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By Shannon M. O'Malley
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When underwriters evaluate potential causes of loss in the central United States, perils such as tornados and high winds, hail, and fire are generally identified as the primary risks of loss. But earthquakes? That is not a risk associated with Texas, Oklahoma, Missouri, Arkansas, etc. Recently, however, these states have experienced a dramatic increase in the number of registered earthquakes. This raises the question — have insurers in these states considered the risks associated with earthquakes?

Earthquakes in Texas?

While earthquakes in Texas and other central states are not unheard of, in recent years, coinciding with the implementation of the drilling technique known as hydraulic fracturing, there have be substantially more significant earthquakes.

For example, in 2004, there were no earthquakes measured in Texas.[1] In 2005, the U.S. Geological Survey measured two earthquakes.[2] But in 2011, the number of earthquakes jumped to 38. And in 2013, there were 54 earthquakes.[3] As of Feb. 25, 2014, there already have been 10 earthquakes reported in Texas.[4] And while these earthquakes have not reached the intensity of quakes in the California region, or caused the same amount of damage, building structures nevertheless are exhibiting the effects of the earth’s movement.

At this time, there is no definitive proof that the increase in earthquakes is the result of fracking. Several studies and articles[5] have evaluated the correlation between the increase in and proximity of earthquakes in relation to fracking operations and injection wells associated with drilling for natural gas.

A number of affected businesses and homeowners have filed lawsuits against drilling companies claiming a correlation between the drilling and their damaged structures.[6] There is no consensus yet that these operations have actually caused the earthquakes.

One thing that is indisputable, however, is that earthquakes are occurring in these central regions. And structures in these locales are not built to withstand smaller earthquakes, unlike their counterparts in California. Therefore, structures are exhibiting cracks in walls and floors, stuck doors and windows, and sinkholes are forming — all potentially as a result of these earthquakes.[7]

How Do the Earthquakes Affect Underwriting?

The central U.S. earthquake discussion has been focused on blame and causation — whether the drilling companies are responsible for the uptick. Inevitably, however, the focus will shift to the actual damage and some focus will shift to whether the commercial or homeowners property insurance policies cover the damage.

Any coverage will be governed by the specific insurance policy at issue, the facts surrounding the loss and the specific state’s law. But there are general principles of insurance law that will apply to losses arising out of earthquakes in the central U.S., and they should be considered when underwriting risks in these states.

Gradual vs. Sudden Damage

Given the relatively small size of these quakes (averaging less than 3 on the Richter scale), no significant damages have yet been reported. But earth tremors can cause cracks in structures and foundation damage. Attorneys practicing in jurisdictions such as Texas know that the soil often shrinks and expands, causing foundations to shift and resulting in these same types of damage. Therefore, one insurance issue raised by earthquakes is whether property damage was caused by settling, cracking, shrinking, etc., or by earthquake. Commercial property insurance policies often contain two provisions that may apply to property exhibiting cracking, foundation shifting, and stuck doors and windows: (1) the “settlement” exclusion; and (2) the “earth movement” provision.

The settlement exclusion is generally defined to exclude coverage for damage caused by or resulting from “settling, cracking, shrinking, bulging, or expansion of pavements, foundations, walls, floors or ceilings.”[8] An earth movement provision, which can be either an exclusion or a specific coverage grant, may state: “Earth movement, including but not limited to earthquake, landslide or subsidence.”[9]

Courts differentiate between settlement exclusions and “earth movement” provisions by recognizing that settlement exclusions do not apply to exclude damage “from unanticipated or sudden forces.”[10] Courts generally recognize that settlement exclusions bar gradual foundational damage, including damage due to soil compression, shrinkage, and expansion issues.[11]

Courts find that earthquakes, which cause earth movement under more sudden forces, fall under insurance policies’ “earth movement” coverages or exclusions.[12] The primary difference between an earth movement provision (for coverage or exclusion) and the settlement exclusion is whether the damage is sudden and/or cataclysmic.[13] Therefore, any type of movement of earth or soil does not necessarily fall under a policy’s “earth movement” provision.

For example, in T.R. Jones v. St. Paul Insurance Co.,[14] a Texas court of appeals held that structural damage to a commercial building caused by moisture-related expansion and contraction of soils under an insured’s property was not “earth movement.” Instead, that provision “contemplate[d] abnormally large movements such as the examples listed” in the provision — i.e. earthquake, landslide, mudflow, earth sinking, earth rising or shifting.[15] These distinctions raise flags that should be considered by underwriters. “Earth movement” coverage is often an add-on that may be purchased by the insured, such as flood insurance. The central U.S. states that are experiencing these earthquakes are generally located in Seismic Zones 0, 1, and to a lesser extent, 2. These zones are seen as lower risk for insurers and, therefore, underwriters may be more willing to sell coverage for “earth movement” provisions at a reduced rate in these states. But given the rise in the number of earthquakes and similar “sudden” occurrences, underwriters may want to look more closely at the risks and type of damage that may result.

