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Insurance Company to Reimburse Insured for Redesign Costs Where Policy Fails to Define Land Use Ordinance and Environmental Regulation But Not Where Policy Expressly Excluded Costs Relating to Sinkholes

In High Assocs. v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 150711, Civil Action No. 12-5804 (E.D. Pa. Oct. 18, 2013) (J. Schmehl), the court granted summary judgment in favor of Plaintiffs on their claim for reimbursement of redesign costs of stormwater management basins, finding that the insurance policy at issue failed to define key terms and was thus ambiguous. However, the court granted a motion for summary judgment in favor of the defendant, Zurich American Insurance Company, relating to the costs of filling sinkholes as the court found the policy language clear and unambiguous in excluding those costs.

Following a substantial rainfall which caused sinkholes and damage to stormwater basins, Plaintiffs, as owners and developers of a large shopping center, had to stabilize and repair the basins and fill the sinkholes. Plaintiffs were forced to redesign the basins as state, county and municipal authorities refused to allow Plaintiffs to repair the basins in the same manner that they were previously constructed. Plaintiffs reported the loss to Zurich who had issued a Commercial Inland Marine policy. Zurich reimbursed Plaintiffs for the cost of rebuilding the basins as originally designed. Zurich, however, refused to reimburse Plaintiffs for the costs associated with the redesign and construction of the stormwater basins to conform to state and local regulations as well as for the costs associated with filling the sinkholes. 

With respect to the redesign of the stormwater basins, the court evaluated whether the East Lampeter Township Storm Water Management Ordinance ("Township SWMO") was a "land use ordinance," an "environmental regulation" or both. The Zurich policy's supplemental coverage provided that Zurich would cover the increased cost to repair a covered building or structure "as a result of the enforcement of a...land use ordinance, law or decree" which is "in force at the time when a covered peril occurs to a covered building or structure." Zurich denied coverage based on the policy exclusion that stated there is no coverage for "the costs associated with the enforcement of any ordinance, law or decree that...requires 'you' or anyone else to install process improvements or process modifications to property, when either is required or performed to comply with...EPA, or other similar environmental regulations." The Township SWMO was enacted pursuant to the Pennsylvania Storm Water Management Act, 32 P.S. § 680.1 et seq. ("PA SWMO"). The court determined that the Township SWMO was a land use regulation because it served to limit and control how property owners can use their property within the township. The PA SWMO, on the other hand, was an environmental ordinance because it contemplated the protection and preservation of the environment and the natural resources of Pennsylvania. As a result, the court found that the Township SWMO, which was a land use ordinance authorized by an environmental regulation, was in fact both a land use ordinance and an environmental regulation. Zurich failed to define "land use regulation" or "environmental ordinance" in the policy and failed to describe the differences between the two. The policy also failed to expressly exclude coverage where increased costs of design and construction were due to both land use and environmental regulations. As a result, the policy was ambiguous such that Plaintiffs could reasonably expect coverage for the increased costs to redesign the stormwater basins.

However, the court determined that the Zurich policy clearly excluded the costs relating to filling the sinkholes. The policy contained an earth movement exclusion which stated that Zurich would not pay for "loss caused by any 'earth movement' (other than 'sinkhole collapse') or caused by eruption, explosion, or effusion of a volcano." The definition of "sinkhole collapse" specifically stated that it "does not include the...cost of filling the sinkholes." Therefore, the policy expressly excepted sinkhole collapse from the exclusion but then excluded the cost of filling the sinkholes from the definition. The court held that this language was clear and unambiguous. Thus, Plaintiffs were not entitled to reimbursement for the costs of filling in the sinkholes.

The full decision can be found here: High Assocs. v Zurich Am. Ins. Co., No. 12-5804 (E.D. Pa. Oct. 18, 2013).pdf

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