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| November 2009, Volume 35 |
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130.6-7CONCURRENT CAUSATION AND ANTI-CONCURRENT CAUSATION CLAUSES–A DISCUSSION(December 2008) INTRODUCTION
Which came first – the chicken or the egg? At times it is difficult to identify when and why an insurance concept began or developed. That is not the case with concurrent causation. A direct chain of events has lead to the current situation where both concurrent causation and anti-concurrent causation clauses are important parts of the insurance fabric. However, before tracing the linage of this concept, two important terms must be defined. Insurance Words and Their Meanings provides the following simple definitions:
Example:
A boy drops a ball. It rolls down
the hill and strikes a car. The proximate cause of the loss is the boy dropping
the ball. If another child intervened and kicked the dropped ball, the kicking
replaces the dropping of the ball as the proximate cause.
Example: The ball in the example above strikes the car at the same time the car’s tire runs over a nail that punctures it. Both events occur at the same time. One of them, collision, is covered. The other, tire puncture, is not. BACKGROUND
In the very early days of insurance, insurance on property was offered for only specified perils. Fire insurance was the first, soon followed by lightning because of the close relationship between the two. The insured could purchase separate insurance coverage for wind and hail, explosion, riot, civil commotion, vehicle damage and aircraft damage. Selling these coverages separately led to adverse selection because insurance buyers understood their own exposures much better than insurance company underwriters and purchased only coverages with a high degree of exposure relative to the premium charged. Companies next developed extended coverage endorsements to combine the perils indicated above while still excluding boiler explosion and vandalism and malicious mischief. They discovered that they could charge a lower premium on this basis because of the increased number of purchasers and a reduction in the element of adverse selection. These combined perils are now represented in large part by CP 10 10–Causes Of Loss–Basic Form. Because of the success of this endorsement, a broad perils endorsement that added vandalism and other perils was introduced. These combined perils now equate to CP 10 20–Causes Of Loss–Broad Form. Coverage was available for the specific perils listed. A dramatic shift occurred with the introduction of all risk perils similar to the coverage provided by Ocean and Inland Marine coverage forms and policies. Physical loss or damage to covered property applied unless specifically excluded or limited. This coverage is now known as CP 10 30–Causes of Loss–Special Form. This approach caused a radical shift in coverage interpretation. Under the named perils forms, the insured was required to prove that a loss was covered and identify the peril that caused the loss. With the all risk approach, the insurance carrier had to identify and explain the exclusion or limitation that excluded or limited coverage. Earthquake and flood were and still are two of the primary exclusions under the all risk approach. They are considered uninsurable due to their unpredictable and catastrophic nature. The federal government provides flood coverage and a limited earthquake market is available to those customers willing to pay the high premiums involved. Two California court cases in the early 1980s changed everything. The term concurrent causation was introduced and policies have not been the same since. In the first case, Safeco Insurance Co. v. Guyton, 692 F.2d 551 (1982), Safeco was found liable for flood damage under an all risks homeowners' policy, despite its very clear flood exclusion. The court agreed that flood was excluded. It stated that the proximate cause of the loss was the negligent maintenance of the flood control structures and, since such third party action was not excluded, the resulting damage from the failure of the flood controls was covered, even though flood itself was specifically excluded. In a similar manner, in Premier Insurance Co. v. Welch, 140 Cal. App. 3d 720 (1983), the homeowners' all risks policy with a very clear earth movement exclusion was found to cover landslide damage to the insured's home. This was because the faulty installation of a drain by a third party was the proximate cause of the loss. Since the faulty installation was not excluded, the earth movement loss was covered, even though earth movement itself was specifically excluded. These two decisions sent shockwaves through the industry and forced it to make choices. Premiums could be increased significantly to cover the potential losses presented by these decisions or changes in coverage language could be made. The decision was to revise the wording in all policies so the insured could choose for itself when and how to insure flood and/or earthquake. The 1989 