If insurers do not want to cover these types of damage to structures, they should ensure that their policies contain exclusions for both types of earth movement (or a combination of the same language from each) to exclude coverage for physical loss or damage resulting from both gradual and sudden/cataclysmic earth movement.

Causation If an insurance policy excludes foundation damage due to settlement, but covers “earth movement,” the insurer and insured may dispute the cause of the damage. For example, a property may have preexisting foundation damage due to gradual subsidence or other soil movement and exhibit some cracking in the walls and floors. Later, however, an earthquake may strike the area causing more significant damage to the structure requiring repair. If the insurance policy in place excludes both settlement and earth movement, then there is likely no dispute. But if the policy provides coverage for “earth movement,” then the question arises: What portion of the cracking is covered by the policy?

In Texas, the insured has the burden to prove coverage and allocate between covered and excluded damage, even when a loss may be caused, in part, by an excluded cause of loss.[16] Other states, such as Oklahoma, place the burden on the insurer to demonstrate the amount of damage excluded by the policy.[17] Either way, the parties must present evidence to allocate between the covered damage (cracking due to earthquakes) and excluded damage (cracking due to settlement).

Another thorny issue is the extent of damage caused by the earthquake. If there is coverage for earth movement, the question may be whether the earthquake damaged the property in some unforeseen fashion — such as made it more susceptible to foundational shifting or weakened its structure. In that case, damage may not manifest until a few years later, after an insurance policy has expired. Coverage and the policy triggered will depend on the specific policy language and the state’s trigger of coverage laws.

Man-Made vs. Naturally Occurring Earthquakes

In some instances, courts have distinguished coverage under the earth movement provision when the movement was the result of a “man-made” cause of loss as opposed to a naturally occurring earthquake.[18] This distinction generally applies when the insurance provision is limited to naturally occurring losses (i.e. earthquake, landslide, mudflow) or includes a “man-made” movement (i.e. movement resulting from improper compaction, site selection or any other external forces).[19] Courts sometimes recognize that anti-concurrent causation language or other broad lead-in language may also ensure that an earth movement provision applies to man-made movement.[20]

Given the ongoing investigation into whether the central U.S. earthquakes are caused by the fracking and injection wells, there may be a dispute as to whether these earthquakes are man-made and therefore covered or excluded. Certainly this question will be relevant if the insurer provides coverage for the loss and seeks to recoup any payments through subrogation. Underwriters should be aware of the distinction courts make between the naturally occurring events and events arising from human influence when determining what coverage they intend to provide to insureds.

Conclusion Case law discussing earth movement in the central U.S. generally relates to foundation shifting and external causes, such as plumbing leaks or faulty workmanship rather than earthquakes. Given the abnormal number of earthquakes that are occurring in these areas, however, insurers should be prepared for claims relating to earthquakes — whether policies contain an earth movement coverage provision, exclusion, or neither. Regardless, underwriters should be aware of this issue and be sure that the risks are assessed and the parties’ intent is accurately reflected in the policy.

—By Shannon M. O'Malley, Zelle Hofmann Voelbel & Mason LLP

Shannon O'Malley is a partner in Zelle Hofmann's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] http://eqcharts.com/earthquakes-texas-1990-2014/

[2] Id.

[3] Id.

[4] Id. In fact, studies have shown that earthquakes registering 3 and higher on the Richter scale have increased to approximately 100 per year during 2010-2013 compared with an average of 20 quakes a year from 1970-2000.

http://www.sciencemag.org/content/341/6142/1225942.abstract?sid=c30345be-b412-4fc6-8b5a-165edc857151

[5] See e.g. Winder, Jed P., “Measuring the Response to Texas Earthquake Uptick,” Jan. 23, 2014, Law360, http://www.law360.com/articles/502337/measuring-the-response-to-texas-earthquake-uptick.   

[6] See e.g. Hearn v. BHP Billiton Petroleum (Arkansas) Inc., et al., No. 4:11-cv-474 (E.D. Ark); Finn et. al. v. EOG Resources Inc., et al., No. C2013-00343, 18th Judicial District Court of Johnson County, Texas.

[7] Elkind, Peter, “An Earth-Shaking Mystery in Texas,” CNN Money, Jan. 23, 2014.

[8] Boston Co. Real Estate Counsel v. Home Ins. Co. Inc., 887 F. Supp. 369, 371 (D. Mass. 1995).

[9] Id.

[10] Id. at 373.

[11] Id.

[12] Id.at 374.

