The Earth Movement Exclusion: How Does it Affect Construction Defect Cases?

Adam B. Edgecombe, Esq. | Jimerson & Cobb P.A. | September 26, 2016

One of the biggest considerations for parties on both sides of any lawsuit is whether insurance coverage will apply to the plaintiff’s claims. This is especially true in construction defect cases, where the cost of repairing the alleged damage can be significant, and quite often beyond the financial means of the construction professional being sued. However, many litigants in construction defect cases, on both sides of the litigation, do not understand the intricacies of the insurance policy at issue, including the Earth Movement Exclusion present in many policies.

The general liability policies of construction professionals whose work involves construction or modification of the foundation of a structure, or any type of compaction, grading, or moving of land or dirt on a construction site, will typically include the Earth Movement Exclusion (the “Exclusion”). The Exclusion is a clause in the general liability policy that removes coverage under the policy for injury or damage that is wholly or partially caused by virtually all types of earth or land movement, whether occurring naturally or as the result of human action. A common version of the Exclusion in Florida reads:

This insurance does not apply to any “bodily injury” or any “property damage” that is directly or indirectly caused by, involves, or is in any way connected or related to any movement of earth, whether naturally occurring or due to man-made or any other artificial causes.

Movement includes, but is not limited to, settlement, cracking, contraction, compaction, compression, consolidation, subsidence, shrinking, expansion, heaving, swelling, cave-in, erosion, vibration, shock, earthquake, landslide, mudflow, wind-driven, freezing, thawing or any other movement of earth, regardless of the cause.

Earth includes but is not limited to any dirt, soil, terrain, mud, silt, sediment, clay, rock, sand, fill material or any other substances or materials contained therein.

Based on the plain reading of this exclusion, one can see how it can easily cover a wide range of defect cases and/or claims. Accordingly, the Exclusion has significant implications for plaintiffs and their attorneys when bringing a construction defect claim that may be the result of some sort of earth movement believed to be caused by a construction defect.

The duty of an insurer to defend an insured is triggered when the complaint alleges facts that fairly and potentially bring the suit within policy coverage. State Farm and Casualty Co. v. Higgins, 788 So. 2d 992 (Fla. 4th DCA 2001); Smith v. General Acc. Ins. Co. of America, 641 So. 2d 123 (Fla. 4th DCA 1994). Similarly, there will be no duty to defend or indemnify an insured where the lawsuit’s claims are clearly covered by an exception to the policy. Keen v. Fla. Sheriffs’ Self Insurance, 962 So. 2d 1021 (Fla. 4th DCA); Reliance Ins. Co. v. Royal Motorcar Corp., 534 So.2d 922 (Fla. 4th DCA 1988). Therefore, plaintiffs whose complaints allege some form of damage due to settling or shifting of the foundation as a result of a construction defect may find that they have pled themselves out of having the defendant’s insurer provide coverage and/or a defense related to the claim.

For instance, suppose a plaintiff contracts with a general contractor for the construction of a new home. A few years after the home is completed and the plaintiff has moved in, she notices that her outside pavers have become uneven and cracked; she then inspects the rest of her home and finds several small cracks at the base of some of her walls. The plaintiff hires a construction professional to assess the damage to her home, and is told that it will cost at least $75,000 to repair the damage. The professional further informs the plaintiff that the damage is likely due to poor construction by the contractor who built the home, so the plaintiff hires an attorney to sue the contractor for her damages. The attorney subsequently drafts and files a complaint, alleging that, because of poor construction by the contractor, there has been soil shifting or subsidence, which has resulted in the damage to plaintiff’s home.

Upon receiving the complaint, the contractor submits the claim to his insurer, who promptly denies coverage for the plaintiff’s claim based upon the Earth Movement Exclusion contained in the contractor’s policy. While the plaintiff has a legitimate claim, and the contractor is in fact culpable for the damage, the contractor does not have assets to cover the $75,000 cost of repair (let alone additional funds to cover the plaintiff’s claim for attorney’s fees when she wins the case). As a result, plaintiff is left with the option of giving up on her suit or pursuing a claim where, when she prevails, the contractor will not be able to satisfy her judgment.

However, if the plaintiff’s attorney had alleged that there was damage to the home as the result of a construction defect, but left out the allegations of the soil shifting or subsidence, then it is likely that, when the contractor submits the claim to his insurer, the insurer will at least have to defend the contractor by providing him with an attorney. As a result, the contractor will not be paying legal fees out of his own pocket and there is a chance the claim will be covered by the contractor’s policy, both of which facts can greatly influence whether or not a timely and successful resolution can be achieved for the plaintiff. The whole status of the case has been changed and the chance for plaintiff to settle her claim favorably has been greatly enhanced. Thus, one can see that, from the plaintiff’s perspective, an understanding of the Exception can have a significant and real impact on the success of a construction defect claim.

Similarly, an understanding of the Exclusion is also important for construction professionals as well. First, the professional needs to understand his general liability policy and determine if there is an Earth Movement Exclusion and then assess whether, and how, that Exclusion might be implicated in, or otherwise affect, his current and future projects. If the professional’s liability policy includes the Exclusion, perhaps the right decision for him is to purchase a policy wherein the Exclusion is not included. Alternatively, perhaps the right decision for him is to include an earth movement waiver in his own contracts, absolving him of liability for claims arising from earth movement. Regardless of how he chooses to address the situation, it is important for any construction professional whose work involves movement, compaction, or grading of soil to understand and consider the implications of the Exclusion to his business, and how to address such implications, prior to facing a defect suit involving earth movement.