California Supreme Court case involving Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704 held that the California appellate courts misinterpreted the cases cited above that used concurrent causation doctrine to allow coverage in the face of a clearly excluded peril. It stated that when a loss can be attributed to two causes, one covered and one excluded, coverage applies only if the covered peril is the efficient proximate cause of the loss. These exclusions may not have been needed if this decision had applied to the previous cases. However, since the Insurance Services Office (ISO) had already added them, most insurance companies simply left them in. As a result, this may be potentially harmful to the insured that sustains a loss where the efficient proximate cause is a covered cause of loss where an excluded cause of loss is also involved. Another California case in point is State Farm Fire & Casualty Co. v. Von Der Lieth, 218 Cal. App. 3d 964 (1990). An appeals court overturned a lower court decision that held that third party negligence was the efficient proximate cause of loss and not earth movement. In this case, the appeals court found that even though the third party was negligent, that negligence was not the efficient proximate cause of the loss. The earth movement was. In the Utah case Alf v. State Farm Fire & Casualty Ins. Co., 650 P.2d. 1272 (1993), the efficient proximate cause doctrine was upheld but did not apply in this case because the parties had agreed to contract out of it. Occasionally, an insured
encounters the ordinance or law exclusion. The insurance company relies on this
exclusion to deny coverage for the insured's costs of demolition and debris
removal of a structure seriously damaged by a covered cause of loss when
authorities deem it to be a threat to public safety and order its demolition.
In at least two cases, the courts held that the condition of the building after
a loss that required its demolition was separate and apart from the demolition
order from the authority, effectively setting the exclusion aside. Two of the
cases are Norfolk & Dedham Mutual Fire Ins. Co. v. DeMarta, 799
F.Supp.33 (1993) and Digravina v. Merchants Mutual ins. Co. OTHER
COURT DECISIONS
One court decision that played a major role in the importance of concurrent causation was the Welch case mentioned above and cited below. In that dispute, a drainage system was installed before a home's foundation was laid. The system consisted of a perforated drainage pipe that emptied into a hillside below. The lot was filled and graded, the house built, and a sewer main installed in addition to other construction activities. The fill began sliding downhill during a heavy rainy season, the foundation piers tilted and the foundation cracked, resulting in the house slipping off its foundation and falling into a ravine. The insured brought a claim under its all risk homeowners policy. The insurance company denied the claim because of the standard earth movement and flood exclusions. The resulting lawsuit found in favor of the insurance company and the insured appealed. Investigation revealed that the sub-drain designed to release subsurface waters had been damaged at the lower end and could not accommodate percolating rainwater. The accumulated water saturated the fill and the movement resulted in the home's destruction. One explanation given was that the damage to the drain at the lower end was probably caused by the sewer contractor when the sewer main was laid several feet below the previously installed sub-drain. The appellate court held that the immediate cause and a concurrent cause of the loss was the damage to the drain beneath the structure. This was construed to be a covered peril and not an excluded one. The trial court judgment in favor of the insurance company was reversed. The appeals court declared that the policy covered the loss. In Sunshine Motors v. New Hampshire Ins. Co., 1995 Michigan Court of Appeals, the court reviewed a loss involving heavy rains. A drainage system was blocked by debris and the accumulated water caused flood damage to an auto dealership. Instead of claiming damage directly from flooding, which was excluded, the claim was based on blocked drainage. The lower court agreed with this reasoning but it was reversed on appeal. The higher court ruled it a flood loss and subject to the policy exclusion. A business interruption loss was at the heart of Quadrangle Development Corporation v. Hartford Insurance Co. A hotel had to shut off its electric power after a fire broke out and damaged its switchboard. The repairs took half a day and the hotel filed a claim because of the power outage. The loss originated from electric arcing which, in turn, caused the fire that damaged the board and shut down the power. The hotel's policy covered fire but not electric arcing. The hotel argued that the fire was a concurrent cause and that its loss should be reimbursed by its policy. The court thought otherwise and ruled that the policy language did not extend coverage for arcing, what