The Case: Espedito Realty, LLC v. National Fire Insurance Company of Hartford, decided March 26, 2012
Why we featured this case:
This is the first case decided by a court sitting in Massachusetts to decide whether undermining caused by a burst pipe in a building would be excluded from by the “earth movement”” exclusion.
What You Should Know About This Case:
A Springfield area warehouse owner, Espedito Realty (Espedito) sued its insurer, National Fire Insurance Company of Hartford (National Fire), a subsidiary of CNA Financial. Espedito claimed breach of contract by his insurer and a violation of G.L. c. 93A. for failing to pay for damage to its warehouse floors.
Undiscovered, broken water pipe leaked water into ground undermining warehouse’s concrete floor
Espedito had a business owner’s policy with National Fire that was effective from March 23, 2008 until March 23, 2009. While the policy was in effect a ceiling pipe located between the first and second floor office spaces in Espedito’s warehouse burst in Springfield. The break was not noticed for several days, during which time water from the pipe ran down behind a wall and seeped down into the ground below the concrete floor. As a result, the sub-base below the concrete floor subsided, and the warehouse floor sank.
National Fire did pay almost $28,816.39 for the damage to the walls and the ceiling, as well as for allegedly lost rent. The company refused, however, to pay an additional $144,000 claim for repair to the floor. National Fire responded that the floor’s sinking was caused by “earth movement” underneath the floor and should be paid by the carrier.
National Fire claimed broad policy exclusion for “earth movement” losses barred coverage for the repair of the warehouse floor
Generally, in an insurance policy the “earth movement” exclusion limits the insurer’s obligation to cover damages arising from earthquake, landslide, mine subsidence, and volcanic eruption. In this case, the “earth movement” exclusion in the policy was broadly written and included as a specific part of the exclusion any loss resulting from:
b. “earth movement”
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(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.
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Espedito’s experts argued that the water flowing through the sand sub‑base had created voids between the bottom of the concrete and these voids created a loss of support that ultimately caused the concrete floor to crack and settle. The insurance company’s argument was that this descripition perfectly fit the definition of “earth movement” under the terms of the policy’s broad exclusion and thus, any coverage for the floor was not a covered loss.
What the Court said:
The US District Court in Springfield granted summary judgment to Espedito on National Fire’s claim that the “earth movement” exclusion.
The court interpreted the exclusion as strictly construed under the usual rules of construction and held that any ambiguity had to be construed against the insurer.
The federal district court applied Massachusetts law under the standard rules applicable to federal jurisdiction. The court noted, however, that there was no Massachusetts case directly on point construing the “earth movement” exclusion. The court, however, analyzed a number of cases from other jurisdictions and states that had construed a less stringent version of the “earth movement” exclusion and found that the exclusion was ambiguous. As a result, in this particular case, the district court judge found that a reasonable insured reading the policy would not believe that the common circumstance of a pipe bursting and undermining a property would likely construe this as “earth movement””.
The court delved into the history of the exclusion based upon prior decisions and the fact that the original version of the “earth movement” exclusion was far from what the insurer in this case was attempting to accomplish. The court found that the “earth movement” exclusion was originally intended to protect the insurer from circumstances arising from natural causes such as spontaneous natural events rather than those brought about by man-made causes. It is interesting to note that the exclusion in the policy did not make this distinction but the court found that this was a reasonable reading to be applied to the policy language.
Anti-concurrency clause held inapplicable
The insurer also claimed that the loss would be barred under the “anti-concurrent” clause in the policy. That clause stated in part that:
We will not pay for loss or damage caused directly or indirectly by any of the following [exclusions]. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
The court refused to accept that the anti-concurrent clause bars coverage. To support its decision, the court quoted a recent Nevada Supreme Court decision on the same issue that stated that clarity was “especially important” in light of the anti-concurrent clause and that if the insurer “had wished to exclude damage sustained as a result of soil movement from a burst pipe under its “earth movement” exclusion, it should have drafted a more explicit exclusion.”
Finally, the court finished its reasoning on the exclusion by applying the “reasonable insured” test:
It is very difficult to see how a reasonable insured could read this language to apply to water coming down from a burst pipe on the second floor and seeping down into the ground from above. (Decision at p.12)
It is important to note that this decision did not end the lawsuit. The court granted National Fire additional time to investigate and prosecute its newly discovered defense that the insured has supposedly materially misstated its damages with regard to the business interruption component of its claim.
Agent Takeaways:
- It is likely that courts will interpret that the “earth movement” exclusion applies only to natural causes.
- The anti-concurrent clause found in so many policies will not operate to bar the “earth movement” exclusion.
- Different policies have “earth movement” exclusions that are more clearly limited to natural causes rather than the broad form used here.
- This issue is likely to arise again as a federal court decision. As such it is important to note that while persuasive on Massachusetts state courts, this case is not binding law. An insurer or insured can raise the same claims or defenses in order to obtain a definitive decision under Massachusetts law.
