Insurer Can Exclude Non-Disaster Damages to Home, Court Rules

An insurance company can deny coverage for damage caused by a landslide or other disaster not part of a customer’s policy, even when another cause contributes to the damage, a federal appeals court ruled Monday in the case of a La Palma couple.

The ruling by the U.S. 9th Circuit Court of Appeals, if followed by California courts, would expand a victory for insurers on a related issue in a ruling by the state Supreme Court on March 30. A federal court interpreting state law cannot bind state courts, but its rulings can be influential.

The federal court upheld a lower-court decision that denied insurance benefits to Steven and Peggy Martin, who noticed the foundation cracking and bulging in their newly bought La Palma home in 1984.

The Martins’ claim was denied by State Farm Fire & Casualty Co., which said the damage was caused, at least in part, by earth movement, which was specifically excluded from coverage in their homeowners policy.

The Martins said the earth movement was attributable to sulfates in the soil, allegedly a condition covered by their policy. Contributing to the damage, they said, was faulty construction of the house, which would be covered by insurance.

State Farm cited a clause in the insurance policy that denied coverage for damage that would not have occurred without earth movement or earthquakes, even if other causes contributed to the damage.

Similar clauses were adopted by most California insurers about 1983 after a Marin County jury awarded $1.047 million in damages to a couple who were denied coverage after their home started to split apart. The insurer in that case blamed earth movement, which was excluded by the policy; the couple blamed faulty construction, which was covered.

The damage award was based on a previous California court ruling allowing benefits if a cause covered by insurance had contributed substantially to the damages. But the California Supreme Court on March 30 overturned the damages and ordered a retrial based on a new rule: the risk covered by insurance must be the primary or predominant cause of the damage.

In Monday’s case, however, the question was whether insurers could put an even more restrictive rule in their policies: denying coverage if the damage would not have occurred without earth movement, regardless of what caused the movement.

The Martins, contesting the exclusion, relied on a California law that says an insurer must pay benefits when a risk covered by the policy was the “proximate” cause of the damage, a term that has been interpreted to mean either the primary cause or a substantial cause.

But the appeals court said the law applies only when an insurance policy is silent on the issue and does not prevent an insurer from putting more severe restrictions in the policy.

The 3-0 decision endorsed the view of the trial judge, U.S. District Judge Consuelo Marshall of Los Angeles, who said: “An insurance company has the right to limit the coverage of a policy issued by it, and when it has done so, the plain language of the limitation must be respected.”

The unsigned ruling was issued by Judges J. Clifford Wallace, William Canby and Stephen Trott.

Paul Witmer, the Martins’ lawyer, said he was disappointed by the ruling. He contended that the state law “embodies public policy,” which cannot be violated by an insurance contract.

Peter Abrahams, a lawyer for State Farm, said the company “wrote the new policy language to avoid all these complicated discussions” about multiple causes of damage.