it determined as the proximate cause of loss. The court reviewed a different loss in the Missouri case of Pace Properties v. American Manufacturers Mutual Ins. Co. A retaining wall located on the premises of a shopping center collapsed and the insurance company denied the claim. The shopping center sued and the trial court jury awarded it damages. The insurance company appealed and asked for the decision to be reversed based on its allegation of clear policy language that barred coverage. However, the higher court saw things differently. After reading the policy, it ruled that it was worded in such a way that coverage still applied. The insurer thought the collapse occurred concurrently with the excluded deterioration. In the court's eyes, the policy section did not shield deterioration from concurrency. It ruled that the center was owed coverage for the collapse of its retaining wall. In the California case of Seneva Berry dba Sunny Farms v. Commercial Union Ins. Co., Berry sued the manufacturer of her farm’s irrigation system. Her claim was for serious damages after her irrigation system corroded. On an earlier date, she pumped liquid fungicide to the system to combat an attack of blight to her carrot and potato crop. Since the system was only designed to handle water, the chemicals corroded the piping. The insurance company claimed that the corrosion was not covered. The farmer argued that the loss was concurrently caused by the manufacturer's negligence. She felt the manufacturer owed a duty to warn customers not to put chemicals in the system. The court considered a number of cases it felt were relevant to the issue, including the Pace case indicated above. It ruled in favor of Berry and stated that failure to warn the customer qualified as an efficient proximate cause that occurred sequentially with the use of a corrosive substance. The insurance company was obligated to pay the loss. A New York Court firmly rejected this approach in Kula v. State Farm. A homeowner sued for coverage after earth movement damaged his home. Water from a broken pipe washed away enough soil to create the damage. This court decided that the insurance policy language clearly excluded the loss. The court recognized the concept of concurrent causation but did not see where the concurrent loss defeated clear policy language. The water loss exclusion was upheld. Obviously, courts do not readily or automatically allow coverage simply because of a claim that the loss was created by concurrent sources. Please refer to PF&M Section 270_C111, Parade Sponsor's General Liability Policy Held Not Applicable To Injuries Caused By Owned Automobile, in Court Cases, for an example of a court rejecting the notion. In a decision that could potentially affect property insurance claims arising from Hurricane Katrina, the United States Court of Appeals for the Second Circuit found that coverage under Texas law is based on direct damage caused by rain instead of indirect damage caused by wind. While Turner Construction Co. v. Ace Property & Casualty Insurance Co., No. 04-6641-cv (2nd Cir. Oct 28, 2005) is based on a unique set of facts, the split decision may affect the issue of concurrent causation as between wind damage, generally covered under property policies, and flood damage which is usually excluded. Turner involved damage to the Houston Convention Center from rain that entered it through openings caused by the wind. The insurance policy excluded coverage for rain, whether driven by wind or not, unless located within a fully enclosed structure and then only for such loss caused by or resulting from rain entering through an opening or breach in the building due to a covered cause of loss not otherwise excluded. The policy wind deductible in this case was 1% of the value of the covered location. This amount was more than the actual damage to the building to the extent that, if it were controlling, there would be no coverage. The policy also had a $10,000 deductible for all other covered causes of loss. At trial, the district court issued summary judgment for the insurance company and ruled that the wind deductible applied to the loss. It found that rain, including rain driven by wind, is an excluded cause of loss unless it enters an enclosed building through an opening created by a covered cause of loss. Since wind created the opening through which the rain entered, it concluded that the wind deductible applied. The court of appeals disagreed. It noted the lower court's reasoning to be plausible but found the wind deductible to be ambiguous and not applicable. It reasoned that wind deductible was not a defined term in the policy. It felt it would apply to damage caused directly by wind, such as a tornado. However, in this case it felt the damage was directly caused by rain and only indirectly by wind. In other words, even though wind created the opening through which the rain entered, the rain alone caused the damage. The dissenting justice disagreed with the majority view that application of the deductible is based on the direct