Farmers Property and Casualty Insurance Company v. Carter

Ms. Emily Carter’s home was damaged by a sinkhole caused by nearby construction. Farmers Insurance denied coverage, citing an earth movement exclusion clause. Carter filed a claim for breach of contract and bad faith. The trial court ruled for Carter, finding the exclusion ambiguous and that Farmers failed to investigate properly. Farmers appealed to the Texas Supreme Court, arguing the exclusion was clear and they had no duty to defend or indemnify. The case centered on whether artificial (construction-triggered) earth movement falls under the standard “earth movement” exclusion in homeowners’ policies.

The Texas Supreme Court affirmed in part and reversed in part. It held that the exclusion unambiguously covers all earth movement regardless of cause, but Farmers acted in bad faith by delaying investigation for six months. The court awarded Carter contractual damages for the sinkhole repair (denied coverage) but granted punitive damages for bad faith handling.

Whether the “earth movement” exclusion in a standard homeowners’ insurance policy applies to sinkholes caused by human construction activity (e.g., nearby excavation), and whether the insurer’s failure to conduct a prompt geotechnical investigation constitutes bad faith.

The decision prompted legislative reviews of earth movement exclusions in several states. Consumer advocates hailed the bad faith finding as a check on claims-handling delays. Insurers revised policy language to explicitly address man-made earth movement and accelerated investigation protocols. The case became a benchmark for balancing plain-language exclusions with insurer accountability.