Special Causation Problems in First-Party Property Insurance*

 

Douglas G. Houser

Linda M. Bolduan

 

 

“Cause”: Something that produces an effect, result, or consequence.[1]

 

[T]he causation inquiry stops at the efficient physical cause of the loss; it does not trace events back to their metaphysical beginnings.[2]

 

 

I.

Introduction[3]

All-risk property insurance commonly provides coverage for “all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.”[4]  All-risk property insurance therefore requires an inquiry into causation.  What caused the loss?  On its face, that is a simple inquiry.  However, “[t]he question of . . . causes in property damage insurance lends itself to logic chopping as well as philosophic reflection.”[5]

            The crucial question is what causal event will be held legally accountable for that loss. This article will examine that question in the context of “all-risk” property insurance.

 

II.

Efficient Proximate Cause

            In our common experience, we tend to simplify causative events: Event A caused Loss B, the fire caused the house to burn down.  However, multiple events are often implicated in losses to property, and, for purposes of determining coverage under a particular policy, the insurance company needs to know which event “caused” the loss and whether that event is a covered peril.

            To determine causation when multiple events lead to a property loss, the majority of jurisdictions have adopted a “proximate cause” type analysis.[6]  Also sometimes called “efficient proximate cause,” “moving cause,” “predominant cause,” or combinations thereof,[7] the “proximate cause” of a loss is the “dominant, efficient one,”[8] the one that “sets in motion a chain of events that results in the loss without the intervention of any new or independent force.”[9]  Thus, when there is an “unbroken connection” between the event and the injury, the act “causes” the injury, and an intervening event is not a proximate cause of the injury “unless it is efficient to break the causal connection.”[10]

            As explained by the Supreme Court of West Virginia:

 

            [W]hen examining whether coverage exists for a loss under a first-party insurance policy when the loss is caused by a combination of covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss.  No coverage exists for a loss if the covered risk was only a remote cause of the loss, or conversely, if the excluded risk was the efficient proximate cause of the loss.  The efficient proximate cause is the risk that sets others in motion. It is not necessarily the last act in a chain of events, nor is it the triggering cause.  The efficient proximate cause doctrine looks to the quality of the links in the chain of causation.  The efficient proximate cause is the predominating cause of the loss.[11]

 

However, the efficient proximate cause doctrine applies only when there are at least two distinct perils, which “could each, under some circumstances have occurred independently of the other and caused damage.”[12]  Conversely, the efficient proximate cause doctrine does not apply when a loss is caused by a “single cause, albeit one susceptible to various characterizations.”[13]  Moreover, an insured may not avoid a policy exclusion “merely by affixing an additional label or separate characterization to the act or event causing the loss.”[14]

 

            A. Some Representative “No Coverage” Cases

Point Triumph Condominium Ass’n v. American Guarantee & Liability Insurance Co.[15] involved a condominium association (“Point Triumph”) that owned a complex in a small town located near the mouth of the Columbia River.  Situated only one and a half miles from the Pacific Ocean, the condominium complex had been exposed to normal violent wind and rainstorms. Beginning in 1993, Point Triumph began experiencing problems with water penetration into buildings finished with a siding material called Forestex.  The single building finished with cedar siding did not experience any water penetration problems.  Point Triumph sought coverage for damage to the buildings sided with Forestex, alleging damage “‘as a result of weather.’”[16]  The insurance company denied coverage, asserting that, based upon its investigation, the damage was due to failure of the siding, i.e. the siding “‘developed buckling’”[17] and then wind blew rainwater under the siding, causing wet and dry rot in the buildings.

The subject policy excluded loss resulting from “fungus, decay, deterioration, hidden or latent defect or any quality in the property that causes it to damage or destroy itself”[18] and faulty workmanship or materials.  Based upon the record before it, the court found that the plaintiff’s damages consisted of “‘fungus, decay, [and] deterioration,’” causes of loss expressly excluded from coverage.[19]  Further, the court found that the damage was caused by faulty workmanship or materials, also expressly excluded from coverage under the policy.

However, the plaintiff contended that the efficient proximate cause of its loss was covered wind-driven rain.  The court disagreed, concluding that there was no evidence in the record that wind-driven rain, “a common phenomenon on the Oregon Coast,” would have damaged the plaintiff’s buildings absent defects in the materials or inadequacies in the construction or maintenance of the buildings.[20]

In granting the insurance company’s motion for summary judgment, the court opined:

 

The damage to plaintiff’s buildings was not a “natural” direct or indirect consequence of the rain, but instead was an abnormal occurrence that would not occur in the absence of other conditions, -- the faulty material, construction, or maintenance established by the record – that were specifically excluded from coverage under the policy. . . . [T]he rain cannot be characterized as the “dominant” or “most important” cause of loss.  Accordingly, a trier of fact could not conclude that wind-driven rain constituted the efficient proximate cause.[21]

 

            The court also rejected the plaintiff’s argument that the damage to the underlying structures of its buildings was covered even if the siding was defective.  The court declined to distinguish damage to the buildings’ structure and damage to the siding, opining that damage to the underlying structures was a “direct result” of the defects in material, construction, or maintenance causes of loss excluded from coverage.[22]

Borton & Sons, Inc. v. Travelers Insurance Co.[23] involved a situation in which Borton grew, stored, and packed apples for sale in the domestic market.  In January 1993, one of its storage buildings collapsed due to ice and snow.  The building contained boxes of various types of apples, including a number of boxes of Fuji apples.  All of the apples were exposed to leaking ammonia as well as the weather.

After being notified of the loss, Travelers sent adjusters to the site.  They requested that Borton repack and sell as many of the apples from the damaged building as it could. Borton sold a good portion of the apples, including boxes of Fuji apples.  Borton did not tell its customers that the fruit had been involved in a roof collapse or that it might have been exposed to ammonia.

Borton also sold Fuji apples that had been stored in buildings not involved in the collapse.  However, the company could not sell some 1,089 bins of the undamaged Fuji apples, claiming that the domestic market for Fuji apples was in its infancy, with a limited customer base, and also that the sale of “inferior” apples from the damaged building eroded, in general, confidence in Borton’s Fuji apples.

Travelers declined to pay that portion of Borton’s claim for the 1,089 bins of Fuji apples.  Borton then filed suit, alleging breach of contract and bad faith.  The trial court granted Traveler’s motion for summary judgment and dismissed Borton’s claims.  The Washington Court of Appeals affirmed.

The policy issued by Traveler’s contained a clause that excluded coverage “for loss or damage caused by or resulting from . . . [d]elay, loss of use or loss of market.”[24]  Borton argued that its losses were caused by “loss of market value,” not “loss of market” as provided for in the exclusion.  The court concluded that, to the extent Borton claimed its loss was the result of conditions in the domestic apple market, the exclusion applied to bar coverage.  However, Borton contended that, even if the “loss of market” exclusion applied to its loss, the “efficient proximate cause” rule required the insurance company to pay for the loss because that loss resulted from a covered roof collapse.  The court disagreed, ruling that the “efficient proximate cause” rule could not override a policy exclusion for loss of market, and consequently found no coverage.

In State Farm Fire & Casualty Co. v. Slade,[25] during a severe storm, lightning struck a retaining wall attached to the insureds’ house.  The wall collapsed, causing the ground to give way, which eventually resulted in the cracking of the walls and ceilings in the house. The insureds sought coverage under their homeowners policy.  The insurance company denied coverage based upon an earth-movement exclusion in the policy.  However, the insureds asserted that the efficient proximate cause of their loss was the covered lightning and that the application of the earth-movement exclusion would violate the efficient proximate cause rule.

The Alabama Supreme Court disagreed with the insureds, noting that, under Alabama law, insurance companies and their insureds “are free to agree to any terms in a contract ‘so long as they do not offend some rule of law or contravene public policy.’”[26]  Therefore, at issue before the court was whether the efficient proximate cause rule stated a principle of public policy.

The court determined that the rule did not state a principle of public policy, and, if the court elevated the rule to a principle of public policy, it would invade the province of the legislature. The court concluded that the efficient proximate cause rule did not require it to invalidate the policy’s earth-movement exclusion, “which indicate[d] [the insurance company’s] efforts to contract for narrower coverage.”[27] Accordingly, the court held that the insurance company was entitled to a pre-verdict judgment as a matter of law with respect to the insureds’ claim that covered lightning caused the soil movement that resulted in the insureds’ loss “because the earth-movement exclusion unambiguously exclude[d] coverage for any loss caused in any way by earth movement and because that exclusion is enforceable.”[28]

In Pieper v. Commercial Underwriters Insurance Co., [29] a brush fire caused by arson destroyed the insureds’ collection of rare ceremonial masks.  The insureds sought coverage under an all-risk policy that contained an exclusion for loss or damage to property caused by brush fire.  The insureds contended that the efficient proximate cause of the fire was covered arson.  At issue before the California Court of Appeal was whether “arson” and “brush fire” constituted two separate perils, thereby triggering the application of the efficient proximate cause rule.

