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A D J U S T I N GT O D A Yapplication of the deductible. There is no loss paymentfor the business personal property because the damageis under the deductible.ConclusionIn an effort to spread risk, insurers and governmentagencies are using reinsurance, state and private pools,Fair Access to Insurance Requirements (FAIR) plans,and trading options on a catastrophe index that theChicago Board of Trade maintains. However, more isneeded, according to ISO. Consequently, many insurersadvocate a proposal put forth by the Natural DisasterCoalition. This proposal provides for: Mandatory coverage of hurricanes, earthquakes,volcanoes, and tsunamis, at actuarially sound rates A federal reinsurance program Incentives for state governments to develop lossmitigation programsThe exposure to loss by earthquake may be moresignificant than people realize. Organizations needto check periodically with their insurance advisorsto ensure that their insurance coverage realisticallymeets their exposures.Earthquake insurance is also available with aDifference in Conditions (DIC) policy, the topicplanned for a future issue of Adjusting Today.1Copyright, Insurance Services Office, Inc. 2007, with permission.2Sinkholecollapse (collapse of land into underground spaces created by theaction of water on limestone or similar rock formations), which is commonin Florida and Pennsylvania, is covered by the commercial property policiesof AAIS and ISO. The peril is covered in AAIS homeowner forms, but is notcovered in ISO homeowner forms, but may be added by endorsement. In somestates the coverage is required by law.3Copyright, American Association of Insurance Services, Inc., 2000, withpermission.4Copyright, American Association of Insurance Services, Inc., 2007, withpermission.5Copyright, Insurance Services Office, Inc., 1998, with permission.Courts Have Made a DistinctionEarth Movement: Man-Made vs. Natural CausesSince this issue of Adjusting Todayfocuses on earthquake insurance,it seems fitting to include arelated subject that can likely beencountered in earth movementclaims. That subject has to do withcausation, and particularly whetheran earth movement claim involvesloss or damage caused by naturalevents, which are often widespreadand catastrophic, or loss or damagecaused by man-made activity,which usually is more confined.Although property insurancepolicies contain earth movementADJUSTERSINTERNATIONAL.COMexclusions, the courts havesometimes held for coverage whenthe cause of the earth movementcan be attributed to man-madeactivities, while excluding loss fromnatural events, i.e., earthquake,related earth sinking or shifting, ormudslide. For example, buildingdamages caused by nearby blastingactivities or excavation on anadjacent lot that resulted in settling,sinking, and cracks and separationsin the foundations were consideredto be man-made activities and heldto be covered, despite the earthmovement exclusion.Whether coverage applies typicallydepends on how the exclusion isworded, and particularly on theexistence and/or strength of theanti-concurrent causation lead-inlanguage to the exclusions. Formany years, the Insurance ServicesOffice (ISO) and the AmericanAssociation of Insurance Services(AAIS) have included anticoncurrent causation languagein their commercial property,businessowners, and homeownerspolicies. Essentially, the doctrineof concurrent causation holds thatwhen a loss can be attributed to5

A D J U S T I N GT O D A Ytwo causes, one that is covered andone that is excluded, the loss willbe covered. It applies primarilyto “all risks” or “open perils”policies. Insurers then counteredthe concurrent causation doctrine,which in many instances resulted intheir paying claims that were nevercontemplated in their premiumstructure to be covered, by addingan anti-concurrent causationprovision to the exclusions section.That provision clarified that therewas no coverage for loss causedby an excluded peril (flood,earthquake, etc.), regardless ofany other cause that contributedconcurrently or in any sequence tothe loss.While current standard propertyforms of ISO and AAIS containthis provision, non-standard orindependently filed policies maynot, or may contain their ownversions of this provision.Reviewing court decisionsthat involve the issue ofman-made vs. natural earthmovement losses can beinstructive by providinginsights on how courtsanalyze the issue and theinsurance language that isapplicable to the loss.Court DecisionsThe first case is Fayad v.Clarendon National Ins.Co., 899 So.2d 1082, 2005WL 729172, (Fla. 2005).1The plaintiffs had an allrisks property policy thatcontained an earth movementexclusion. The claim involved6nearby blasting activity