Concurrent Causation And Anti Concurrent Causation Clauses-A Discussion

CONCURRENT CAUSATION AND ANTI-CONCURRENT CAUSATION CLAUSES–A DISCUSSION

(June 2019)

 

flooded sign

 

INTRODUCTION

Which came first…the chicken or the egg? There are times when 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 led to the current situation where both concurrent causation and anti-concurrent causation clauses are important parts of insurance coverage. However, two important terms must be defined before tracing the lineage of this concept. Insurance Words and Their Meanings provide the following simple definitions:

This is what brings about a result without any other force intervening. This is important in insurance since it establishes which policy or policies pays for a loss, i.e., the one(s) that insures the cause of loss or peril that was the proximate cause of the loss.

 

Example: A boy drops a ball. It rolls down the hill and strikes a car. The proximate cause of loss is the boy's act of dropping the ball. If another child intervened and kicked the dropped ball, the act of kicking replaces dropping the ball as the proximate cause.

 

This is a legal concept of applying insurance coverage when two or more hazards, causes of loss, or perils (with at least one being a covered hazard/cause of loss/peril) contribute to creating a loss, essentially at the same time.

 

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, property insurance was offered for only specified perils/causes of loss. Fire insurance was first, followed soon afterwards by lightning, because of the close relationship between the two. The insured could purchase separate insurance coverage for windstorm 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/causes of loss above while still excluding boiler explosion and vandalism and malicious mischief. They discovered that they could charge a lower premium by doing it this way because of the increased number of purchasers and a reduction in the element of adverse selection. CP 10 10–Causes of Loss–Basic Form includes these combined perils/causes of loss in large part. Because of the success of this endorsement, a broad perils/causes of loss endorsement that added vandalism and other perils/causes of loss was introduced. These combined perils/causes of loss now equate to CP 10 20–Causes of Loss–Broad Form. Coverage was available for the specific perils/causes of loss listed.

A dramatic shift occurred when all risk perils/special causes of loss (similar to the Inland Marine coverage forms and policies provide) was introduced. 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 interpreting coverage. Under CP 10 10 and CP 10 20, the insured was required to prove that coverage applied to a given loss and identify the peril/cause of loss that caused the loss. With CP 10 30 (all risk perils/causes of loss), the insurance company 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 risks/special causes of loss approach. They are generally considered uninsurable because they are unpredictable and catastrophic in nature. The federal government provides flood coverage and a limited earthquake market is available to insureds 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 this dispute, a drainage system was installed before the 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 rain season, the foundation piers tilted, and the foundation cracked. This resulted 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 ensuing 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 sewer contractor probably caused the damage to the drain at the lower end 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.

 

These two decisions sent shockwaves through the industry and forced it to make choices. Premiums could be increased significantly to cover the potential losses these decisions presented, or the coverage language could be changed. The decision was made to revise the wording in all policies so the insured could continue to choose whether or not to insure for flood and/or earthquake.

OTHER COURT DECISIONS

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, 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.

An insured occasionally encounters the ordinance or law exclusion. The insurance company relies on this exclusion to deny coverage for the insured's costs to demolish and remove debris of a structure a covered cause of loss seriously damages when civil authorities determine that it is a threat to public safety and order that it be demolished. In at least two cases, the courts held that the condition of the building after a loss that required demolishing it was separate and apart from the authority's demolition order, 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.

In Sunshine Motors v. New Hampshire Ins. Co., 1995 Michigan Court of Appeals, the court reviewed a loss that involved heavy rains. Debris blocked a drainage system 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 that was 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 that 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 policy should reimburse its loss. The court thought otherwise and ruled that the policy language did not extend coverage for arcing, which it determined to be 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 a shopping center’s premises 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 such that coverage still applied. The insurance company 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 company owed coverage to the shopping center 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 designed to handle only water, the chemicals corroded the piping. The insurance company claimed that the corrosion was excluded. The farmer argued that manufacturer's negligence concurrently caused the loss. 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 above) and ruled in favor of Berry. It 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.

In a decision that could potentially affect property insurance claims that arise 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 (that property coverage forms and policies usually cover) and flood damage (usually excluded).

Turner involved damage to the Houston Convention Center from rain that entered it through openings caused by 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 that resulted from rain entering through an opening or breach in the building due to a covered cause of loss not otherwise excluded. The wind deductible in this case was 1% of the covered location’s value. This amount was more than the actual damage to the building to the extent that, if it were controlling, there would be no coverage. There was also 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 that a covered cause of loss creates. Because wind created the opening through which the rain entered, the wind deductible applied.

The court of appeals disagreed. It noted the lower court's reasoning to be plausible but found that the wind deductible was ambiguous and did not apply. It reasoned that the policy did not define the term wind deductible. It reasoned that it would apply to damage caused directly by wind, such as a tornado. However, in this case its reasoning was that the damage was directly caused by rain and only indirectly by wind. In other words, even though wind created the opening that the rain entered through, the rain alone caused the damage.

The dissenting justice disagreed with the majority view that applying 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 policy’s terms. 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 except 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 the direct action of the wind made. 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 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 that allows floodwaters to enter the building). For its part, the dissenting opinion also recognized the general practice that property policies do not usually cover water damage unless it is the result of openings to buildings that wind or some other covered cause of loss causes.

EROSION OF CONCURRENT CAUSATION

Insurance companies have reviewed and rewritten personal and commercial property coverage forms and policies to clarify their intent of coverage in response to court decisions on concurrent causation. 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 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 specific 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 include these elements. It is as if to say, “We really, 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 excluded. However, losses they cause are excluded only if they are excluded elsewhere in the policy. These events are:

1. Weather conditions

2. Acts or decisions 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. Because hailstorms are weather conditions, they are excluded. However, the loss is covered because hail is not excluded elsewhere in the coverage form or policy.

 

CONCLUSION

The 1989 California Supreme Court case Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704 held that the California appellate courts misinterpreted the cases cited at the beginning of this article 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.”

The ACC exclusions may not have been needed if this ruling had happened at the time of the losses. However, most insurance companies simply left them in because the Insurance Services Office (ISO) had already added them. 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.

Consumers will continue to have high expectations with respect to their insurance coverage and insurance companies will continue to adjust claims based on the coverage form or policy language. 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.

Related Court Cases:

Anti-Concurrent Causation (ACC) Clause in Insurance Contract Barred Recovery

"Concurrent Cause" Doctrine Applied

Anti-Concurrent Causation Exclusion Upheld In Katrina Flood Loss

Concurrent Causes Aren’t Nullified By Construction Defects Exclusion