MUDSLIDE DIDN’T CAUSE BUILDING TO EXPLODE SO COVERAGE IS EXCLUDED

In an opinion that the Tenth Circuit has designated for publication, Paros Properties LLC v. Colorado Casualty Insurance Company, No. 15-1369, 2016 U.S. App. LEXIS 15925 (10th Cir. Aug. 29, 2016), the court held that a mudslide exclusion in a policy insuring a commercial building applied to extensive damages caused to that building by such a slide and relieved the carrier of any obligation under the policy, despite plaintiff’s claim that the mudslide caused the building to “explode,” which could have triggered the “explosion” exception to the mudslide exclusion in the policy. In holding for the insurance company, the court ruled that under such an exception, the word “explosion” refers to damage caused by a buildup of internal pressure, not when a building “explodes” from the mudslide’s impact. It stated that to hold otherwise would virtually eliminate the exclusion and read it out of the policy since mudslides “typically produce extreme forces that can smash anything in their paths.”

In September 2013, the insured’s building was destroyed by a mudslide in Boulder, Colorado, and the owner filed a claim with Colorado Casualty, the issuer of the property policy. The policy contained a provision entitled “Water Exclusion Endorsement” which, among other things, excluded from coverage any damages caused by “[m]udslide or mudflow.” Based on the undisputed fact that the building had been destroyed by a mudslide, Colorado Casualty denied the claim based on the exclusion. Paros Properties, LLC (“Paros”), the building’s owner, filed suit in Colorado state court seeking both payment of the claim and bad faith damages based on the alleged improper claim denial. Colorado Casualty removed the case to federal court based on diversity jurisdiction, albeit untimely based on its argument that it did not have notice that the claim was for more than $75,000 when the complaint was served, and filed a motion for summary judgment based on the mudslide exclusion, which was granted. Paros appealed, citing the exception to the exclusion if the mudslide causes, among other things, an “explosion.”

Paros argued that because the mudslide caused the building to “burst apart with a loud boom,” the damages fell within the explosion exception. The court disagreed and stated that even though the policy did not define “explosion,” the widely accepted definition is that an explosion is the result of a buildup of internal pressure and a sudden bursting outward in all directions. The court did acknowledge however, that under the terms of the policy, if the mudslide had, for example, damaged a gas pipe, which then caused an explosion, the exception would apply, although it rejected Paros’s argument that mud, water, and debris had built up within the building and caused the walls to burst outward because there was no evidence in the record to support that claim. (The court’s scientific analysis of why a watermelon bursting after being shot through by a bullet based on kinetic energy is indeed an explosion makes the opinion a worthwhile read).

Based upon its determination that the building was destroyed by the mudslide and not by an explosion, the court affirmed the district court’s grant of summary judgment to Colorado Casualty.

It is also worth noting that the appeals court determined that Colorado Casualty’s removal was not timely under 28 U.S.C. § 1446 but it determined, based on the United States Supreme Court’s ruling in Caterpillar Inc. v. Lewis, 519 U.S. 61 (1996), that because federal jurisdictional requirements were met at the time of the ruling on the motion for summary judgment, and because the district court had correctly ruled on the merits, the appeals court could affirm the judgment and did not have to remand the case back to the state court and force the parties to relitigate the matter there, expending further costs and burdening the state system.

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