            The court concluded that there was a single cause of the fire – the excluded peril of “brush fire” and therefore the efficient proximate cause doctrine did not apply.  The court agreed with the insurance company that “‘just as a leak cannot occur without a break in a pipe[], a brush fire cannot occur without a source of ignition.’”[30]  In affirming the trial court’s grant of summary judgment in favor of the insurance company, the appellate court opined:

 

There are certain elements required to create a fire—oxygen, combustible material and a source of ignition. By labeling this fire as an ‘arson fire’ the [insureds] have artificially divided these essential elements into separate perils, which thereby flies in the face of common sense and the mutual intention of the parties.

            We find that the cause of the [insureds’] loss, damage to their fine arts collection, was due to one cause, the brush fire. The cause of the brush fire under the circumstances in which it was ignited seven miles from the [insureds’] residence is irrelevant to the issue of coverage. The efficient proximate cause doctrine does not apply.

“If every possible characterization of an action or event were counted an additional peril, the exclusions in all-risk insurance contracts would be largely meaningless.”[31]

 

Kish v. Insurance Co. of North America,[32] involved insureds who owned residences in a river basin. Heavy and continuous rainfall caused high levels of water in the basin, which eventually broke through protective dikes and damaged the insureds’ homes.  The insureds sought coverage under their all-risk homeowners policies, which expressly excluded coverage for losses resulting directly or indirectly from flood and surface waters.  The insureds contended, however, that the efficient proximate cause of their loss was rain, a covered peril.  At issue before the Washington Supreme Court was whether rain and flood constituted two separate perils, thereby triggering the application of the efficient proximate cause rule.

            Looking to the “plain, ordinary, and popular” meaning of the terms “rain” and “flood,” the court determined that an average purchaser of insurance would expect the term “flood” to include flood induced by rain.[33]  Because there was only one cause of the damage – rain-induced flood – that was “clearly and reasonably” excluded under the policies, the court held there was no coverage.[34]

            In reaching its decision, the court commented that the purpose of the efficient proximate cause rule is to provide a “‘workable rule of coverage that provides a fair result within the reasonable expectations of both the insured and the insurer.’”[35]  In the case at bar, the court found that application of the rule would circumvent the intentions and expectations of the parties:

 

Plaintiffs lived on a nationally recognized floodplain. The fact that their particular houses are located on parcels usually not flooded does not detract from this fact.  They knew that flood would be excluded by any insurance policy they purchased, as exemplified by the existence of the National Flood Insurance Program (of which Plaintiffs’ county was a part). . . .  The insurance companies anticipated that they would not have to pay for flood damage under their all-risk policies, particularly where the risk of flood is high and the National Flood Insurance Program applies.  To construe rain as a separate peril from flood in this case would fail to acknowledge the intent and expectations of the parties.”[36]

 

B. Some Representative “Coverage” Cases

            In Tento International, Inc. v. State Farm Fire & Casualty Co.,[37] Tento rented space for its electrical equipment company.  In making repairs to the roof covering Tento’s business, the roofing contractor removed a portion of the roof, but failed to install a temporary covering.  Rain fell and damaged Tento’s equipment.  Tento sought coverage under a policy covering accidental direct physical loss to property, unless the loss was “to the interior of any building or structure, or the property inside any building or structure, caused by rain, . . . unless:  a. the building or structure first sustains damage by an insured loss to its roof or walls through which the rain . . . enters . . . .”[38]  The trial court granted the insurance company’s motion to dismiss, holding that the policy clearly excluded coverage for the insured’s rain damage because the building did not first sustain damage to its roof by an insured loss. The Ninth Circuit reversed.

            The appeals court agreed with the insured that the predominant or “‘most important cause of the loss’”[39] was the roofing contractor’s negligence, not the rain. Because the contractor’s negligence was the efficient proximate cause of the loss, the court held that the loss would be covered, subject to any exclusions in the policy.

Bowers v. Farmers Insurance Exchange[40] involved a situation in which Bowers owned a rental house.  Without her knowledge, the tenants converted the basement of the house into a hothouse for growing marijuana.  The cultivation of the marijuana caused damage, including the growth of mold throughout the house.  As described by the court:

 

[T]he tenants diverted all of the heat from the furnace to the basement in order to create a marijuana grow room. They irrigated the marijuana plants under grow lights. This created a sauna-like environment in the basement. Additionally, they sealed the house and thereby trapped the water vapor generated by their activities in the basement.[41]

 

Bowers sought coverage under a landlord’s protection policy for warped paneling in the basement and the clean up of mold-related damage.  The insurance company paid for the damaged paneling, but denied coverage for the mold damage, asserting it was not covered under the policy.  The policy covered loss from vandalism, but not from mold.  Bowers contended that her loss was covered vandalism because the tenants willfully, wantonly, and recklessly damaged her property.  However, the insurance company argued that Bowers’ loss was due to mold, and mold losses were expressly excluded by the policy.  At issue was whether the efficient proximate cause of Bowers’ loss was the tenants’ vandalism, a covered peril, or the mold, an excluded peril.

Under Washington law, when an insured peril is the proximate cause of a loss, there is coverage, “even if subsequent events in the causal chain are specifically excluded from coverage.”[42]  In the case at bar, the court found that there could be no reasonable difference of opinion regarding the proximate cause of Bowers’ loss, holding that it was the tenants’ acts, which “‘in an unbroken sequence . . . [produced] the result for which recovery is sought[.]’”[43]

 

II.

Ensuing Loss

            Although a loss may, at first glance, appear to fall within an exclusion, a property policy may contain an exception to the exclusion for some, but not all, of the damage.  There are several types of ensuing loss clauses.  One type broadly covers any loss occurring subsequent to an excluded loss, so long as that subsequent loss is not excluded by the policy.[44]  A second type more narrowly covers losses subsequent to an excluded loss arising from specified perils.[45]

            A covered ensuing loss that follows an earlier excluded cause of loss may be related to or totally unrelated to that earlier loss.  For example, a “related” cause of loss may occur when excluded “faulty workmanship” or “earth movement” results in the breaking of a natural gas line – an uncovered loss.  But if the natural gas was then ignited by a spark, thereby causing a second, separate “fire” loss, the “fire” loss would be covered to the extent it could be reasonably identified and distinguished from the earlier uncovered loss.  A covered but “unrelated” ensuing loss may occur, for example, when a covered lightning strike follows a loss resulting from excluded “earth movement.”  The “lightning” damage would be covered to the extent it could be apportioned to the lightning event and would be a second, separate covered loss.  An interesting question arises in any attempted apportionment between an excluded cause of loss and a separate, second ensuing loss from a covered peril.  For example, what damage is there from the destruction by fire of building materials incorporated into a building that was arguably already worthless and uninhabitable as a result of an excluded faulty design or workmanship?

            Most courts appear to agree that the ensuing loss clause is clear and unambiguous.  For example, in McDonald v. State Farm Fire & Casualty Co., [46] the Washington Supreme Court stated:

 

            The ensuing loss clause may be confusing, but it is not ambiguous. Reasonably interpreted, the ensuing loss clause says that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered. The uncovered event itself, however, is never covered.[47]

 

            Richland Valley Products, Inc. v. St. Paul Fire & Casualty Co.,[48] a case decided by the Wisconsin Court of Appeals, illustrates the application of the ensuing loss clause.  In Richland Valley, brine mixed with ammonia in the insured manufacturer’s faulty ice cream machine, leading to crystallization and precipitation of salts and resulting in clogged pipes.  The insured’s policy excluded loss or damage caused or made worse by “contamination” and contained the following ensuing loss provision:  “If a loss that would otherwise be covered results from one of these causes, we’ll pay for the direct loss that results.”[49]  At issue was whether some portion of the insured’s loss constituted a covered ensuing loss.

