Jessica, one of our Construction Risk Insurance Specialists (CRIS), just placed coverage for a grading contractor that just had a major claim denied due to a subsidence exclusion in their GL policy. The effect of the exclusion compromised coverage for most of their work. The new client had recently seen one of my articles condemning its use. It confounds me that many brokers still think the subsidence exclusion is mandatory for contractor GL policies. Such line of thinking can be very troublesome for the contracting community as they rely on their brokers to provide cover that will answer for most events. I have been writing of the subsidence issue for years and most insurance underwriters will delete or not quote primary or excess/umbrella policies with the troubling language. Most subsidence exclusion endorsements are very broadly written eliminating coverage for any earth movement including earthquake.
March 2010 AGCC Constructor, page 17 as published
Liability Subsidence Exclusion Upheld – $12.6M Loss – Coverage Denied
By Robert G. Mahan, Esq.
In November 2009 the CA 4th District Court of Appeals upheld the broad subsidence exclusionary language contained in the City of Carlsbad’s primary and excess liability policies issued by the Insurance Company of the State of Pennsylvania (ISOP), an AIG company. City of Carlsbad v. Insurance Co. of the State of Pa., 180 Cal.App.4th 176
The City of Carlsbad was sued when a hillside collapsed due to the negligent maintenance of a city fire hydrant and waterline. The landslide seriously damaged an adjacent condominium development causing both bodily injury and property damage claims.
The ISOP policy contained a broad subsidence exclusion stating (ISOP) will not defend or pay under this Policy for claims or suits against you for property damage arising out of land subsidence for any reason whatsoever. The policy defined “land subsidence” as follows: “Land subsidence means the movement of land or earth, including, but not limited to, sinking or settling of land, earth movement, earth expansion and/or contraction, (earthquake), landslide, slipping, falling away, caving in, eroding, earth sinking, and earth rising or shifting or tilting.”
After the trial court upheld ISOP’s motion for summary judgment, the City appealed, alleging the exclusion did not apply to the facts of the case. The appeals court disagreed with all of the arguments of the city, emphasizing plainly and precisely that the language was not ambiguous that the peril of land subsidence, including landslides, was not covered, regardless of the cause. The courts only care what the exclusionary language clearly states. They are not concerned with reforming contractual language that might be repugnant to insurance buyers.
The author has twice warned in earlier Constructor issues that the subsidence exclusionary endorsement attached to many Commercial General Liability and Excess policies is unacceptable. Originally, the exclusion applied only to completed operations property damage and was limited to subsidence generally caused by foundation failures. Many construction insurance carriers have extended the subsidence exclusion into a clear, absolute subsidence or earth movement exclusion including landslide and earthquake. Some limit the exclusion to property damage, but most also extend the exclusion to bodily injury.
Why the big concern for most contractors?
- Any earthquake induced bodily injury or property damage is excluded. If structural failure occurs arising out of construction defects, there is no coverage for the resulting damage.
- No coverage for landslides however caused
- No coverage for bodily injury arising out of a trench collapse on an ongoing job. Such is patently unfair for any earth moving contractors, but the carriers are indifferent to their plight.
- Possible coverage problems arising out of equipment upset.
- Many subcontractors will most likely have this exclusion endorsed on their liability policies.
What can you do to eliminate or mitigate the problem?
- Request that the exclusion be deleted – many carriers will delete on request for no charge. Offer to pay extra premium to remove the exclusion, if needed.
- Use a different insurer – many A rated insurers don’t exclude subsidence
- Ensure the exclusion is removed from both primary and excess policies.
- Require your subs to disclose the existence of a subsidence exclusionary endorsement. The AGC Standard Form subcontract requires subsidence coverage.
- If the exclusion can’t be deleted, obtain a side letter from the insurer limiting the areas where the exclusion applies.
- Only work with insurance brokers agents who are construction savvy.
- Lastly, don’t accept coverage based on price alone. Brokers don’t have to act as pure order takers, accepting a carrier’s offering and passing it on to their clients. It is their duty to get the broadest cover at an acceptable price.
Some brokers and carriers rely on the misguided belief that it would be unfair for the courts to allow the subsidence exclusion to be triggered by a landslide, earthquake or other earth movement. If your broker of carrier is of that persuasion, get it in writing along with a certificate of professional liability insurance from the broker. Few, however, carry adequate limits to satisfy the $12M Carlsbad case.
Most construction liability policies today have numerous exclusionary endorsements, such as subsidence, which can catch contractors by surprise, especially after a loss occurs. Contractors need to understand that not all insurance policies are created equal and be wary of the “devil in the details” when purchasing coverage.
Prepared by Robert G. Mahan Esq., managing member of Mahan Insurance Brokers Inc. in Newport Beach. Bob is a member of the CA Bar and is very active on the AGCC Legal Advisory Committee. He drafted most of the insurance provisions in the AGCC Standard Form Contracts. He can be reached at (949) 279-9937, by email at firstname.lastname@example.org