Underground Climate Change: Property Insurance Coverage for an Emerging Risk

Heat emanating from basements, train tunnels, sewers and other underground systems in major metropolises in the U.S. and Europe is heating the ground between city surfaces and the bedrock. The temperature increase reaches as high as 27° Fahrenheit in some parts of Chicago, according to a recent study.

This “underground climate change” is impacting ground soil conditions, causing layers of sand, clay and rock to expand or contract by as much as half an inch beneath some buildings. These conditions are already causing structural strains on buildings and even exacerbating cracks and defects in walls and foundations. Should the problem go unabated, significantly more structural damage is expected.

Damage caused by underground climate change is largely uncharted territory for policyholders and claims professionals alike. But while this source of damage may be novel, the policy language that will determine whether coverage exists is familiar. Claims professionals and policyholders should prepare themselves by examining current policies and considering how claims filed under current policies are likely to play out.

Whether property insurance coverage will respond to loss and damage resulting from underground climate change will likely hinge on the application of the so-called “earth movement” exclusion and potential exceptions to it, in addition to other policy exceptions.

Determining coverage in specific cases will require a careful review of the policy language at issue, which will vary from policy to policy, as well as of state-specific rules with respect to insurance causation. Those rules seek to determine the cause of a property damage loss as well as the significance of such cause for insurance coverage purposes. These rules vary considerably from state to state, so savvy policyholders will do whatever they can to avail themselves of the jurisdiction they deem most advantageous.

All-Risk Coverage

Our focus here is on broad “all risk” first-party property insurance policies, which generally cover all risks that aren’t expressly excluded by the policy language.

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Courts across the country generally apply a very strict and narrow interpretation of exclusionary clauses, permitting insurance companies to avoid coverage only where they can demonstrate that the exclusion applies in the particular case and that it is subject to no other reasonable interpretation. Any ambiguity in exclusionary language generally is construed against the insurance company and in favor of coverage.

Earth Movement Exclusion and Insurance Causation

The so-called earth movement exclusion is commonly written into all risk property insurance policies and often asserted by the insurance company to deny coverage for property losses involving structural damage to foundations.

A typical earth movement exclusion states that the insurance company will not pay for any losses resulting from “earth movement,” meaning “the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, erosion, and subsidence but does not include sinkhole collapse.”

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Earth movement exclusions can be a formidable barrier to obtaining insurance coverage, because they are often employed alongside Anti-Concurrent Causation (or “ACC”) provisions. ACC provisions typically state that the insurance company “will not pay for loss or damage caused directly or indirectly by [earth movement]. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” Therefore, if earth movement is found to be even a contributing cause of loss, the ACC clause purports to bar coverage entirely.

If the property insurance policy at issue does not include an ACC clause, then a court determining whether a covered cause of loss was the reason for the policyholder’s property damage would likely apply one of two “causation” tests.

The majority of states apply the “efficient proximate cause rule,” under which policyholders’ property losses are deemed covered if the efficient proximate cause of the loss is a covered peril under the policy.

For example, Album Realty Corp. v. Am. Home Assur. Co. involved a frozen pipe (an excluded cause of loss) that resulted in water damage (a covered cause of loss), and the New York Court of Appeals held that the water was the dominant and proximate cause of the loss and found it covered. Other courts have found the originating cause of loss to be the dominant and efficient proximate cause. Courts have not reached consensus on what “proximate cause” means for insurance purposes and have employed a variety of criteria over the years, including substantial factor, most direct and obvious cause, predominate cause, prime cause, moving cause and cause that triggers a chain of events.

The second commonly applied test for insurance causation is the “concurrent cause rule,” under which policyholders’ losses are deemed insured if at least one of the causes that contributed to the loss is a covered peril under the policy. For example, in the case of buildings suffering structural damage resulting from underground climate change, if a court finds that earth movement (an excluded cause of loss) partially caused the loss, while rising underground temperatures (a non-excluded and therefore covered cause of loss) also partially caused the property damage, then the loss is covered in any jurisdiction employing the concurrent cause rule.

Exceptions to the Earth Movement Exclusion

Many exclusions in insurance policies, including the earth movement exclusion, contain ensuing loss provisions and exceptions that bring the loss back within coverage. Exceptions to the earth movement exclusion that might apply when damages result from underground climate change include the following.

Many policies provide coverage where fire or explosion ensues from excluded “earth movement.” In such cases, policies typically state that the insurance company will pay for the loss or damage caused by that ensuing fire or explosion. This provision might result in coverage for resulting damages, but not for damages directly caused by earth movement itself.

Further, depending on the applicable jurisdiction and the policy language at issue, whether earth movement is human caused or natural might matter. In the majority of jurisdictions (for example, D. Colo. in Miller v. Am. Fam. Mut. Ins. Co.), damages resulting from human-caused earth movement might be covered if an exclusion does not expressly state that it applies to human-caused earth movement. Some courts, too, have cited policy reasons in finding in favor of coverage for human-caused earth movement. For example, the Florida Supreme Court observed in Fayad: “When losses are caused by human activity, insurance companies have the opportunity to recover some of the payments made to their insured by asserting subrogation rights against the entity responsible for the activity.” Insurance companies can forestall such interpretations, however, with policy language that states categorically that damage caused by earth movement is excluded regardless of cause.

Coverage for an “Abrupt Collapse”

Another policy exception (sometimes called an “additional coverage”) that should be considered is the exception or coverage addition for an “abrupt collapse.” This generally is not listed as an exception to the earth movement exclusion, but rather as an exception to the collapse exclusion typically contained in first-party property insurance policies, or as an additional coverage in either the policy form or in a standalone endorsement to the policy.

An “abrupt collapse” typically is defined within a policy and applies if it results from delineated causes, which often include a variation of the language “building decay that is hidden from view, unless the presence of such decay is known to the Insured prior to collapse.”

If underground climate change is causing unknown, hidden damages to a building’s below-grade structure and an “abrupt collapse” of the building results, there is an argument that the damages from the abrupt collapse are covered, notwithstanding the presence of an earth movement exclusion in the policy. Indeed, if there is an abrupt collapse as a result of underground climate change under a policy containing an earth movement exclusion, construing the policy as a whole and giving effect to all terms wherever possible should, at a minimum, result in an ambiguity in the policy that is construed in favor of coverage.

There are numerous arguments in favor of coverage under all risk property insurance policies for losses related to underground climate change. To determine if a particular loss is covered or not, the specific language in the policy at issue must be examined in conjunction with state-specific rules of insurance policy interpretation, insurance causation, and other insurance-related jurisprudence in connection with the earth movement exclusion, collapse and other policy provisions. Should underground climate change go unabated, it is likely that these issues will be litigated in most if not all states with major cities and underground systems within the next decade.

Artese is a shareholder in the New York office of Anderson Kill. His national practice concentrates on all types of insurance recovery litigation, with an emphasis on securing insurance coverage for property and business interruption losses stemming from natural disasters and other perils. Email: dartese@andersonkill.com.

Middlebrooks is a shareholder in Anderson Kill’s New York office, where he concentrates his practice in insurance recovery, exclusively on behalf of policyholders. Email: emiddlebrooks@andersonkill.com.

Dupont is an attorney in Anderson Kill’s New York office. He focuses his practice on insurance recovery, exclusively on behalf of policyholders. Email: tdupont@andersonkill.com.