            The court held that the insured’s loss constituted excluded “contamination.”[50]  The court reasoned that the initial contamination of the ammonia by the brine led to a subsequent contamination loss resulting from the crystallization and precipitation of salts, which eventually clogged the system.  The ensuing loss clause did not apply because this subsequent contamination was not a loss that would otherwise be covered under the policy.  In contrast, if the initial contamination had resulted in a fire, the fire loss would have been covered under the ensuing loss clause because loss by fire was a loss otherwise covered under the insured’s policy.[51]

            A. Direct Cause v. Ensuing Loss

            The purpose of an ensuing loss exception to an exclusion is to provide coverage only for certain losses that occur subsequent to an excluded loss, “not to enlarge the list of items covered under the policy.”[52]  Therefore, courts seek to ensure that the exception does not swallow the exclusion by precluding coverage for ensuing losses that are “directly related to the original excluded risk.”[53]  Absent a second, separate covered cause of loss, there should be no coverage.[54]

            For example, in Alwart v. State Farm Fire & Casualty Co.,[55] the insureds sought coverage under their homeowners insurance for losses resulting from the buckling, wrinkling, and bulging of the exterior wall surface of their house. It was undisputed that the problem was due to contractor error and improper workmanship.  The policy at issue provided coverage for any ensuing loss to property not excluded or excepted by the policy.  The ensuing loss clause was located in “Section I – Exclusions” and was followed by a list of specific exclusions, including one for faulty workmanship.  The insureds conceded that the policy excluded ensuing losses resulting directly from defective workmanship. However, the insureds contended that their losses were an “indirect” consequence of the faulty workmanship and were therefore covered.  The insureds gave as an example of an indirect loss water damage resulting from defective flashing, where the defective flashing was a non-covered, direct consequence of faulty workmanship.  The North Carolina Court of Appeals disagreed with the insureds. It held that the policy excluded the cost of repairing faulty workmanship, whether direct or indirect.

            In Acme Galvanizing Co. v. Fireman’s Fund Insurance Co.,[56] the California Court of Appeal expressly stated that, for an ensuing loss to be covered, it must be an independent, covered peril separate from the initial excluded peril.  In Acme Galvanizing, a steel kettle in the insured’s galvanizing plant ruptured, allowing several tons of molten zinc to spill, damaging or destroying the surrounding equipment.  The evidence showed that an inadequate weld caused the rupture.  The court ruled that the loss was caused by a latent defect, which was excluded under the all-risk commercial property policy at issue.

            However, the insured contended that, even if the kettle rupture was caused by an excluded latent defect, the discharge of the molten zinc that damaged or destroyed the surrounding equipment was a covered “ensuing loss.”  The court disagreed.

            The policy provided coverage for a loss precipitated by an excluded peril where the “loss by a peril not otherwise excluded ensues and then the Company shall be liable for only such ensuing loss.”[57]  The court interpreted this language to provide coverage only for an ensuing loss arising from a separate, independent, but covered peril resulting from the original excluded peril.  The court concluded that, in the case at bar, the ensuing loss clause did not apply to provide coverage for the insured’s loss.  It reasoned that:

 

[T]here was no peril separate from and in addition to the initial excluded peril of the welding failure and kettle rupture.  The spillage of molten zinc was part of the loss directly caused by such peril, not a new hazard or phenomenon.  If the molten zinc had ignited a fire or caused an explosion which destroyed the plant, then the fire or explosion would have been a new covered peril with the ensuing loss covered.  That did not occur.”[58]

 

Like the California Court of Appeal in Acme Galvanizing, the Fifth Circuit Court of Appeals in Alton Ochsner Medical Foundation v. Allendale Mutual Insurance Co.[59] recently concluded that a covered ensuing loss must be distinct from the initial loss.  In Alton, the insured sought coverage under an all-risk policy for costs associated with the repair of cracks in the foundation of a building under construction. In part, the policy did not insure against “faulty workmanship,” “settling [or] cracking . . . , unless physical damage not excluded by this Policy results, in which event, this Policy will cover only such resulting damage.”[60]

The insured conceded that the initial cracking of the foundation, which was only minor in extent, fell under one or both of the exclusions.  However, the insured argued that later, more severe cracking occurred, described as  “‘material impairment of structural integrity,’” that constituted “resulting damage” covered under the policy.[61]  In contrast, the insurance company argued that the language at issue referred to physical damage that was “‘distinct and separable’” from the excluded damage and made no quantitative distinction between major and minor damage.[62]

The Fifth Circuit Court of Appeals agreed with the insurance company, concluding that “‘resulting physical damage’” was “different in kind, not merely different in degree”[63] and perceiving no basis for the insured’s distinction between minor damage and material impairment of structural integrity. The court concluded that

 

[D]irect harm from cracking or faulty design or construction is excluded (no matter how severe it is) “unless physical damage not excluded by this Policy results,” that is, unless damage of a different kind – a kind that is not excluded – results. . . . [M]inor damage to the foundation does not “cause” the more severe structural impairment. The cracking is the impairment; they are synonymous.[64]

 

            B. Builders’ Risk Insurance and Ensuing Loss

            Builders’ risk insurance is a specialized type of temporary property insurance that insures a building during the course of construction.  Like other property insurance, builders’ risk policies may contain exclusions modified by ensuing loss language.  An example is a faulty workmanship exclusion, which may provide that the policy does not cover the  “‘[c]ost of making good faulty or defective workmanship, material, construction or design, but . . . shall not apply to the damage resulting from such faulty or defective workmanship, material, construction or design.’”[65]

            In Allianz Insurance Co. v. Impero,[66] the court held that a claim for bad concrete resulting from faulty inspection was excluded under the above-quoted exclusion.  In that case, the insured contractor sought coverage for repairs to deficiencies in the concrete wall of a building.  The evidence showed that the “bad” concrete resulted from a number of factors, including an erroneous determination by an inspector that the concrete mix had an adequate water content.  The insurance company argued that the faulty workmanship exclusion barred the claim.  The insured, however, contended that the inspector’s error led to damage resulting from that error within the meaning of the exception.

            The court agreed with the insurance company, reasoning that the sole claim was for the cost of correcting the deficiencies in the concrete, not for correcting damage to some other portion of the work.  The court concluded that, “when a contractor assumes the obligation of completing a structure in accordance with plans and specifications and fails to perform properly, he cannot recover under the all-risk policy for the cost of making good his faulty work.”[67]

            In contrast to the court in Impero, some courts have held that the “damage resulting from” language in a “cost of making good” exclusion permits coverage for faulty workmanship.  For example, in Rosenberg v. First State Insurance Co.,[68] the insureds had a builders’ risk policy, which they had obtained for a commercial building they were constructing. The policy covered lost rents due to “untenantability, caused by damage to or destruction of the building . . . by the peril(s) insured against during the term of this policy . . . .” and also contained a “cost of making good” exclusion.[69]

            The insureds did not complete the building on schedule due to damage resulting from faulty workmanship.  Although the damage rendered the building “untenantable,” the insurer refused to compensate its insureds for the resulting loss of rental income.  It argued that faulty workmanship was not a covered peril under the exclusion and therefore there was no coverage for lost rents.

            The court disagreed, finding that the exclusion did not establish that faulty workmanship was not a covered peril.  The court concluded:

 

            To the contrary, the phrase stating this exclusion goes on to clarify that ‘this exclusion shall not apply to damage resulting from such faulty or defective workmanship, material, construction or design.’ Because damage resulting from defective workmanship is expressly covered by the policy, the conclusion is inescapable that the faulty workmanship is a covered peril.[70]

 

            Similarly, in National Fire Insurance Co. v. Valero Energy Corp.,[71] the court held that an exception for damages “arising as a consequence” of faulty workmanship covered a loss due to the use of inadequately-designed components. In that case, during the testing phase of an oil refinery expansion project, a scrubber sustained substantial damage as a result of faulty design.  As a consequence, the insured had to shut down the refinery to make repairs and alterations.  The builders’ risk policy at issue excluded the cost of making good faulty workmanship, materials, construction, or design, but excepted “physical loss or damage arising as a consequence of faulty workmanship, material, construction or design.”[72]

            The court reasoned that the loss at issue could be characterized in one of two ways:  (1) the use of inadequate components required the insured to replace them to “make good” the faulty design; or (2) as a consequence of the faulty design and the inadequacy of the components, there was physical damage to the components necessitating their replacement.  Adopting a construction of the exclusionary clause favoring the insured, the court characterized the loss “as a consequence of” the faulty design, thereby bringing the loss within the exception to the exclusion and thus within the coverage of the policy.[73]

            Both Rosenberg and Valero Energy construed the “damage resulting from” or “damage as a consequence” language to provide coverage for faulty workmanship.  In the context of builders’ risk policies, some courts have established a rule that damage to the product, such as a building under construction, caused by negligence is covered pursuant to such language.  This contrasts sharply with the reasoning of courts that exclude coverage for faulty workmanship when the exclusion is modified by “ensuing loss” language.

            For example, in Tzung v. State Farm Fire & Casualty Co.,[74] the insureds purchased a nine-unit apartment building.  At the same time, they obtained an “Apartment Special Form” policy that insured “‘against all risks of direct physical loss’” not otherwise excluded.[75]  The policy excluded, in part, “loss caused by . . . faulty materials or workmanship unless loss by fire or explosion not otherwise excluded ensues. . . .”[76]

            Within a year after purchase, the insureds noticed cracks in the building and driveway and sought coverage for their losses.  They contended that the apartment was damaged by the contractor’s negligence in improperly constructing the building, arguing that the contractor’s negligence was an included peril under the policy. In other words, the insureds contended that if the rule applied in builders’ risk policies applied to their all-risk commercial property policy, the faulty workmanship exclusion in their policy would not apply to bar coverage for losses caused by the negligent design and construction of their apartment building.  The insurance company, on the other hand, argued that the faulty workmanship exclusion precluded recovery.