thatcaused structural damage to theirhome. Clarendon denied the claimon the basis that blasting wasearth movement and, therefore,excluded. The pertinent provisionin the Clarendon policy read asfollows:We do not insure for losscaused directly or indirectlyby any of the following. Suchloss is excluded regardlessof any other cause or eventcontributing concurrently or inany sequence to the loss.The earth movement exclusion read:Earth Movement, meaningearthquake, including landshock waves or tremors before,during or after a volcaniceruption; landslide; minesubsidence; mudflow; earthsinking, rising or shifting; unlessdirect loss by: fire or explosionensues and then we will payonly for the ensuing loss.The trial court decided in favorof Clarendon based on the rulingin another case, State Farm Fire &Casualty Co. v. Castillo, 829 So.2d242 (Fla. 3d DCA 2002). In thatcase, the court held that the lead-inlanguage of the exclusions clearlyruled out coverage. State Farm’slead-in provision read:We do not insure under anycoverage for any loss whichwould not have occurred in theabsence of one or more of thefollowing events. We do notinsure for such loss regardlessof: (a) the cause of the excludedevents or (b) other causes of theloss or (c) whether other causesacted concurrently or in anysequence with the excludedcoverage“ Whetherapplies typicallydepends on how theexclusion is worded,and particularly onthe existence and/orstrength of the anticoncurrent causationlead-in language tothe exclusions.”ADJUSTINGT O D A Y. C O M

A D J U S T I N GT O D A Yevent to produce the loss; or(d) whether the event occurssuddenly or gradually, involvesisolated or widespread damage,arises from natural or externalforces, or occurs as a result ofany combination of these.Note that the (d) part of thisprovision refers to both natural aswell as external forces.The court in the Castillo caseconcluded that based on thislanguage, the policy clearly andunambiguously excluded the earthmovement loss, regardless of thecause. The trial court in Fayadfollowed this reasoning, despitethe fact that the lead-in languageto the exclusions in each policyread differently.The plaintiff appealed to the DistrictCourt on the basis that theexclusionary language in theClarendon policy was materiallydifferent from the exclusion in theState Farm policy. While agreeingthat the Clarendon exclusion wasmuch narrower, the District Courtnevertheless upheld the ruling of thetrial court. The plaintiff then appealedto the Florida Supreme Court.Without including all the details ofthe Supreme Court’s analysis, themain points of the Court’s rulingwere as follows: (1) There is adistinction between losses causedby man-made events and naturalcauses; (2) Where an earthmovement exclusion does notcontain language excluding earthmovement regardless of its cause,ADJUSTERSINTERNATIONAL.COMthe majority of courts conclude thatthe exclusion only applies to earthmovement caused by natural causes;(3) The principle of ejusdem generis,meaning that where a policy listsseveral events (such as mudslide,earthquake, volcano) and then listsa broader event (earth sinking, risingor shifting), the court will interpretthe broader events as applying tothe same kind or class as those thatare specifically mentioned.The Florida Supreme Courtconcluded that there was no specificlanguage in the Clarendon policythat excluded earth movementregardless of cause (despite thelead-in language of the Clarendonpolicy), and that the policy listedseveral natural events in itsdefinition of “earth movement.”As a result, the Court overturnedthe District Court and ruled thatthe policy covered damage causedby blasting. The Court furtherstated that if Clarendon intendedto exclude damage from earthmovement caused by man-madeevents, it should have done soclearly and unambiguously.It is also noteworthy that the Courtcommented that even thoughClarendon would be paying forthe plaintiff’s damage, it couldseek recovery against the blastingcompany through subrogation.In Pioneer Tower Owners Assn.v. State Farm Fire & Casualty Co.2009 NY Slip Op 03409 (Court ofAppeals)2, the plaintiff made claimfor damage to its condominiumbuilding that was caused byexcavation on an adjacent lot. StateFarm denied the claim citing theearth movement exclusion.When cracks appeared in thebuilding, an engineer was called inand concluded that the cracks andseparations in the building werecaused by the excavation workon the adjacent lot. The engineerattributed damage to the buildingto flawed underpinning that wasbuilt by the excavating company toprotect the plaintiff’s foundation,and that as a result, earth slid awayfrom beneath the building causingthe damage.State Farm’s anti-concurrent causeprovision was the same as thatshown in the Castillo case, exceptfor part (d). (Emphasis added.) Theearth movement exclusion in theState Farm policy read as follows:Earth movement, meaningthe sinking, rising, shifting,expanding or contracting ofearth, all whether combinedwith water or not. Earthmovement includes but isnot limited to earthquake,landslide, erosion, andsubsidence but does notinclude sinkhole collapse.State Farm also relied on the settlingor cracking exclusion which read:We do not insure for loss eitherconsisting of, or directly andimmediately caused by, oneor more of the following:f. settling, cracking, shrinking,bulging or expansion.In deciding this case, the Courtnoted that the law governing7

