When does an excluded loss end and a covered “resulting loss” begin?  This thorny question was the subject of a recent decision out of the Southern District of Texas, EMS USA, Inc. v. The Travelers Lloyds Insurance Co.No. H-16-1443, 2018 U.S. Dist. LEXIS 54509 (S.D. Tex. Feb. 28, 2018),  adopted by EMS, USA, Inc. v. Travelers Lloyds Ins. Co., 2018 U.S. Dist. LEXIS 52884 (S.D. Tex., Mar. 29, 2018). EMS involved a builder’s risk policy that covered a natural gas pipeline construction job in southeast Texas. The insured, the pipeline contractor, had through a subcontractor, drilled a “pilot hole” for the pipeline. The next step was to widen the pilot hole to accommodate the pipeline. This operation involved using a reamer attached to a guide wire that directed the operation. When the guide wire broke, the reamer was stuck in the pilot hole and could not be removed, and a new pilot hole had to be excavated. Travelers denied coverage for the cost of attempting to salvage the first pilot hole, and redrilling the second, arguing that the loss was not covered  because (1) the pilot hole was “land” that was not covered under the policy; (2) the hole had not suffered “direct physical loss or damage” as required by the policy’s coverage grant; and (3) the loss, even if within the grant of coverage, fell under the policy’s exclusion for faulty workmanship.
Continue Reading Texas Federal Court Holds Faulty Workmanship Exclusion Applies to All Damage Caused By Drilling Gear Malfunction, Rejects Insured’s Claim for Covered “Resulting Loss”

Most commercial and personal lines property insurance policies exclude damage caused directly or indirectly by the peril of “earth movement.” The ISO version of this exclusion appears in many modern policies and provides that:

  1. [Insurer] 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.

b. Earth Movement

(1) Earthquake, including any earth sinking, rising or shifting related to such event.
(2) Landslide, including any earth sinking, rising or shifting related to such event.
(3) Mine subsidence, meaning subsidence of a man-made mine, whether or not mining activity has ceased;
(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 contraction, expansion, freezing, thawing, erosion, improperly compacted soil and the action of water under the ground surface.

(See Causes of Loss—Special Form, CP 10 30 10 00, Copyright Insurance Services Office, Inc. 1999)

For more than a decade, courts throughout the country have wrestled with the question of whether the Earth Movement exclusion applies in all circumstances where earth movement plays some part in the chain of events that produced the loss. Most of the reported decisions address the interpretation and application of subparagraph (4) of the exclusion, quoted above. The loss scenarios that typically spawn coverage litigation involve some form of damage to a building’s structure (floor slab, foundations walls, etc.) caused by the movement or depletion of supporting or surrounding soil due to, (i) demolition, blasting or heavy construction activities at neighboring properties; or (ii) water leaking from an underground supply or drainage pipe.

A number of jurisdictions have construed the Earth Movement exclusion narrowly and ruled that it applies only to earth movement associated with “natural” causes (such as an earthquake or landslide), and not to construction or other causes involving human intervention. En route to finding coverage, those courts typically rely on the historical development of the Earth Movement exclusion or resort to the doctrine of “reasonable expectations.” In the other camp lie courts that apply the exclusionary language literally to bar coverage for all property damage associated with earth movement, regardless of what caused the ground to move. Those courts often rely upon the anti-concurrent causation language of the exclusion: “Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
Continue Reading “Earth Movement” Exclusion Bars Coverage for Damage Traced to Leak from Broken Water Pipe, According to Massachusetts Appeals Court

Ensuing Loss Clause Does Not Create Coverage For Otherwise Excluded Losses

Property insurance policies often contain exclusions with ensuing loss provisions, which state that an ensuing loss not excluded is covered. Whether a loss constitutes a covered ensuing loss is therefore frequently a critical issue in a coverage determination. In Sprague v. Safeco Insurance Company