            The Ninth Circuit Court of Appeals agreed with the insurance company, concluding that the faulty workmanship exclusion unambiguously barred recovery of losses caused by defects in the design and construction of the insureds’ building.  The court commented that “only a strained interpretation of the exclusion for faulty workmanship would permit recovery for losses caused by the negligent design and construction of the [insured’s] apartment building.”[77]

            In declining coverage, the Tzung court concluded that the faulty workmanship exclusion at issue unambiguously excluded losses caused by the defective construction and design of the insureds’ building.  The court reasoned that “this rule does not necessarily have any meaning in the context of this all risk policy, mainly because the exclusion here clearly states that damages caused by faulty workmanship are not covered unless a fire ensues.”[78]

 

            C. “Ensuing Loss” Clauses vs. “Unless” Clauses

            It may be important to distinguish an “ensuing loss” exception to an exclusion from a so-called “unless” clause following an exclusion.  For example, in Libbey-Owens-Ford Co. v. Insurance Co. of North America, [79] the wear and tear exclusion in the policy at issue contained an “unless” clause “excluding coverage for ‘wear and tear . . . unless such loss is caused directly by physical damage not otherwise excluded in this policy . . .’”[80]

            The insured argued that the “unless” clause referred to “loss from wear and tear not excluded by other sections of the policy.”[81]  In effect, the insured contended that the specific wording of the wear and tear exclusion required the court to look beyond the initial wear and tear damage to determine whether any other loss or damage was caused by “damage not otherwise excluded in this policy.”

            However, the Sixth Circuit Court of Appeals rejected the insured’s argument, noting that the cases cited by the insured were “inapposite because they construe ‘ensuing loss’ clauses, not unless clauses like the one at issue here.”[82]  The appeals court explained that “[a]n ensuing loss clause provides, for example, that the policy excludes loss caused by mechanical breakdown, ‘unless an insured peril ensues and then only for the actual loss or damage caused by such ensuing peril.’”[83]

 

IV.

Opting Out: Anti-Concurrent Causation Clauses – Freedom Of Contract

            In order to preclude application of the efficient proximate cause doctrine, insurance companies have added language to all-risk policies providing that loss or damage is excluded “‘regardless of any other cause or event that contributes concurrently or in any sequence to the loss.’”[84]  Most courts that have addressed the issue have found such exclusionary language enforceable.[85]  Courts generally reason that the parties to an insurance contract can opt out of the efficient proximate cause doctrine by clear and unambiguous exclusionary language.[86]

            For example, Toumayan v. State Farm General Insurance Co.[87] involved a period of unusually heavy rains in the St. Louis, Missouri area.  The land at the rear of the insureds’ property moved downward and away from their home, causing the concrete patio and retaining wall to subside.  The insureds sought coverage under their homeowners policy for the loss.  The insurance company denied their claim.

            Sometime later, the insureds had a large portion of the land at the rear of their residence excavated for the purpose of stabilizing the land and replacing the destroyed patio and retaining wall.  During the excavation, the insureds discovered a broken sewer line leading from underneath their residence out toward the rear of their home and found evidence of previous attempts at repair or remediation.  The insureds eventually brought suit against the insurance company, alleging breach of contract and vexatious refusal to pay.  The trial court granted summary judgment in favor of the insureds on the breach-of-contract claim and in favor of the insurance company on the vexatious-refusal-to-pay claim.  The insurance company appealed. The Missouri Court of Appeals reversed on the breach-of-contract claim.

            The policy at issue contained an earth movement exclusion, barring coverage for “the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not.”[88]  The appeals court found the exclusion applied to bar the insureds’ loss. However, the insureds argued that the cause of their loss was water saturation from the broken sewer pipe, a peril specifically covered by a “Back-Up of Sewer or Drain Endorsement.” Therefore, it was irrelevant that the resulting damage was caused by an excluded peril, i.e. earth movement. The insureds’ argument thus relied upon an application of the efficient proximate cause doctrine.

As explained by the court:

 

If the language of the sewer endorsement covered the specific facts of this case and the efficient proximate cause doctrine applied, then plaintiffs [the insureds] could recover under the policy because a covered risk under the endorsement, a broken sewer pipe, set in motion a sequence of events which ultimately caused the loss from an excepted risk, earth movement.[89]

 

            However, the court opined that the efficient proximate cause doctrine could be applied only if the policy did not contain pertinent exclusionary language or was ambiguous.  The policy contained the following exclusionary language:

 

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of:

(a) the cause of the excluded event; or

(b) other causes of the loss; or

(c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or

(d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: [Listed Exclusions].[90]

 

            The Toumayan court found this exclusionary language was “unambiguous” and prevented application of the efficient proximate cause doctrine.[91]  The court therefore reversed the trial court’s grant of summary judgment in favor of the insureds and remanded the case to the trial court.[92]

            Although most jurisdictions find anti-concurrent clauses enforceable, there are some exceptions.  For example, in Safeco Insurance Co. of America v. Hirschmann, [93] the Washington Supreme Court, relying upon its prior decisions, expressly held that “[w]hen an insured risk sets into operation a chain of causation in which the last step may be an excluded risk, the [anti-concurrent cause] exclusion will not defeat recovery.”[94]  The court did comment, however, that such a clause “may operate to circumvent coverage for losses resulting from causal chains in which excluded perils are the only proximate causes, or chains in which an excluded peril is the efficient proximate cause.”[95]

Similarly, in Murray v. State Farm Fire & Casualty Co.,[96] the high court of West Virginia declined to enforce an anti-concurrent causation clause like that quoted above, finding that enforcement would conflict with the reasonable expectations of the parties.  Relying upon the California Court of Appeal opinion in Howell v. State Farm Fire & Casualty Co.,[97] discussed previously, the West Virginia court reasoned that “‘[n]o reasonable person would pay for insurance against some future peril if it were possible for the insurer to avoid liability by discovering an excluded peril somewhere in the chain of causation.’”[98]  The court concluded that, because the anti-concurrent causation clause at issue conflicted with what the court considered to be the reasonable expectations of the parties, the clause should be construed “to allow coverage for losses proximately caused by a covered risk, and [to] deny coverage only when an excepted risk is the efficient proximate cause of the loss.”[99]

            In California, federal and state courts disagree as to whether anti-concurrent causation language is enforceable.  Thus, in State Farm Fire & Casualty Co. v. Martin,[100] the Ninth Circuit Court of Appeals affirmed a California federal district court’s holding that anti-concurrent causation policy language is enforceable.  This occurred in a diversity case in which the federal court was trying to predict what the California Supreme Court would ultimately do when faced with the issue of enforcing or refusing to enforce anti-concurrent cause language.  The policy at issue provided:  “We do not insure for such loss regardless of: a) the cause of the excluded event; or b) other causes of the loss; or c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.”[101]

In contrast, under California Insurance Code section 530:

 

An insurer is liable for a loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.[102]

 

            Notwithstanding section 530, the appeals court agreed with the district court that “‘[a]n insurance company has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected.’”[103]  The appeals court concluded that section 530 “provides guidance when a policy is silent on concurrent causation; it does not prohibit inclusion of a provision similar to the concurrent causation provision [in the policy at issue].”[104]

The California Supreme Court has not spoken on the issue.  However, in Howell v. State Farm Fire & Casualty Co.,[105] the California Court of Appeal concluded that a property insurer cannot contract out of coverage when a covered peril is the efficient proximate cause of the loss, even though an excluded peril has “contributed or was necessary to” the loss.[106]  The court explained that California statutory and judicial law make an insurance company liable “whenever a covered peril is the ‘efficient proximate cause’ of the loss, regardless of other contributing causes.”[107]

 

V.

Causation and Appraisal

            When a policyholder and its insurance company disagree on the amount of a property loss, the appraisal provision generally found in all-risk policies allows either party to make a written demand for an appraisal of the loss.  Such a provision typically directs each party to select a competent and impartial appraiser, who then select an umpire. Each appraiser separately states the actual cash value, the amount of loss, or the cost of repair or replacement. If the appraisers fail to agree, they submit their differences to the umpire.  A decision agreed to by any two is binding on the parties.