Additionally, if a construction professional finds himself being sued for a claim involving possible earth movement, it is of equal importance that he consults an attorney who understands the implications of the Exclusion to review his policy and the lawsuit. At that time, the attorney can advise the professional whether he should persist in demanding coverage for the lawsuit’s claims (up to and including a declaratory action for coverage) or, if the attorney determines that the Exclusion applies, assist the professional in educating the plaintiff and her attorneys as to the implications of the Exclusion, how it affects the plaintiff’s claims, and negotiating a favorable resolution.

In summation, the Earth Movement Exclusion is an important and little-understood provision in construction professionals’ liability policies. Failure to understand and consider its implications can carry quite serious repercussions for the prosecution or defense of a defect case.

Workmanship and Earth Movement Exclusions Preclude Coverage for Collapse As a Matter of Law

Joann Selleck | Cozen O’Connor | July 29, 2016

A U.S. federal district court recently granted Peerless Insurance’s summary judgment motion, concluding that, as a matter of law, under Virginia law, a property policy insuring a building under renovation would not provide coverage for a collapsed basement wall due to a subcontractor’s lack of shoring,. Taja Investments LLC v. Peerless Ins. Co. a/k/a Liberty Mutual Ins. Co., Civ. No. 1:15-cv-01647, 2016 U.S. Dist. LEXIS 95760 (E. D. VA, July 21, 2016).

The plaintiff insured, Taja Investments, was a construction company, which was excavating a 4-5 foot crawlspace under a building to create a space with a 9 foot depth in order to allow for additional living areas. The insured’s claim arose out of the collapse of one of the basement walls due to the failure of the insured’s subcontractor’s  to follow construction recommendations and provide shoring as the excavation progressed. Litigation followed after Peerless declined plaintiff’s claim.

In ruling on cross summary judgment motions filed by the insured and Peerless, the court rejected the insured’s arguments that: (1) while the basement wall collapse may be excluded by the workmanship exclusion, the cost of building repair was a covered ensuing loss;  and that (2) the collapse occurred “underground,” and, therefore, the earth movement exclusion did not apply.   

The district court first concluded that the collapse was the result of the insured’s own acts or omissions in failing to underpin the basement as the excavation progressed and as the construction plan required. The court noted that the over excavation coupled with the lack of underpinning caused the collapse, which the insured’s own witnesses even tacitly admitted.  In following well established Virginia insurance precedent that an additional independent covered cause of loss is required in order to trigger a policy’s ensuing loss provision, the court found that no such independent subsequent loss existed in the instant case. See Travco Ins. Co. v. Ward, 715 F. Supp. 2d 699, 718-19 (E.D. Va. 2010), aff’d, 504 Fed. Appx. 251 (4th Cir. 2013) (declining to find the ensuing loss provision applicable because the relevant damage occurred gradually over a period of time and was merely a single discrete loss from a single discrete injury). In doing so, the court also departed with the recent cases that decline to require an independent and additional covered cause of loss before restoring coverage under an ensuing loss exception. See Selective Way Ins. Co. v. National Fire Ins. Co. of Hartford, 988 F. Supp. 2d 530, 538 (D. Md. 2013); see also Vision One, LLC v. Philadelphia Indem. Ins. Co. 276 P.3d 300, 308-09 (Wash.  2012).

The court was also unpersuaded by plaintiff’s attempt to distinguish the cost of replacing the workmanship (which the plaintiff, itself, conceded was not covered) from the cost of replacing the structure (which the plaintiff argued was an ensuing loss), as plaintiff’s argument was merely an erroneous attempt to separate cause and effect.

The court was likewise unpersuaded by the plaintiff’s argument that the earth movement exclusion did not apply since the collapse occurred “underground.” Essentially, the plaintiff contended that the earth movement exclusion is only applicable to movements or vibrations at the earth’s surface, yet, here, the relevant earth movement activity occurred “below grade.”  Based on the particular exclusionary language in the Peerless policy the court determined that the policy plainly indicates that the exclusion was applicable to both man-made and naturally occurring earth movement. The court then concluded that, regardless of the fact that the loss involved “below grade” damage (i.e., in the basement area under the building), the plaintiff’s relevant conduct still occurred at the earth’s surface and earth movement still occurred at the earth’s surface. The policy’s unambiguous earth movement exclusion, therefore, applied. The policy provided no indication that it was meant to exclude below grade activity. As the trial judge stated, “while the movement that caused the east wall’s collapse occurred below grade (in the basement, below the ground level of the structure), it still involved movement of the earth surface (the uppermost layer of the soil and clay).” As a result, Peerless prevailed on its motion for summary judgment; and the court denied the insured’s motion for summary judgment.

This recent decision is another example of the common coverage issues that can arise in the context of collapse.  In relation to ensuing loss, this opinion demonstrates how, under Virginia law, an additional and independent covered loss is still a prerequisite to trigger an ensuing loss, though not all jurisdictions are in agreement with this analysis.  This case further demonstrates that, regardless of the case law cited in support of the applicability or inapplicability of an exclusion like the earth movement exclusion here, a court will still look to the plain language of the particular exclusion at issue.  If that exclusion is clear and unambiguous, a court is unlikely to attempt to re-write the exclusion and overall intent of the policy, but, instead, apply it. Here, and regardless of other court decisions interpreting similar yet different earth movement exclusions, the court looked to the specific exclusionary language at issue here and applied it in the true meaning of its terms.