A D J U S T I N GT O D A Yinterpretation of insurance policyexclusionary clauses is highlyfavorable to insureds, and citedSeaboard Sur. Co. v. Gillette Co.64 NY2d 304 1984 which saidessentially that:Whenever an insurer wishes toexclude certain coverage fromits policy, it must do so in clearand unmistakable language andany exclusions must be accordeda strict and narrow constructionand must not be subject toanother reasonable interpretation.State Farm argued that the earthmovement exclusion appliedbecause the loss was caused by themovement of earth, and specificallyby its sinking and shifting beneaththe plaintiff’s building. It alsocontended that the settling orcracking exclusion applied becausethe loss consisted of cracking thatwas directly and immediatelycaused by the settling of thebuilding (which was in turn causedby the excavation).The plaintiff, on the other hand,contended that a literal readingof the words does not give themeaning that an ordinary personwould assign to these exclusionaryclauses. As to the earth movementexclusion, plaintiff pointed tothe examples of earth movementgiven in the policy of earthquake,landslide, erosion and subsidence.The plaintiff’s position was thatan excavation — the intentionalremoval of earth by humans — isa different kind of event from anearthquake and the other examples8given, and suggested that whenspecific examples are mentioned,those not mentioned should beunderstood to be things of the samekind (ejusdem generis).The plaintiff contended that ifthe drafter of the policy languagein question intended to bringexcavation within the exclusion,it should have been listed as anexample of the perils not covered.Similarly, the plaintiff argued thatthe settling or cracking exclusionwould not be thought by anordinary person to apply to settlingor cracking that is the immediateand obvious result of some otherevent, such as the intentionalremoval of earth in the vicinity ofthe building.After considering both arguments,the Appeals Court concluded thatboth the plaintiff’s and defendant’spositions were reasonable.However, the Court added thatthe precedents require the policyinterpretation to narrow theexclusions, and result in coverage.It also cited two Appellate Divisioncases and one Federal DistrictCourt decision that have held thatthe earth movement exclusions,using identical language, are notapplicable to losses caused byexcavation. (Lee v. State Farm Fire& Cas. Co., 32 AD3d 902 [2d Dept.2006]; Burack v. Tower Ins. Co. of N.Y.,12 AD3d 167 [1st Dept. 2004]; Wyattv. Northwestern Mut. Ins. Co. of Seattle,304 F. Supp. 781 [D Minn. 1969].)Accordingly, coverage was affordedthe plaintiff in this case.In the case of Castillo v. State FarmFire & Casualty Company, 32 FLWD2474a (Fla. 3rd DCA October 17,2007)3, nearby blasting createdshockwaves and vibrations thatdamaged the plaintiff’s dwellingwithout actual displacement orpermanent displacement of theearth. (This case has no relationto State Farm Fire & Casualty Co. v.Castillo discussed previously whichheld that coverage did not apply.)The case involves the identical,strong State Farm anti-concurrentcause language that was quoted inthe State Farm v. Castillo casebeginning on page 6 and the earthmovement exclusion that wascontained in the Pioneer TowerOwners Assn. v. State Farm decisiondiscussed previously. In Castillo v.State Farm, the allegations in thecomplaint were that vibrations andshockwaves caused by blastingwithout displacement of the earthresulted in the damage to theplaintiff’s dwelling. The Court thennoted that the policy does notspecifically address whether or notdamages caused by blasting,shockwaves, or vibrations fall under“earth movement” and would,therefore, be excluded fromcoverage. The Court went on to saythat when the terms of the contractare ambiguous and susceptible todifferent interpretations, parolevidence4 is admissible to explain,clarify or elucidate the ambiguousterm.The Court then sought furtherinformation to determine whetherthe exclusion applied in this case byADJUSTINGT O D A Y. C O M