            However, courts sometimes disagree as to the scope of the appraisal.  Does the “amount of loss” include a determination of the “cause” of that loss?  Some courts squarely hold that appraisers may not consider causation, other courts squarely hold that appraisers may consider causation, and there are still other courts that express a more ambiguous view.[108]

 

A. Some Representative Cases Holding that Appraisers May Determine Causation

In 201 N. Wells, LLC. v. Fidelity & Guaranty Insurance Co.,[109] a case being handled by the authors’ office, the court found that “determining the cause of the damages is inherent to the appraiser’s duties.”[110]  In Wells, a float valve in the insured building’s tower water tank malfunctioned, causing a large volume of water to cascade through the building.  All 30 floors of the building sustained water damage.  The malfunction occurred during a weekend, when the building was largely unoccupied, and consequently was not discovered immediately.  Pursuant to its insurance policy, 201 N. Wells, LLC (“201”) sought coverage for water damage to the building “caused by accidental discharge or leakage of water as a direct result of the breaking or cracking of any part of a system or appliance containing water or steam.”[111]  As required by the policy, 201 filed a Proof of Loss, claiming almost $8 million in damages and more than $1 million in supplemental damages under the replacement cost coverage of the policy.

The insurance company undertook its own evaluation of the loss and then made two settlement offers, both of which were rejected.  Finding a dispute as to the amount of the loss to the building, the insurance company demanded an appraisal under the policy’s appraisal provision.

201 did not deny that the appraisal provision at issue was enforceable under Illinois law or that it was a generally valid contractual provision.  Rather, 201 asserted that the provision did not apply in the case at bar because the parties were not disputing the value of the property or the amount of loss.  Instead, they were disputing the causes of the loss and whether the insurance company was liable for that portion of the damage it claimed that 201 caused by failing to dry out the building.  According to 201, its own estimates included asbestos-, fungi- and mold-related damage to the building resulting from and occurring after the water damage, whereas the insurance company’s estimates evaluated the damage as if the building had been dried out.

The court commented that an appraisal provision is used to determine the amount of damages, not liability.  Nevertheless, the court found the provision applicable to the instant case even though the parties had used allegedly different methods to determine the loss, pointing out that “disagreements over the amount of loss often occur for precisely this reason.”[112]  Moreover, “[a] finding that the parties can ignore a demand for appraisal in such situations would render the provision meaningless in many cases.”[113]  However, the court noted that the insurance company could not direct its appraiser to ignore certain types of damage to the building because the insurance company had already decided that it was not liable for that particular type of damage; “[s]uch behavior would also render an appraisal (and therefore appraisal provisions) largely useless if a court subsequently decides that liability does exist for the type of damage the insurer excluded from the appraisal process.”[114]  The court concluded that an appraiser’s proper duty is to evaluate the amount of damage to covered property, after which the insurance company can apply any alleged mitigating factors.

The court required the appraisers not only to evaluate the amount of damage to the building, but also to determine the amount of loss caused by water damage and the amount of loss caused by asbestos, mold, and fungi.  Finding that a determination of causation is “inherent” in the duties of an appraiser, the court gave the following illustration:  “For example, if a building has damage before a covered event occurred, the appraiser cannot determine the amount of loss without evaluating what damage was caused by the covered event and which damage was caused, for instance, by previous wear and tear.”[115]

            In granting the insurance company’s stay pending the appraisal, the court concluded that, if it found that the insurance company was not ultimately liable for the full amount of damage to the building, the appraisers’ assessment as to each type of damage “will avoid the need for additional litigation.”[116]

Similarly, in CIGNA Insurance Co. v. Didimoi Property Holdings, N.V.,[117] the court ruled that causation is a matter for an appraiser, not the court.  In CIGNA, a fire started in a tenant file storage room of the insured building, causing severe damage and rendering the building unusable.  Following the fire, the insureds (the building owner and the mortgagee) and the insurance company unsuccessfully attempted to reach an agreement on the amount of loss, including the extent of the fire damage and the cost to repair or replace the building.  Notwithstanding their disagreement over the amount of loss, the insurer paid more than $18,000,000 to initiate repairs and $5,000,000 for business interruption.

Pursuant to the policy, the insureds filed their sworn proof of loss for approximately $92,000,000.  The insurance company rejected the proof of loss as excessive and invoked the policy’s appraisal provision.  The insureds argued for a narrow construction of the phrase “amount of loss,” limiting the appraisers to determining the amount of money necessary to repair or replace the damages without determining the cause of the loss or the amount of the covered loss.  On the other hand, the insurance company contended that at issue was the extent of the fire damage, a question concerning the amount of loss and therefore appropriately determined by the appraisers.

The court agreed with the insurance company, concluding that, “in the insurance context, an appraiser’s assessment of the ‘amount of loss’ necessarily includes a determination of the cause of the loss, as well as the amount it would cost to repair that which was lost.”[118]  The court reasoned that its conclusion was consistent with the plain meaning of the terms “amount of loss” and “loss,” commenting that the insureds confused “coverage” and “amount of loss.”[119]  In distinguishing Auto-Owners Insurance Co. v. Kwaiser,[120] a Michigan case relied upon by the insureds, the court opined:

 

Unlike the instant case, the parties in Kwaiser did not merely contest the scope or extent of the damage, rather the parties in Kwaiser raised the issue of whether that damage was excluded under the policy. Because questions involving the application of policy exclusions are legal questions concerning liability and coverage, they are not, as the Kwaiser court correctly concluded, within the appraiser’s authority.[121]

 

B. Representative Cases Holding that Appraisers May Not Consider Causation

In Wausau Insurance Co. v. Herbert Halperin Distribution Corp.,[122] the insureds discovered that a portion of the roof of an insured building had collapsed.  An independent inspection concluded that the collapse was due to framing members and plywood that, due to long-term exposure to water, were rotten and decayed by fungus and mold.  The insurance company offered to pay $56,000 as satisfaction of the insureds’ claims after its evaluation of the immediate and direct damage resulting from the partial collapse of the roof.

The insureds, however, argued that the insurance company was liable for a much greater amount than offered because it was structurally impossible to repair the damaged part of the roof without repairing or replacing the entire roof.  On the other hand, the insurance company contended that it was not liable for a greater amount because of exclusions for damage caused by faulty design, construction, or operational deterioration and wear and tear.  At issue was whether the dispute between the parties involved “the actual cash value or the amount of loss” under the appraisal provision in the subject policy.[123]

The court rejected the insurer’s position that the only issue subject to appraisal was the monetary valuation of items that the parties agreed were covered by the policy, opining that, “[t]o so read the appraisal clause would make the term ‘the amount of loss’ simply redundant to the term ‘the actual cash value.’”[124]  However, the court concluded that the appraisal provision did not apply in the instant case, reasoning that the appraisal provision would be applicable only if the insurer was disputing that, as a factual matter, an area larger than that immediately damaged by the collapse had to be repaired in order to repair the resultant damage.  The court found instead that the insurance company was contesting the legal causation of the collapse on the ground that certain policy exclusions applied to limit the scope of coverage.  The court concluded: “[t]his issue is one of contract interpretation which is within the competence of the Court, not an appraiser, to resolve. Of course, to the extent that issues of design and construction relating to ‘the amount of loss’ are ultimately presented, these will be properly referable to the appraisal process.”[125]

 

VI.

Causation, Experts, And A Question of Fact For The Jury

“The issue of causation is usually a question of fact for the jury.”[126]  However, when “the facts are undisputed and there can be no reasonable difference of opinion regarding their meaning,” the efficient proximate cause of a loss is a question of law for the court.[127]  An insurance company’s expert may testify as to the cause of loss.[128]  When the expert’s testimony creates a genuine issue of material fact on the causation issue, summary judgment for the policyholder is precluded.

For example, in Maryland Casualty Co. v. Therm-O-Disc, Inc.,[129] the home of Eileen Gitelson, the insured, was damaged by fire. Maryland Casualty, Gitelson’s insurer, paid for her loss and was subrogated to any claims Gitelson had regarding the fire.  Maryland Casualty then sued Therm-O-Disc to recover for the damage, alleging that a defective thermostat manufactured by Therm-O-Disc and contained in Gitelson’s clothes dryer caused the fire.

At trial, Maryland Casualty introduced the testimony of one James Rodems, an electrical engineer who specialized in thermostats and other electrical switches, to establish that the thermostat was defective and caused the fire.  At the close of evidence, Therm-O-Disc moved for judgment as a matter of law under Federal Rule of Civil Procedure 50(a), arguing that Maryland Casualty had failed to show a causal link between the allegedly defective thermostat and the fire.  The district court denied the motion.  The jury returned a verdict against Therm-O-Disc, who then appealed.  The Fourth Circuit affirmed the district court’s denial of Therm-O-Disc’s motion for judgment as a matter of law.

