California Court Upholds Insurance Denial for Mudslide Claim
A California appellate court has reaffirmed an insurance company's decision to deny a homeowner's mudslide claim, highlighting policy exclusions related to incomplete construction and natural events.
The case centers around a property in Sherman Oaks, situated at the base of a steep incline. In 2019, a construction company undertook a project on an adjoining lot, which involved building a large home and a retaining wall. Concerns arose when the wall, only partially completed with drilled holes and rebar, was reported to Los Angeles city officials. Despite these reports, no formal stop order was issued for the construction. As a significant rainfall hit in December 2019, water flow over the unfinished portion of the wall triggered a mudslide, damaging the neighboring property.
Insurance Claim and Denial
The affected homeowners filed a claim with First American Property & Casualty Insurance under their all-risk policy, anticipating coverage for damages amounting to approximately $386,000. Initial discussions with the insurer’s staff suggested a favorable outcome. An adjuster even remarked that the claim was "a done deal." However, the insurer reversed course and denied the claim in July 2020. The decision cited policy exclusions pertaining to earth movement, water damage, third-party negligence, and provisionally built structures.
The exclusion of such claims under "all-risk" policies has a precedent, as insurers typically specify exceptions to situations involving earth movement and weather-related incidents. Industry insiders understand that such limitations are integral to underwriting processes, aimed at clarifying the scope of coverage and managing potential liabilities effectively.
Legal Proceedings and Court Ruling
The homeowners pursued legal action, alleging breach of contract, bad faith, and fraud. However, the trial court and the appellate court both sided with First American, citing the clear applicability of the policy’s exclusions. On August 27, 2026, the Second Appellate District confirmed the decision. The court emphasized that an incomplete wall could not function properly, thus activating the stated exclusions.
| Claim Element | Court Finding | Insurance Implication |
|---|---|---|
| Cause of Loss | Policy Exclusions Apply | Earth Movement, Water, Third-party Negligence |
| Coverage Assurance | Not Binding Without Policy Support | Discussions Cannot Amend Exclusions |
| Incomplete Construction | Deemed Inadequate | Partial Construction Does Not Qualify for Coverage |
Implications for Insurance Professionals
This ruling serves as an important reminder for claims adjusters and legal advisors about the durability of policy exclusions, even in the face of potential internal communications suggesting coverage. It underscores the necessity for thorough policy understanding and clear client communication. Insurance professionals must ensure that all assurances align accurately with policy terms to prevent misunderstandings and legal disputes.
Furthermore, the case illustrates the critical role of construction compliance and risk assessment in underwriting decisions. Agents and brokers working with construction-related risks should diligently evaluate ongoing projects' adherence to regulatory standards to mitigate liabilities arising from incomplete work.