Should Insurer Pay for Negligent Third Party?

Eric bought his home in 1976 and State Farm Insurance Co. has insured it since then. In 1983 Eric noticed cracking of the home’s interior and exterior walls, patio and front steps. A year later State Farm paid Eric $14,075 for physical damage to the house.

But Eric demanded the full $231,000 policy limit. He argued the damage is being caused by poor drainage in the subdivision, which lacks city sewers and storm drains.

State Farm sued Eric for declaratory relief, asking the court to decide if Eric should be paid. The insurance company argued that Eric’s homeowner insurance policy excludes damage for “earth movement.” But Eric replied that the cause of the rising underground water was the third-party negligence of the subdivision developer who failed to provide city sewers and adequate storm drains.

If you were the judge would you require State Farm to pay Eric for damage to his home caused by third-party negligence?

The judge said yes.

The cause of the damage to Eric’s home was the rising ground water due to inadequate drainage rather than earth movement, which is excluded under Eric’s homeowner insurance policy, the judge explained. “If third-party negligence is not excluded under such a policy, it is a covered peril,” the judge emphasized.

Since the damage was not caused by natural water, an excluded coverage, but to the artificially high level of ground water due to septic tanks rather than city sewers and to poor storm water drainage, all third-party causes, State Farm is liable to Eric for all the damage to his home, the judge ruled.

Based on the 1991 California Supreme Court decision in State Farm vs. Von Der Lieth, 2 Cal.Rptr.2d 183, 54 Cal.3d 1123.