cause of loss. He reasoned that rain itself can never create a covered cause of loss under the terms of the policy. On the contrary, rain damage is covered only if it arises from wind damage and the wind deductible should control. His interpretation followed his observations of the practice in the Texas insurance industry. In his view, windstorm coverage commonly protects against hurricanes with the exclusion for loss caused by water, whether driven by wind or not, unless the building first sustains actual damage by direct force of wind, and water enters the building through openings made by the direct action of the wind. In other words, Texas excludes flood and water damage unless it results from openings to structures caused by wind. According to the justice, under this practice, the water damage at issue in this case must be inextricably linked to wind damage to be covered. As a result, the wind deductible must apply. Both opinions have potential implications for Hurricane Katrina and other hurricane claims. In a concurrent cause of loss situation, the majority opinion reasoning arguably supports a conclusion that coverage is determined based on the most direct cause of loss, potentially from flooding, and not damage from an indirect cause, wind, unless the wind creates an opening in a building through which floodwaters enter the building. For its part, the dissenting opinion also recognizes the general practice that water damage is generally not covered under property policies unless it is the result of openings to buildings caused by wind or some other cause of loss. EROSION
OF CONCURRENT CAUSATION
Responding to court decisions on concurrent causation, insurance companies have reviewed and rewritten personal and commercial property coverage forms to clarify the intent of coverage. The two specific areas addressed involve changing collapse coverage and adding what are commonly called anti-concurrent causation clauses. COLLAPSE
COVERAGE RESTRICTIONS
ISO excludes collapse from CP 10 30–Causes Of Loss–Special Form and then adds back limited collapse coverage under Additional Coverage–Collapse. Collapse coverage is usually restricted to a collapse caused by any of the following:
ANTI-CONCURRENT CAUSATION CLAUSES
Anti-Concurrent Causation (ACC) clauses have two parts. The most frequently discussed and derided language is found in the introductory language to one specific set of exclusions. However, other exclusions in the coverage form are not subject to this same strict language. This particular clause has three parts: 1. The insurance company does not insure for direct or indirect loss caused by the listed causes. 2. The loss is excluded regardless of other causes or events that contribute to the loss concurrently or in a sequence. 3. The exclusions still apply even if the loss event is widespread or affects a large area. While ISO provides standardized wording for this introductory language, not all companies use it. Some clauses are more restrictive and some are less but they all have these elements. It is as if to say, “We really, really mean that we don’t cover these types of losses.” Example: Mike lights a match and intentionally sets his home on fire. Even though the intentional act is excluded, fire is a covered cause of loss. And even though fire is a covered cause of loss, there is no coverage because it occurred concurrently with an excluded intentional act. The second part of the anti-concurrent clause is a list of specific events that are not covered. However, losses caused by them are excluded only if they are excluded elsewhere in the policy. These events are: 1. Weather conditions 2. Acts or decisions made by individuals or groups 3. Faulty, defective or inadequate construction, maintenance and materials, to name a few. Example: A hailstorm damages the roof of a house. Since hailstorms are weather conditions, they are excluded. However, since hail is not excluded elsewhere in the coverage form or policy, the loss is covered. Consumer advocates want to eliminate the ACC clauses because they believe they are unfair to the insured and violates its expectations concerning insurance coverage. On the other hand, the insurance industry believes the ACC language is necessary to avoid paying clearly excluded losses, such as flood and earthquake, or from their being found covered by judicial decree. The ongoing debate started in the mid 1980s and revives with every major catastrophe, with no end in sight. THE DEBATE CONTINUES
Consumers will continue to have high expectations with respect to their insurance coverage and insurance companies will continue to adjust claims based on the language of the coverage form or policy. This means that arguments will continue as long as expectations and reality do not match. It also means that, until consumers are willing to pay for, and insurance companies are willing to offer, true “all risk” policies, the debate will continue, especially when a widespread event occurs and even more so when a legislator is the consumer whose expectations are not met. |