This was originally published on the SGR Blog.
Was Insurance Claim Barred by “Earth Movement” Exclusion?
Commercial insurance policies often provide generic risk coverage, but that general coverage is often concurrently limited in scope by specific exclusions. As a recent case illustrates, the Court may be required to navigate the exclusions to determine if coverage liability exists.
Great American Insurance Company of New York issued a risk property insurance policy to 3502 Partners LLC, insuring property located at 35-02 Northern Blvd., Long Island City, New York-a two-story brick and mortar building with multiple commercial tenants, adjacent to and directly behind a piece of property owned and maintained by the Metropolitan Transit Authority, known as the Sunnyside Yard, a 180-acre railroad yard.
Sunnyside Yard was undergoing excavation and construction activity. On May 5, 2020, while the policy was in full force and effect, Partners’ property suffered a loss when, as a direct result of the excavation, the property’s back exterior wall shifted outward, detached from its foundation, and forced a significant outward bulge resulting in cracking to the interior floors. As a result, Partners suffered damages in excess of $3,320,000.00. That same day, Partners notified Great American of the loss. On or about June 24, 2020, Great American denied the claim and refused to provide any coverage under the policy.
On February 26, 2021, Partners sued Great American for breach of contract and sought a judgment: (1) on the first cause of action, for breach of contract, in an amount believed to be in excess of $3,000,000.00 (representing the damages to the property), plus interest thereon from May 5, 2020; and (2) on the second cause of action, for breach of contract-loss of business income and extra expenses, in an amount believed to be in excess of $320,000.00 (representing business income and extra expenses losses), plus interest thereon from May 5, 2020.
Great American moved to dismiss the complaint on the grounds that an “earth movement” exclusion contained in the policy barred coverage for the claim. Partners opposed the motion.
The “earth movement” exclusion provided, in pertinent part, that:
- We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
- Earth Movement
(4) earth sinking (other than sinkhole collapse), rising or shifting including soil conditions which cause settling, cracking or other disarrangement of foundations or other parts of realty. Soil conditions include contractions, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water under the ground surface.
The exclusion applied regardless of whether or not the event was caused by an act of nature, man-made, or was otherwise caused.
The complaint alleged that the property “suffered a loss, as a direct result of the excavation at [Sunnyside Yard].” Taken as true, the alleged damage clearly fell within the exclusion because the loss was the result of intentional movement of earth.
Partners submitted the affidavit of a principal, Alessandro Demarinis, who attested that: the Sunnyside Yard construction project caused significant vibrations at his company’s property and, “as a result of the construction work, including without limitations the vibrations caused by the construction work, the insured property suffered damage in the form of broken foundations and significant damage to the wall adjacent to the Sunnyside Yard;” and “[a]s a direct result of the use of [a] backhoe and general work performed in connection with the construction activities taking place in areas adjoining the [property], on or about April 2020, the [property] suffered significant damage.”
The Demarinis affidavit attached a photograph, showing the close proximity between the insured property and the excavation work and argued that “[a]s reflected in the photo, it is clear that the work performed, and necessarily the construction equipment involved — that this active operation came within inches of the [insured] structure and could have easily made direct contact with it.”
However, the Court found that Partners’ new allegation that its losses were caused by the negligence of a third party did not take the claim out of the exclusion because the exclusion applied when “loss or damage [is] caused directly or indirectly by” earth movement, “regardless of any other cause or event that contributes concurrently or in any sequence to the loss,” and it applied “regardless of whether [earth movement] is caused by an act of nature, man-made or is otherwise caused.”
Moreover, this case was distinguishable from another action in which there was at least some alleged damage to the structure that was not caused by earth movement, but rather by impact damage from heavy equipment. In that case, the insured provided the court with expert evidence illustrating that the damage was caused by impact and vibrations from a large backhoe. The Court went on to say that “coverage would not apply if earth movement were merely a contributing cause of the damage.” Here, the complaint clearly stated that the damages were the direct result of the excavation, nothing more, nothing less.
Partners was not afforded coverage pursuant to the policy’s provision providing additional coverage for a “collapse.” The policy defined a collapse as “an abrupt falling down or caving in of a building or any part of a building with the result that the building or any part of a building cannot be occupied for its intended purpose.” However, the policy narrowed that additional coverage by stating that it did not apply to:
(2) a part of a building that is standing even if it has separated from another part of the building;
(3) a part of a building that is standing or any part of a building that is standing, even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion.
The policy language was clear and Partners did not allege any facts illustrating that the property has actually collapsed, only that “the [property’s] back exterior wall shifted outward, detached from its foundation and forced a significant outward bulge resulting in cracking to the interior floors.” Thus, Partners was not entitled to coverage under that specific provision.
Great American’s motion to dismiss was granted. Whether or not Partners had a cause of action against the MTA was not before the Court.