Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance

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Floor Subsidence Caused By Leaky Pipe Is Not “Earth Movement” But Insurer Can Pursue Fraud Defense Unearthed During Discovery

A pipe bursts in a warehouse.  Water seeps under the concrete floor and the floor sinks.  The warehouse owner is covered for the damage to the floor even though the policy excludes “earth movement.” 

Although the policy’s “earth movement” exclusion said it applied to “the action of water under the ground surface,” a federal District Court judge ruled that a reasonable insured would not expect the policy to exclude subsidence caused by water from a burst pipe.  The exclusion could reasonably be interpreted to be limited to naturally occurring phenomena or perils external to the insured property.  As a result, the Court denied the insurer’s motion seeking summary judgment that the “earth movement” exclusion barred the insured’s claim for damage to the warehouse floor.

But the policyholder’s claim did not only include the water damage to the walls and ceilings from the burst pipe, and the damage from the subsidence of the floor.  It also included a business interruption claim for lost rent from a tenant who, the policyholder asserted, had vacated the property due to the water damage.  After deposition testimony that the tenant never left, and never stopped paying rent, the insurer moved to amend its answer to add a fraud defense.  The Court ruled that the motion was timely, and the insurer can renew its motion for summary judgment on the fraud defense after the policyholder has the opportunity for discovery on this issue.

The insurer argues that fraud voids the policy, so that the policyholder is not entitled to coverage for the floor subsidence, and must return the payments made for the lost rent and the water damage.  So, despite prevailing on the “earth movement” issue, the policyholder is still on shaky ground.

The case is Espedito Realty, LLC v. National Fire Ins. Co. of Hartford, United States District Court for the District of Massachusetts Civil Action No. 10-cv-30039-MAP (March 26, 20012).

Harvey Nosowitz
(617) 621-6555

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Harvey Nosowitz


Posted In: Construction Defects

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