Court Rejects Earth Movement Exclusion in Favor of Prior Covered Loss
By Don R. Sampen, published, Chicago Daily Law Bulletin, November 3, 2020
The 1st District Appellate Court recently held that an earth movement exclusion in an all-risk property insurance policy did not bar all coverage for damage to an industrial freezer facility, where evidence existed of damage caused not only by ground upheaval beneath a freezer in the facility but also by water saturating insulation and requiring its replacement.
The case is 4220 Kildare, LLC v. Regent Insurance Co., 2020 IL App (1st) 181840 (Sept. 30). The insured, Kildare, was represented by Ronald A. Stearney of Chicago. Leahy Eisenberg & Fraenkel Ltd. of Chicago represented the insurer, Regent.
Kildare owned a refrigerated warehouse building in Chicago which contained large freezer rooms for food storage. In 2008 it experienced a property loss to the floor of one of its freezer rooms, caused by a freezer door having been left open over a long weekend. As the result of the open door, the room froze up, and during the process of removing the ice, water accumulated in the soil under the floor. In the winter months, the water froze and caused upheaval in the floor, requiring substantial repairs.
During the repair process, Kildare also observed insulation under the floor saturated with water and ice, requiring that the insulation also be removed and replaced.
Kildare notified Regent of the loss in 2009. Regent was the issuer of an all-risk property insurance policy covering Kildare’s facilities. Among other provisions in the policy was an earth movement exclusion, which excluded coverage for earth sinking, rising or shifting, including as the result of water in the soil freezing or thawing.
Based on the earth movement and other exclusions, Regent denied coverage. Thereafter Kildare filed a proof of loss seeking coverage for having to replace the concrete floor under the freezer, prompting a second denial of coverage by Regent.
Kildare filed suit seeking damages of $722,000 for both property damage and lost business income. The case went to jury trial, and the jury returned a verdict in favor of Kildare for $544,000, for repairs and lost income.
Regent then filed a motion for judgment notwithstanding the verdict, which motion was granted. The trial judge found that the earth movement exclusion broadly applied and that the evidence overwhelmingly favored Regent in the application of the earth movement exclusion. The court then vacated the jury verdict and entered judgment for Regent. Kildare took this appeal.
In an opinion by Justice Margaret Stanton McBride, the 1st District reversed. She initially observed that Kildare had properly made a prima facie case for coverage under the Regent policy, and that the burden then shifted to Regent to establish the application of an exclusion.
Kildare’s opening argument on appeal was that the earth movement exclusion was ambiguous as to whether it applied solely to losses from naturally occurring events or also covered earth movement stemming from human action. McBride said she need not resolve that issue, because a second argument made by Kildare was more persuasive.
The second argument was that, even if the earth movement exclusion applied, the evidence at trial showed two separate losses: the first being when the insulation became damaged and required replacement, and the second occurring later when the floor heaved.
Kildare claimed the floor slab had to be demolished and replaced as a result of the first loss — before the floor heaved — resulting in the majority of the repair expenses.
Regent responded that Kildare’s argument was simply an attempt to rewrite the facts of the case, after 10 years of litigation. McBride, however, disagreed. She observed that the insulation constituting a separate covered loss was, in fact, a theory argued at trial. That loss appeared to give rise to the damages awarded by the jury, which did not include the amount Kildare sought for the floor heaving.
Moreover, even though Regent’s experts consistently testified that the floor’s heaving was the cause of the claimed damages, at least some evidence existed showing a separate and prior loss due to the saturation of the insulation.
Regent offered the “anti-concurrent causation” clause of the policy as a further reason why Kildare’s separate loss theory should not prevail. That clause barred coverage where two events, one covered and one excluded, contributed to the same loss, at either the same time or one after the other.
Viewing the evidence in the light most favorable to Kildare, however, McBride found testimony in the record supporting Kildare’s position that the insulation was damaged prior to any damage from earth movement, such that Kildare’s entitlement to compensation for that covered loss vested prior to the later excluded loss.
In sum, whether or not the excluded earth movement damage occurred was of no consequence where Kildare suffered a prior compensable loss.
Finally, Regent argued that a “faulty maintenance exclusion” also justified the denial of coverage. That exclusion barred coverage for loss resulting from faulty or inadequate maintenance by Kildare. The faulty maintenance in this case, according to Regent, was Kildare’s failure to provide heat to a crawl space under a freezer, allowing that space to freeze.
Once again, McBride pointed to evidence in the record, this time supporting Kildare’s position that its ventilation system under the freezer in question was not faulty. In light of the conflicting evidence, McBride said the jury was entitled to draw an inference adverse to Regent.
The court therefore concluded that the motion JNOV for Regent should not have been granted and that the verdict for Kildare should be reinstated.
An insured under an all-risk property insurance policy is entitled to compensation for a covered loss so long as it becomes vested prior to a later excluded loss.