First-party insurance policies protecting homes and businesses can take many forms and vary in the scope of risk covered by the policy. One way insurers attempt to manage risk is by limiting coverage based on the cause of the loss. Some policies only insure losses in connection with a single peril, such as flood insurance. Other policies, referred to as “all-risk” policies, insure losses in connection with all causes unless a peril is specifically identified in the policy as an uncovered or excluded peril.
An issue arises when two or more perils combine to cause a loss and at least one of the perils is an uncovered peril. These types of losses generally fall into two categories: dependent perils and independent perils. Perils are dependent if the second peril would not have existed but for the first peril. Perils are independent if the second peril would have occurred regardless of the existence of the first peril (that is, the first peril is not the cause of the second peril).
Courts across jurisdictions generally have applied two different theories of recovery when addressing coverage in a multiple cause scenario: efficient proximate causation and concurrent causation. The efficient proximate causation theory typically is applied where perils are dependent. Courts that apply this theory hold that an insured may recover if the covered peril was the dominant and efficient cause of the loss. Some states, such as California and North Dakota, have codified the efficient proximate causation theory as law, even where two risks are independent. As an example of how this theory is applied, consider an incident in which high winds cause a barrel of toxic material to spill, damaging a building. If pollution is identified as an excluded peril, then the court or jury would be tasked with determining whether wind or pollution was the efficient cause of the loss.
The concurrent causation theory is based on the proposition that coverage for a loss resulting from a covered peril may not be denied merely because an excluded peril was an additional cause of the loss. This theory of recovery generally is applied where two independent perils combine to cause a loss, but the causes cannot be separated. A common scenario is when wind and water combine during a storm to damage a house or business. If flood is an excluded peril but wind is a covered peril, then the critical inquiry is whether the damage caused by flooding is distinguishable from damage caused by wind.
The Effect of Sebo
In 2016, the Florida Supreme Court was presented with the issue of coverage for losses caused by multiple risks in Sebo v. Am. Home Assur. Co. The pertinent facts of that case are as follows.
In early 2005, the insured purchased an $11 million home in Naples, Florida. Shortly after taking possession of the home, the insured discovered significant issues stemming from water intrusion. During the summer of 2005, the property continued to show signs of decay indicative of major design and construction flaws. In October 2005, Naples was impacted by Hurricane Wilma, which further damaged the home. It was undisputed that rainwater and hurricane winds combined with the defective construction to cause damage to the insured’s property.
The insured did not report a claim for water intrusion and property damage to his insurer until December 2005. After investigating the loss, the insurer denied coverage for most of the claimed damage, with the exception of coverage for mold. While the insured settled his claims against those involved in the design, construction, and sale of the home, the insured went to trial against the insurer. On March 1, 2007, a jury awarded the insured $7.71 million for physical damage to his home due to water intrusion before and after Hurricane Wilma.
On appeal to the Florida Second District Court of Appeals, the court held that “a covered peril can usually be found somewhere in the chain of causation, and to apply the concurrent causation analysis would effectively nullify all exclusions in an all-risk policy.” The appellate court further recognized that the majority of jurisdictions have adopted the efficient proximate cause theory. On Dec. 1, 2016, the Florida Supreme Court weighed in, rejecting the efficient proximate cause theory and upholding the concurrent causation theory. The court reasoned that the efficient proximate cause doctrine cannot be applied in cases where no efficient cause can be determined.
Florida is not the only jurisdiction to adopt the concurrent causation theory. Specifically, courts in at least 10 other states including Florida, Kentucky, Minnesota, Nevada, New York, North Carolina, Pennsylvania, Tennessee, Texas, Vermont, and Wisconsin have rendered decisions applying the concurrent causation theory. Thus, in the wake of Sebo and the split amongst jurisdictions as to the proper theory to apply, it is important to understand the potential negative implications of the concurrent causation theory and ways insurers can protect themselves.
Negative Implications of Sebo
The concurrent causation theory is problematic in that it places no emphasis on how perils combine to cause damage. For example, imagine a large window that is partially cracked and warped because of subsidence of a building’s foundation (an uncovered peril), and that a strong gust of wind (a covered peril) shatters the glass that would not have shattered but for the damage previously caused by the subsidence.
Under this hypothetical, the perils would be characterized as independent because the subsidence did not cause the wind and, under the law of jurisdictions in states like Florida, the concurrent causation theory would apply. The concurrent causation theory would mandate the insurer to indemnify its insured for the window damage if the damage caused by the two independent perils cannot be separated.
This is an unfair result for the insurer. In the above example as well as in Sebo, while the two independent perils did not set each other in motion, the concurrent causation theory would apply equally despite the fact that the damage caused by the covered peril would not have occurred but for the damage caused by the uncovered peril. The actual cause of the damage is ignored in favor of a bright-line test that focuses on whether the peril was involved in causing the loss, even if the relationship between the covered peril and the loss is de minimis.