[13] See e.g, Burton v. State Farm Fire & Cas. Co., 533 F.2d 177, 179 (5th Cir. 1976) (finding that “the term ‘settling’ ... refers to damage caused by action of the structure in response to gradual movement of the earth beneath the house. By contrast, ‘sinking’ refers to a sudden earth movement ...”). See also Boston Co. Real Estate, 887 F. Supp. at 374 (holding that foundation damage was not covered under policy’s earth movement endorsement because the damage at issue was caused by gradually occurring soil compression — not a sudden, cataclysmic event); see also KAAPA Ethanol LLC v. Affiliated FM Ins. Co., No. 7:05-CV-5010, 2008 WL 4790997, at *7 (D. Neb. Oct. 30, 2008) (holding that policy’s earth movement endorsement unambiguously encompassed “damage caused by sudden or abrupt earth movement,” whereas settlement exclusion applied to “damage caused by the gradual movement of a structure’s foundation”).

[14] T.R. Jones v. St. Paul Insurance Co., 725 S.W.2d 291 (Tex. App. — Corpus Christi 1987, no pet.).

[15] Id. at 294.

[16] Hardware Dealers Mutual Insurance Co. v. Berglund, 393 S.W.2d 309, 310 (Tex. 1965); Wallis v. United Services Automobile Ass., 2 S.W.3d 300, 303 (Tex. App. — San Antonio 1999, pet. denied); TEX. R. CIV. P. 94.

[17] Myers v. Travelers Home & Marine Ins. Co., 12-CV-0056-CVE-PJC, 2012 WL 1664251 (N.D. Okla. May 11, 2012) (recognizing that under Oklahoma law, “once the insured establishes coverage, ‘the insurer has the burden of showing that a loss falls within an exclusionary clause of the policy.’”).

[18] See e.g. Fayad v. Clarendon Nat. Ins. Co., 899 So. 2d 1082, 1087 (Fla. 2005) (recognizing the “distinction between losses caused by natural events, which are often cataclysmic and widespread, and losses caused by man-made events” and holding that damage from blasting was not excluded because it was a man-made event). See also, Winters v. Charter Oak Fire Ins. Co., 4 F.Supp.2d 1288, 1291 (D.N.M.1998) (construing earth movement exclusion to include only naturally occurring events); Sentinel Assocs. v. American Mfrs. Mut. Ins. Co., 804 F.Supp. 815, 818 (E.D.Va.1992) (determining that if natural forces led to the damage the earth movement exclusion is applicable; whereas if a man-made problem caused the damage the exclusion is inapplicable); Wyatt v. Northwestern Mut. Ins. Co., 304 F.Supp. 781, 783 (D.Minn.1969) (“Certainly not all earth movements, or at least those where some human action causes such are included in the [earth movement] exclusion.”); Bly v. Auto Owners Ins. Co., 437 So.2d 495, 497 (Ala.1983) (stating that the exclusion enumerated only naturally occurring phenomena); Opsal v. United Servs. Auto. Ass'n, 2 Cal.App.4th 1197, 10 Cal.Rptr.2d 352, 355 (1991) (stating that earth movement exclusion can be reasonably read to apply only to naturally occurring earth movement); Henning Nelson Constr. Co. v. Fireman's Fund American Life Ins. Co., 383 N.W.2d 645, 653 (Minn.1986) (determining that “the earth movement exclusion must be construed to apply to earth movements caused by widespread natural disasters and not to those caused by human forces”); Ariston Airline & Catering Co. v. Forbes, 211 N.J.Super. 472, 511 A.2d 1278, 1284 (1986) (concluding that the term “earth movement” must be interpreted as referring to natural phenomena); United Nuclear Corp. v. Allendale Mut. Ins., 103 N.M. 480, 709 P.2d 649, 652 (1985) (finding no error in the trial court's construction of the earth movement exclusion to apply to only naturally occurring phenomena); Holy Angels Acad. v. Hartford Ins. Group, 127 Misc.2d 1024, 487 N.Y.S.2d 1005, 1007 (N.Y.Sup.Ct.1985) (concluding that the earth movement exclusion was intended to remove from coverage damage occurring from natural causes); Steele v. Statesman Ins. Co., 530 Pa. 190, 607 A.2d 742, 743 (1992) (strictly construing the earth movement exclusion as applicable only to earth movement caused by natural events); Rankin v. Generali-U.S. Branch, 986 S.W.2d 237, 239-40 (Tenn.Ct.App.1998) (declining to apply earth movement exclusion to bar recovery for damage caused by man-made event); American Motorists Ins. Co. v. R & S Meats Inc., 190 Wis.2d 196, 526 N.W.2d 791, 796 (Wis.Ct.App.1994) (stating no preclusion under earth movement exclusion where earth movement results from human action).

[19] Brice v. State Farm Fire & Cas. Co., 761 F. Supp. 2d 96, 102 (S.D.N.Y. 2010).

[20] See e.g. Brice, 761 F. Supp. 2d at 102 (recognizing that the exclusion may be defined to include man-made events: “... whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these ....”); State Farm Fire & Cas. Co. v. Bongen, 925 P.2d 1042, 1045 (Alaska 1996) (recognizing that “since the exclusion is for earth movement loss from any cause, we can only conclude earth movement encompasses both natural and human processes”).