Under Maryland law, a causal relationship between a claimed defect and an injury may be established by circumstantial evidence.  A plaintiff must offer proof that rises above the level of speculation or conjecture, and where such proof is offered, there is a question of fact for the jury.[130]  The appeals court noted that the jury had heard Rodems’ theory that the thermostat was defective and caused the fire.  In addition, Maryland Casualty had introduced other evidence that ruled out any other cause of the fire.  The court concluded that, “[u]nder these circumstances, it was left to the jury to determine the question of causation, which it resolved in favor of Maryland Casualty,” and “[e]xamining the evidence in the light most favorable to Maryland Casualty, we hold that the jury properly reached its verdict.”[131]

 

VII.

Conclusion

Most jurisdictions have adopted an “efficient proximate cause” type doctrine in resolving coverage causation disputes.  Although arguably difficult in application, the doctrine may be simply stated:

 

n      When a covered peril is the efficient proximate cause of the loss, there is coverage.

n      When an excluded peril is the efficient proximate cause of the loss, coverage is denied.

 

Some fundamental questions to ask in coverage disputes involving causation include:

n      Was the property insured?

n      Did the claimant have an insurable interest in the insured property?

n      Did the loss occur during the policy term?

n      How was the loss caused? It is important to focus on the “how,” rather than the “why.”

 

Insurance claims that go into litigation over causation disputes might be more appropriately called “fact suits” rather than “law suits.”

ENDNOTES

 


*          The analyses, conclusions, and/or opinions expressed in this article are the authors’ own and do not necessarily reflect the position of the law firm of Bullivant Houser Bailey, the opinions of its clients, or the policy of the FDCC.

[1]           The American Heritage Dictionary 249 (2d Coll. ed. 1991).

[2]           Home Ins. Co. v. Am. Ins. Co., 537 N.Y.S.2d 516, 517 (App. Div. 1989) (citations and internal quotation marks omitted).

[3]           Previously presented as Special Causation Problems in North America at the 2001 Annual Meeting of the Federation of Insurance & Corporate Counsel, Le Meridien Grosvenor House, London, England, July 21-28, 2001.

[4]           13A George J. Couch, Ronald A. Anderson & Mark S. Rhodes, Couch Cyclopedia of Insurance Law § 48.141 (2d ed. rev. 1983).

[5]           Bettigole v. Am. Employers Ins. Co., 567 N.E.2d 1259, 1262 n.5, (Mass. App. Ct. 1991).

[6]           Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1, 10 (W.Va. 1998).

The California Supreme Court has noted that there could be unusual situations in which the efficient proximate cause rule would not be useful. The court gave as an example a property loss resulting from the simultaneous crash of an aircraft into a structure (typically a covered peril in an all-risk policy) during an earthquake (typically an excluded peril when it operates alone to cause a loss). Under those hypothetical facts, it might be impossible to determine which cause was the efficient proximate cause of the loss. In such a novel case, an analysis other than efficient proximate cause might be needed. See Garvey v. State Farm Fire & Cas. Co., 770 P.2d 704, 713 n.9 (Cal. 1989).

[7]           Pioneer Chlor Alkali Co. v. Nat’l Union Fire Ins. Co., 863 F. Supp. 1226, 1231 (D. Nev. 1994).

[8]           Murray, 509 S.E.2d at 11.

[9]           18 Couch, supra note 4 § 74:717.

[10]          Muller v. Globe & Rutgers Fire Ins. Co., 246 F. 759, 762-63 (2d Cir. 1917).

[11]          Murray, 509 S.E.2d at 12 (footnote omitted). See also Farrell v. Royal Ins. Co. of Am., 989 F. Supp. 159, 164 (D. Conn. 1997) (“Thus, under an all risk policy where the efficient cause of loss is a covered risk, coverage is not defeated merely because an excluded risk contributed to the loss or constituted the loss (unless the policy expressly excludes such loss regardless of the antecedent cause.”); State Farm Fire & Cas. Co. v. Von Der Lieth, 820 P.2d 285, 290-91 (Cal. 1991) (“[T]he scope of coverage under an all-risk homeowner’s policy includes all risks except those specifically excluded by the policy. When a loss is caused by a combination of a covered and specifically excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss. . . . [T]he question of what caused the loss is generally a question of fact, and the loss is not covered if the covered risk was only a remote cause of the loss, or the excluded risk was the efficient proximate or predominate cause.”) (citations omitted). Cf. Assurance Co. of Am. v. Jay-Mar, Inc., 38 F. Supp. 2d 349, 353 (D.N.J. 1999) (noting that New Jersey’s lower courts have found coverage where the included cause of loss is either the first or the last step in the causation chain and that “[t]his is broader coverage than that provided by the courts in a number of other states,” i.e. those courts adopting the efficient proximate cause doctrine and holding that a loss is covered where the first step in the causation chain is a covered risk).

[12]          Finn v. Cont’l Ins. Co., 267 Cal. Rptr. 22, 24 (Ct. App. 1990).

[13]          Chadwick v. Fire Ins. Exch., 21 Cal. Rptr. 2d 871, 874 (Ct. App. 1993).

[14]          Id.

[15]          No. 99-1504-JE, op. & order (D. Or. Dec. 29, 2000).

[16]          Id. at 4.

[17]          Id. at 5.

[18]          Id. at 8.

[19]          Id. at 13.

[20]          Id. at 17.

[21]          Id. at 17-18.

[22]          Id. at 19.

[23]          No. 18100-6-III, 2000 WL 60028 (Wash. Ct. App. Jan. 25, 2000).

[24]          Id. at *4.

[25]          747 So. 2d 293 (Ala. 1999).

[26]          Id. at 313 (citation omitted).

[27]          Id. at 314.

[28]          Id. In Slade, the insureds alternatively argued that their loss was covered because the lightning moved through the saturated ground and struck the slab of their home. The court concluded that the testimony of the insureds’ expert created a factual question as to whether the lightning directly struck the insureds’ house and therefore that claim was correctly submitted to the jury.

[29]          69 Cal. Rptr. 2d 551 (Ct. App. 1997).

[30]          Pieper v. Commercial Underwriters Ins. Co., 69 Cal. Rptr. 2d 551, 557 (Ct. App. 1997).

[31]          Id. at 557-58 (citation omitted).

[32]          883 P.2d 308 (Wash. 1994).

[33]          Id. at 312.

[34]          Id.

[35]          Id. (citation omitted).

[36]          Id. (footnote and citation omitted). See 42 U.S.C. §4001 (National Flood Insurance Program). See also Byers v. United Serv. Auto. Ass’n, No.44003-9-I, 2000 Wash. App. LEXIS 2894 (Wash. Ct. App. Jan. 24, 2000) (heavy snow and rain caused neighbor’s retaining wall to slide down a hillside and collide with insureds’ house; concluding that the efficient proximate cause of the loss was “‘water below the surface of the ground, exerting pressure on the retaining wall,’” an event excluded under a specific exclusion for “water damage” and finding no coverage because the efficient proximate cause of insureds’ loss was an excluded event);  Olson v. State Farm Fire & Cas. Co., No. 95-55012, 1996 WL 498920, at *2 (9th Cir. Aug. 30, 1996) (California law) (water from leaking pipe under house mixed with earth to cause a landslide that damaged insureds’ house; rejecting the insureds’ argument that water accumulation was the efficient proximate cause of the landslide and holding that exclusion for “earth movement combined with water” barred coverage)  --  “The [insureds] attempt to isolate ‘water’ as a cause of the landslide and thereby evade the ‘earth movement combined with water’ exclusion is unavailing. The exclusion encompasses both earth movement and water as causes and denies coverage when, as in this case, damage is caused by a combination of the two. The district court correctly concluded that the [insureds’] claim falls squarely within the exclusion.”); Cohen Furniture Co. v. St. Paul Ins. Co., 573 N.E.2d 851, 853 (Ill. App. Ct. 1991) (subject policy excluded losses “caused directly or indirectly by the enforcement of any law governing . . ., construction [or] repair  . . . of buildings . . . .”; holding that the cost of a fire suppression system required by city ordinance and installed in a building reconstructed after fire was excluded from coverage by “clear and unambiguous” building laws exclusion).

[37]          222 F.3d 660 (9th Cir. 2000) (California law).

[38]          Id. at 661 (omissions in original).

[39]          Id. at 663 (citing Garvey v. State Farm Fire & Cas. Co., 770 P.2d 704, 708 (Cal. 1989)).

[40]          991 P.2d 734 (Wash. Ct. App. 2000), as amended on reconsideration (March 7, 2000).

[41]          Id. at 737.

[42]          Findlay v. United Pac. Ins. Co., 895 P.2d 32, 33 (Wash. Ct. App. 1995), aff’d, 917 P.2d 116 (Wash. 1996).

