example of the perils not covered. Similarly, the plaintiff argued that the settling or cracking exclusion would not be thought by an ordinary person 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. After considering both arguments, the Appeals Court concluded that both the plaintiff’s and defendant’s positions were reasonable. However, the Court added that the precedents require the policy interpretation to narrow the exclusions, and result in coverage. It also cited two Appellate Division cases and one Federal District Court decision that have held that the earth movement exclusions, using identical language, are not applicable to losses caused by excavation. ( Lee v. State Farm Fire & Cas. Co., 32 AD3d 902 [2d Dept. 2006]; Burack v. Tower Ins. Co. of N.Y., 12AD3d 167 [1 st Dept. 2004]; Wyatt v. Northwestern Mut. Ins. Co. of Seattle, 304 F. Supp. 781 [DMinn. 1969].)

Accordingly, coverage was afforded the plaintiff in this case. In the case of Castillo v. State Farm Fire & Casualty Company , 32 FLW D2474a (Fla. 3 rd DCAOctober 17, 2007) 3 , nearby blasting created shockwaves and vibrations that damaged the plaintiff’s dwelling without actual displacement or permanent displacement of the earth. (This case has no relation to State Farm Fire & Casualty Co. v. Castillo discussed previously which held that coverage did not apply.)

The case involves the identical, strong State Farm anti-concurrent cause language that was quoted in the State Farm v. Castillo case beginning on page 6 and the earth movement exclusion that was contained in the Pioneer Tower Owners Assn. v. State Farm decision discussed previously. In Castillo v. State Farm , the allegations in the complaint were that vibrations and shockwaves caused by blasting without displacement of the earth resulted in the damage to the plaintiff’s dwelling. The Court then noted that the policy does not specifically address whether or not damages caused by blasting, shockwaves, or vibrations fall under “earth movement” and would, therefore, be excluded from coverage. The Court went on to say that when the terms of the contract are ambiguous and susceptible to different interpretations, parol evidence 4 is admissible to explain, clarify or elucidate the ambiguous term.

The Court then sought further information to determine whether the exclusion applied in this case by...