The Sebo decision also ignores a critical distinction between third-party policies (referred to as liability policies) and the all-risk policy explained above and at issue in Sebo. As the Florida Second District Court of Appeals recognized in Sebo, unlike third-party liability insurance policies that provide coverage for a “broad spectrum of unnamed perils” caused by the insured’s negligent acts, first-party policies are underwritten and priced based on the distribution of risk between the insurer and the insured in light of the perils that are covered and uncovered. Because the concurrent causation theory does not focus on the degree of damage caused by the uncovered peril versus the covered peril, application of the concurrent causation theory in the first-party insurance context arguably can thwart the insuring intent of an all-risk policy because there is no distribution or balancing of risk between the two perils.
Another problem with the concurrent causation theory relates to fortuity. Whether written in the policy or not, general principles of insurance require that a loss be fortuitous to be covered. This so-called fortuity requirement exists primarily to dissuade insureds from either committing fraud or avoiding reasonable upkeep of the covered property. Fortuity becomes an issue when insureds are aware of damage caused by an uncovered peril that significantly damages property, but they choose not to timely remedy the damage.
In Sebo, the insured could have been aware of the fact that future rainstorms would cause additional damage to his home unless remedied. The hurricane that caused further damage to the insured’s already damaged and unrepaired home, which the Sebo court mandated the insurer to pay, was arguably not fortuitous from the standpoint of the insured, especially given that the mansion was located in an area prone to tropical storms and hurricanes.
Given the circumstances of a particular case, application of the concurrent causation theory may lead to an insurer paying for an excluded risk, despite an uncovered peril being tenuously connected to the damage. This is patently obvious when considering that the judgment rendered by the jury in Sebo awarded $7.68 million for pre-hurricane damage and $30,600 for hurricane-related damage.
Anti-Concurrent Causation Clauses
One way insurers can attempt to contractually circumvent application of the concurrent causation theory is through anti-concurrent causation clauses. Such clauses generally provide that the policy does provide coverage for loss or damage caused directly or indirectly by specific perils, and that losses caused by the enumerated perils are excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.
While anti-concurrent causation clauses differ from policy to policy, courts in most jurisdictions have enforced anti-concurrent causation clauses pursuant to its plain language. One of the reasons underlying the enforcement of such clauses is the public policy that parties to a contract are free to agree that certain doctrines or theories will not apply.
However, a minority of courts have refused to enforce these types of provisions. For example, a North Carolina court refused to uphold an otherwise unambiguous anti-concurrent causation clause, citing to the purported principle of law that coverage should extend when damage results from more than one cause even though one of those causes is specifically excluded. While policy language and court interpretation may differ from case to case, insurers should employ anti-concurrent causation clauses to thwart application of the concurrent causation theory.
Changing Risks and Renewals
As was the case in Sebo, the risk assumed by the insurer changed after policy inception. Specifically, the home insured as new construction was later determined to have been poorly designed and constructed. An argument can be made that had the insurer been apprised of the change in risk, it could have charged a higher premium for the increased risk or investigated the damage caused by the negligent design and construction prior to the occurrence of the uncovered peril so as to be better equipped to apportion damage between the covered and uncovered perils.
In some states, such as Illinois, an insured has a legal duty to advise an insurer of changed conditions materially affecting the risk the insurer assumed if that changed condition is discovered between the time the insurance application is submitted and the time the policy is issued. This principle may have application in the context of policies already issued.
As an alternative to requiring notice of uncovered claims (which would likely be met with resistance from both the insurer community and advocates for insureds), insurers can require notice when an insured risk has been materially affected by any peril, covered or uncovered. By imposing this requirement, the insurer is afforded the opportunity to investigate the change in risk while the insured—being forced to disclose the change in risk—is encouraged to repair the damage caused by that peril in a more timely fashion. Under this framework, perils that occur independently would be less likely to combine to cause a more catastrophic loss, and damage caused by the first independent peril can be separated from damage caused by the second independent peril.
Renewal periods also offer opportunities. Many insurers issue renewal policies in connection with the same risk once a policy has expired. When it comes to damage caused by independent perils, as was the case in Sebo, those perils often affect the property at different points in time. By conducting thorough investigations when it comes time to renew a policy—including an in-person inspection of the property for damage that occurred to the insured property but was not reported to the insurer during the prior policy year—insurers can identify existing damage or material changes in risk more readily. Inspections of this nature not only allow insurers to make more informed underwriting decisions, but also provide the insurer with support for the argument that the concurrent causation theory should not apply because damage caused by the covered and uncovered peril are identifiable.
The Sebo decision has set the stage for future litigation across all jurisdictions on the issue of concurrent causes of loss. When evaluating coverage for damage caused by two or more independent perils, insurers should be mindful of the law of the jurisdiction governing interpretation of the policy, anti-concurrent causation policy language, and policy notice requirements.