[43]          Bowers, 991 P.2d at 738 (citation omitted).  See also Fajardo Shopping Ctr., S.E. v. Sun Alliance Ins. Co. of Puerto Rico, Inc., 167 F.3d 1 (1st Cir. 1999) (Puerto Rico law) (concluding that damage to roof was caused by hurricane, a covered peril, rather than by excluded faulty design and therefore finding coverage); Associated Aviation Underwriters v. George Koch Sons, Inc., 712 N.E.2d 1071 (Ind. Ct. App.) (concluding that aircraft engine damage was proximately caused by covered negligence, which resulted in excluded wear and tear and therefore finding coverage);  DiCalogero v. Hinham Mut. Fire Ins. Co., 1998 WL 164927 (Mass. Ct. App. April 3, 1998) (furnace malfunctioned causing pipe in second-story bathroom to burst, which caused seven feet of water in basement, water floated the oil tank, which separated the tank from the furnace, causing the oil to leak out of the tank and contaminating the water, which further resulted in costs to insured for removal and disposal of oil-contaminated water; concluding that broken pipe, which was an insured risk, was the efficient proximate cause of loss even though loss associated with removal of contaminated water appeared to be outside the policy and therefore found coverage); Erie Ins. Exchange v. Bledsoe, 540 S.E.2d 57, 62 (N.C. Ct. App. 2000) (subject policy covered “collapse,”  holding that the trial court erred in not submitting a concurrent causation instruction to the jury based upon whether the damage was a result of uncovered natural “settling” or a combination of covered perils, which subsequently caused a “collapse”  --  “Without a proximate concurrent cause clarification here, we find that the jury was not fully instructed in the law as they were not allowed to consider whether multiple factors combined to cause the damage at issue.”).

[44]          See, e.g., Am. Concept Ins. Co. v. Jones, 935 F. Supp. 1220, 1229 (D. Utah 1996) (“‘We do not insure for loss to property described in Coverages A and B caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered.’”).

[45]          See, e.g., Tzung v. State Farm Fire & Cas. Co., 873 F.2d 1338, 1340 (9th Cir. 1989) (California law) (“THIS POLICY DOES NOT INSURE UNDER THIS FORM AGAINST: . . . D. LOSS CAUSED BY . . . 8. . . . FAULTY MATERIALS OR WORKMANSHIP UNLESS LOSS BY FIRE OR EXPLOSION NOT OTHERWISE EXCLUDED ENSUES . . . .”) (omissions in original).

[46]          837 P.2d 1000 (Wash. 1992).

[47]          Id. at 1005. See also Schloss v. Cincinnati Ins. Co., 54 F. Supp. 2d 1090, 1094 (M.D. Ala. 1999), aff’d, 211 F.3d 131 (11th Cir. 2000) (holding that, “[a]lthough ensuing loss is not defined by the policy, the ordinary meaning given to this clause is clear, and the provision is unambiguous.”). But see Phillips Home Builders, Inc. v. Travelers Ins. Co., 700 A.2d 127, 130 (Del. 1997) (concluding ensuing loss clause was ambiguous).

[48]          548 N.W.2d 127 (Wis. Ct. App. 1996).

[49]          Id. at 130.

[50]          Id. at 132.

[51]          Id. at 132-33.

[52]          McDonald, 837 P.2d at 1005.

[53]          Narob Dev. Corp. v. Ins. Co. of N. Am., 631 N.Y.S.2d 155 (App. Div. 1995).

[54]          See Acme Galvanizing Co. v. Fireman’s Fund Ins. Co., 270 Cal. Rptr. 405 (Ct. App. 1990). See, e.g., Point Triumph Condo. Ass’n v. Am. Guar. & Liab. Ins. Co., No. 99-1504-JE, at 18-19 (D.Or. Dec. 29, 2000) (unpublished opinion) (holding that moisture damage caused by defects in siding or by faulty construction or maintenance could not be characterized as “‘separate and independent’” of those defects and therefore ensuing loss provision did not apply).

[55]          508 S.E.2d 531 (N.C. Ct. App. 1998).

[56]          270 Cal. Rptr. 405 (Ct. App. 1990).

[57]          Id. at 407.

[58]          Id. at 411. See also Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 301-02 (Minn. Ct. App. 1997) (holding that release of asbestos fibers in buildings was caused by excluded wear and tear, but resultant contamination was a distinct, separable peril covered under ensuing loss clause in an all-risk policy). Cf. Schloss v. Cincinnati Ins. Co., 54 F. Supp. 2d 1090, 1094-95 (M.D. Ala. 1999), aff’d, 211 F.3d 131 (11th Cir. 2000) (policy contained exclusion for “wet or dry rot” or “loss caused by . . . dry or wet rot,” followed by ensuing loss clause;  holding that costs to remove roof and siding were not covered by the policy because they were part of the cost to repair rot, not a separate ensuing loss  --  “Reasonably interpreted, therefore, the ensuing loss clause means that if a specified uncovered loss occurs, here rot, then a separate loss which follows as a result of the specified, uncovered loss which would otherwise be covered remains covered.”).

[59]          219 F.3d 501 (5th Cir. 2000) (Louisiana law).

[60]          Id. at 504.

[61]          Id. at 506.

[62]          Id.

[63]          Id.

[64]          Id. (court’s emphasis).

[65]          See Allianz Ins. Co. v. Impero, 654 F. Supp. 16, 17 (E.D. Wash. 1986) (quoting policy language) (emphasis added).

[66]          Id.

[67]          Id. at 18. See also So. Cal. Edison Co. v. Harbor Ins. Co., 148 Cal. Rptr. 106, 107 (Ct. App. 1978) (differential settling of building resulted from faulty foundation design; holding that costs incurred in raising the foundation to a proper level compensated for and corrected design defects and therefore fell within the provision excluding “cost of making good faulty workmanship, construction or design”); Rivnor Prop. v. Herbert O’Donnell, Inc., 633 So. 2d 735, 753 (La. Ct. App.), writ denied, 643 So.2d 147 (La. 1994) (holding that architect’s fees awarded by court were part of “cost of making good” insured’s faulty workmanship and were excluded from coverage, rather than covered damage “resulting from” the faulty workmanship).

[68]          280 Cal. Rptr. 388 (Ct. App. 1991).

[69]          Id. at 390.

[70]          Id. at 392 (also concluding that the ensuing loss language covered both physical and economic damages resulting from defective workmanship).

[71]          777 S.W.2d 501 (Tex. Ct. App. 1989).

[72]          Id. at 505.

[73]          Id. at 506. Cf. Kroll Const. Co. v. Great Am. Ins. Co., 594 F. Supp. 304, 308 (N.D. Ga. 1984) (holding that costs incurred after faulty work was “made good” were not excluded under faulty workmanship exclusion).

[74]          873 F.2d 1338 (9th Cir. 1989) (California law).

[75]          Id. at 1339.

[76]          Id. at 1340.

[77]          Id. at 1340-41.

[78]          Id. at 1341.

[79]          9 F.3d 422 (6th Cir. 1993) (Ohio law).

[80]          Id. at 429.

[81]          Id.

[82]          Id. at 430 (footnote omitted).

[83]          Id. at 430 n.10 (citation omitted). See also Adams-Arapahoe Joint School Dist. No. 28-J v. Cont’l Ins. Co., 891 F.2d 772, 777 n.3 (10th Cir. 1989) (pointing out that “[t]he ‘unless’ clause is not the policy’s ensuing loss provision”).

[84]          See TNT Speed & Sport Ctr., Inc. v. Am. States Ins. Co., 114 F.3d 731, 734 (8th Cir. 1997) (quoting policy language).

[85]          Assurance Co. of Am., Inc. v. Jay-Mar, Inc., 38 F. Supp.2d 349, 354 (D.N.J. 1999) (finding that New Jersey would follow the majority rule and citing cases). See also Preferred Mut. Ins. Co. v. Meggison, 53 F. Supp. 2d 139, 142 (D. Mass. 1999) (“The ‘vast majority of states’ uphold such clauses.”).

[86]          Toumayan v. State Farm Gen. Ins. Co., 970 S.W.2d 822, 826 (Mo. Ct. App. 1998).

[87]          Id.

[88]          Id. at 824.

[89]          Id. at 825-26.

[90]          Id. at 824.  Cf. Pioneer Chlor Alkali Co., Inc. v. Nat’l Union Fire Ins. Co., 863 F. Supp. 1226, 1233 (D. Nev. 1994) (holding that the words “loss caused by or resulting from” do not avoid application of the efficient proximate cause doctrine).

[91]          Toumayan, 970 S.W.2d at 826.

[92]          Id. See also Preferred Mut. Ins. Co. v. Travelers Cos., 127 F.3d 136, 138 (1st Cir. 1997) (Massachusetts law) (an anti-concurrent clause stated: “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”;  holding that the clause “unambiguously means what it says.”); Preferred Mut. Ins. Co. v. Meggison, 53 F. Supp. 2d 139, 142 (D. Mass. 1999), in which the anti-concurrent cause provision stated:

We do not pay for loss if one or more of the following exclusions apply to the loss, regardless of other causes or events that contribute to or aggravate the loss, whether such causes or events act to produce the loss before, at the same time as, or after the excluded causes or events.

