It is routine to see an Earth Movement Exclusion is a property policy.  But I don’t recall ever seeing one in a commercial general liability policy.  I’ve certainly never had one in play in any construction defect claim. either my client or another insurer.

But that’s what the Montana Supreme Court’s decision in Loendorf v. Employers Mutual Casualty Company, No. DA21-449 (Mont. July 19, 2022) is all about.

The facts are straightforward and resemble those not uncommon in construction defect cases.  Helgeson Homes built several homes in Billings.  The court described what happened next: “After moving in, Homeowners noticed small cracks in the homes’ interior walls and foundation. Helgeson assured them the cracks were not indicative of a more serious problem, but the damage increased over the next several years. In 2017, Homeowners hired Krivonen Structural Consultants to inspect their properties. Krivonen found misaligned doors and windows, foundation movement issues, separation of exterior siding, and cracks in the foundation and drywall. Krivonen characterized the damage as functional-structural damage caused by settlement of the soil under and around the homes.”

The homeowners filed suit against Helgeson, alleging that the damage was caused by Helgeson’s failure to install deep foundation systems, such as foundation piers, in an area with known sandy soils with “collapse potential.” Helgeson has denied any negligence.

Helgeson sought coverage under a commercial general liability policy issued by Employers Mutual Casualty.  EMC undertook Helgeson’s defense and filed an action seeking a declaration that, on account of the Earth Movement Exclusion, no coverage was owed.

The Earth Movement Exclusion provided as follows:

“This insurance does not apply to “bodily injury,” “property damage,” “personal injury” and “advertising injury” . . . arising out of, caused by, resulting from, contributed to, aggravated by, or related to earthquake, landslide, mudflow, subsidence, settling, slipping, falling away, shrinking, expansion, caving in, shifting, eroding, rising, tilting or any other movement of land, earth or mud.”

The lower court held that the Earth Movement Exclusion did not apply, concluding that it was limited to “settling of the earth rather than earth movement as a result of the insured’s actions,” and further stated that the exclusion applies to “long-term earth movement that spanned years from expected earth movement, not movement caused by the insured.”

The Montana high court saw it differently, reasoning that, while “[h]omeowners are correct that the Exclusion does not attempt to differentiate between natural and human-caused earth movement, that does not render it ambiguous, but rather encompassing, by design.”

More interestingly, the court also found support for its decision in the interplay between the policy’s insuring agreement and the exclusion, one that was addressed by another state high court: “The Mississippi Supreme Court [Hankins v. Maryland Cas. (Miss. 2012)] concluded it would be ‘nonsensical’ to limit the earth movement exclusion’s applicability to ‘nature-caused’ or ‘natural force’ earth movement because the exclusion would serve no purpose in a third-party CGL policy that only covers ‘occurrence[s]’ that cause ‘property damage’ for which the insured is found liable.” 

The opinion does not address other issues concerning potential coverage for construction defects, such as “occurrence” and the “your work” exclusion.  But, presumably, these were not applicable if the case went to the supreme court on the Earth Movement Exclusion.   

Of course, earth movement is not an issue in every construction defect case – not even most.  But it comes up enough that insurers, looking to limit their seemingly ever-growing CD exposure, may want to consider adding this well-known property policy exclusion to their CGL.