A D J U S T I N GT O D A Ylooking at State Farm’s internaloperating guidelines. Inreviewing those guidelines,the Court found a reference tothe effect that damage fromblasting, crane or demolitionequipment, etc., cannot occurunless the earth moves.Therefore, the Court reasonedthat coverage will be providedfor blasting that causesshockwaves/vibrationstransmitted through the earthto the plaintiff’s dwellingwhich causes damage withoutdisplacement of the earth. Inconclusion, the Court determinedthat the plaintiff could proceed to ajury because the question ofwhether or not the shockwaves andvibrations alleged by the Castillosdamaged their dwelling withoutdisplacement of the earth was anissue of material fact. The Courtalso noted that once the plaintiffestablishes a loss apparently withinthe terms of an all risks policy, theburden shifts to the insurancecompany to prove that the loss arosefrom a cause which is excluded.In Totty v. Chubb Corp., 455 F. Supp.2d 376 (W.D. Pa. 2006)5, the Court,applying Pennsylvania law, heldthat the earth movement exclusionin the homeowner’s insurancepolicy did not clearly excludedamage caused by man-madeforces and, therefore, denied theinsurer’s motion for summaryjudgment.The plaintiff alleged that herproperty was damaged becauseof the densification of sandADJUSTERSINTERNATIONAL.COMlayers in the underlying soilthat resulted from the use of avibratory compactor to repavethe adjacent street in July 2002.Damage included cracked walls,damaged door frames, plumbingleaks, and the sinking of one sideof her home. Although the case isidentified as Totty v. Chubb Corp.,the claim was initially denied byGreat Northern Insurance Co.,a member of the Chubb Group,whose policy insured Totty. Tottysubsequently filed suit against bothChubb Corp., the parent company,and Great Northern. Hence, thereferences to Great Northernthroughout the discussion. GreatNorthern contested the plaintiff’stheory of causation, but argued thateven under that theory, the loss wasnot covered because it fell withinthe policy’s earth movement andstructural movement exclusions.The earth movement exclusionin Great Northern’s policy wassimilar to the exclusionarylanguage previously cited in theaforementioned cases.The Court reasoned that on onehand, the exclusion bars coveragefor natural events, i.e., earthquakesand volcanic eruptions. On theother hand, it bars coverage forevents which can be natural,man-made or both, i.e., landslide,mudflow, earth sinking, rising orshifting. Although it is arguablethat the exclusion is applicable toearth movement due to natural andman-made events, a reasonableperson could conclude that theexclusion is applicable to earthmovement due to natural eventsonly. Since the earth movementexclusion is reasonably susceptibleto different constructions, it isimpossible to determine the intentof the parties as manifested by thewritten language of the contract ofinsurance.Relying on this ambiguity and theprinciple of ejusdem generis, theCourt held that the plaintiff’s policyexcluded coverage only for naturalearth movements. The Court furtherheld that Great Northern could have9

A D J U S T I N GT O D A Yeasily excluded earth movementcaused by man-made events.The cases reviewed previously,except for State Farm Fire & CasualtyCo. v. Castillo, held for coverage.However, in Cali v. MerrimackMut. Fire Ins. Co., 2007 NY Slip Op06415 (Appellate Division, SecondDept.)6, the Court ruled that theearth movement exclusion appliedto rule out coverage. A portion ofthe plaintiff’s home collapsed whenthe concrete slab foundation settled,sank, and cracked. Merrimackdenied the claim based on the policylanguage that excluded losses dueto earth movement, earth sinking,rising or shifting and settling,shrinking, bulging, or expansion,including resultant cracking ofpavements, patios, foundations, etc.The plaintiff’s engineer concludedthat the slab foundation partiallycollapsed as a result of decayedwood in the earth beneath thefoundation, which caused a void inthe soil and the eventual collapse.The Court held that Merrimack metits initial burden of establishingthat the exclusion clearly andunambiguously applied to the loss.The Court also made referenceto language which stated thatlosses due to earth movement areexcluded regardless of any other causeor event contributing concurrently orin any sequence to the loss. Here, theloss was attributable to the resultantearth movement

is a 70 percent probability that an earthquake of magnitude 6.7 or larger will strike the San Francisco Bay area over the next 30 years. (For statistical information about earthquake exposures in other regions of the country, see sidebar, titled "More About Earthquakes.") Earthquake insurance provides protection from the shaking and cracking