In Meggison, the insureds claimed that the weight of snow and ice caused damage to their house, a covered peril under the homeowners policy at issue. The insurance company argued that the primary cause of the loss was the lack of adequate support under the front porch due to defective design, an excluded peril. Pursuant to the insurance company’s motion for summary judgment, the insureds had the burden of presenting evidence establishing a genuine issue of material fact as to whether their loss was due to lack of adequate support. The court concluded that, if the insureds failed to present adequate evidence on that point, “then coverage must be denied in accordance with the anticoncurrent causation clause, regardless of whether other causes, such as the weight of snow and ice, contributed to the loss.” Id. at 143.

[93]          Safeco Ins. Co. of Am. v. Hirschmann, 773 P.2d 413 (Wash. 1989).

[94]          Id. at 417.

[95]          Id. See also Findlay v. United Pac. Ins. Co., 917 P.2d 116, 122 (Wash. 1996), in which the Washington Supreme Court stated:

            What this court will not enforce is a contract of insurance wherein coverage is excluded simply because one cause of a loss, in a chain of causation, is an excluded peril. . . . If the efficient proximate cause, the cause that triggers other causes to result in a loss, is a specifically named, unambiguous excluded peril in the policy, we will not mandate coverage. We will not, under the guise of public policy, rewrite a clear contract between the parties. The efficient proximate cause rule should be applied to enforce the reasonable expectations of the parties based on the language of the insurance contract and not to create a new contract for the parties. (citations omitted).

[96]          509 S.E.2d 1 (W.Va. 1998).

[97]          267 Cal. Rptr. 708 (Ct. App. 1990).

[98]          Murray, 509 S.E.2d at 15 (quoting Howell, 267 Cal. Rptr. at 728-29) (footnote omitted) (alteration in original).

[99]          Id. In Murray, the State Farm homeowners policy contained the following “lead-in” clause:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of:

(a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:  [Listed Exclusions].

Id. at 13.

            With respect to State Farm’s exclusionary language, the Murray court stated:

            We acknowledge that jurisdictions are in conflict over the effect of the State Farm lead-in clause in landslide cases. At least two jurisdictions hold the clause has no effect on limiting coverage . . . . At least five jurisdictions hold that the lead-in clause is enforceable . . . .

Id. at 15 n.14 (citations omitted).

For other jurisdictions holding State Farm’s lead-in clause enforceable, see Rhoden v. State Farm Fire & Cas. Co., 32 F. Supp. 2d 907, 912-13 (S.D. Miss. 1998), aff’d, 200 F.3d 815 (5th Cir. 1999); State Farm Fire & Cas. Co. v. Martin, 668 F. Supp. 1379 (C.D. Cal. 1987), aff’d, 872 F.2d 319 (9th Cir. 1989); State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 314 (Ala. 1999).

[100]        872 F.2d 319 (9th Cir. 1989), aff’g, 668 F. Supp. 1379 (C.D.Cal. 1987).

[101]        Id. at 321.

[102]        Id.

[103]        Id. (citation omitted).

[104]        Id.

[105]        267 Cal. Rptr. 708 (Ct. App. 1990).

[106]        Id. at 711.

[107]        Id. (footnote omitted). See also Cuevas v. Allstate Ins. Co., 872 F. Supp. 737, 740 (S.D. Cal. 1994) (distinguishing Howell & Gillis v. Sun Ins. Office, Ltd., 47 Cal. Rptr. 868 (Ct. App. 1965) and stating that it did not read Howell “for the proposition that an insurer is prohibited from excluding certain specified losses from coverage”).

[108]        See CIGNA Ins. Co. v. Didimoi Prop. Holdings, N.V., 110 F. Supp. 2d 259, 265-69 (D. Del. 2000) (citing cases).

[109]        No. 1:00-cv-03855 (N.D. Ill. Feb. 2, 2001).

[110]        Id.

[111]        Id.

[112]        Id.

[113]        Id.

[114]        Id.

[115]        Id.

[116]        Id.

[117]        110 F. Supp. 2d 259, 265-69 (D. Del. 2000).

[118]        Id. at 264.

[119]        Id. at 265.

[120]        476 N.W.2d 467 (Mich. Ct. App. 1991).

[121]        CIGNA, 110 F. Supp. 2d at 267.  Cf. Nationwide Mut. Ins. Co. v. Johnson, 774 So. 2d 779 (Fla. Dist. Ct. App. 2000) in which the insured contended that its loss was caused by a sinkhole, a covered peril, but the insurance company contended that the loss was caused by earth movement, an excluded peril.  The appellate court reversed the trial court’s holding that it would determine whether there was a covered loss and then have an appraisal panel determine dollar amount of loss, holding that “causation is a factual issue for the appraisal panel to decide as part of the ‘amount of loss’ determination.” Id. at 781-82.

[122]        664 F. Supp. 987 (D. Md. 1987).

[123]        Id. at 988.

[124]        Id.

[125]        Id. See also Spearman Indus. Inc. v. St. Paul Fire & Marine Ins. Co., 109 F. Supp. 2d 905, 907 (N.D. Ill. 2000) (holding that “causation is a matter for the courts – not an appraiser – to decide”); Wells v. Am. States Preferred Ins. Co., 919 S.W.2d 679, 684 (Tex. Ct. App. 1996) (holding that “appraisers have no power to determine the cause of the damages; [t]heir power is limited to the function of determining the money value of the property damage” and concluding that “the weight of authority from other jurisdictions discussing the issue follows the rule that appraisers have no power or authority to determine questions of causation, coverage, or liability.” (citing cases);  Holt v. State Farm Lloyds, 1999 WL 261923, at *2 (N.D. Tex. April 21, 1999) (“It is well established that appraisers may only determine the amount of loss and may not assess causation, coverage, or liability for the damage.”).

[126]        Walker v. Am. Cyanamid Co., 948 P.2d 1123, 1130 (Idaho 1997).

[127]        Bowers v. Farmers Ins. Exch., 991 P.2d 734, 738 (Wash. Ct. App. 2000), as amended on reconsideration (March 7, 2000). See also Graham v. Pub. Employees Mut. Ins. Co., 656 P.2d 1077, 1081 (Wash. 1983) (“As a general rule, the question of proximate cause is for the jury, and it is only when the facts are undisputed and the inferences therefrom are plain and incapable of reasonable doubt or difference of opinion that it may be a question of law for the court.”) (citations omitted).

[128]        The admissibility of expert testimony is governed by Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993) and its progeny. Under Daubert, the trial court functions as an evidentiary “gatekeeper” to determine whether the proferred expert testimony will be reliable and helpful.

[129]        137 F.3d 780 (4th Cir. 1998) (Maryland law).

[130]        Id. at 786 (citing Maryland cases).

[131]        Id. See also Pennsylvania Lumbermens Ins. Corp. v. Landmark Elec., Inc., 675 N.E.2d 65, 74 (Ohio Ct. App. 1996) (concluding that insurance company’s fire cause expert could testify in opposition to insured’s summary judgment motion in expert’s sphere of expertise based upon facts to be established by testimony of others and holding that expert’s testimony raised fact issue precluding summary judgment); Love of God Holiness Temple Church v. Union Standard Ins. Co., 860 S.W.2d 179, 181 (Tex. Ct. App. 1993) (insured alleged wind/hail damaged its church, which was put in issue by insurance company’s standard denial;  noting that the insurance company produced testimony from three expert witnesses who said wind or hail did not cause the church’s damages and holding, “[a]s the issue was raised by the pleadings and the evidence, the trial court correctly submitted the issue of causation to the jury”).

 

(authors’ bios)

Douglas G. Houser is a senior partner at Bullivant Houser Bailey in Portland, Oregon.  He is a member of the American Bar Association (Past Chair, TIPS); Defense Research Institute (Past Treasurer and Member of Board of Directors) and Past Chair, Insurance Coverage Committee; Oregon Association of Defense Counsel (Past President); International Association of Defense Counsel (Past Chair, Property Insurance Committee); Federation of Insurance and Corporate Counsel (Past President); Association of Defense Trial Attorneys (ADTA); American Board of Trial Advocates (ABOTA); and National Judicial College Council for the Future. Mr. Houser is a Fellow of the American College of Trial Lawyers, a Fellow of the American Law Institute, a Fellow of the International Academy of Trial Lawyers, and serves on the Board of Directors of NIKE, Inc. and the Rand Corporation.

 

Linda M. Bolduan is an associate at Bullivant Houser Bailey in Portland, Oregon.  She is a member of the American Bar Association and is admitted to practice in the state and federal courts of Oregon. Ms. Bolduan’s practice focuses on insurance coverage.