May 8, 2015
Often damage to a building or structure can be the result of multiple
perils. One of the most common examples is when a windstorm causes a
building to sustain both flood and wind damage. Based on the policy
language at issue, there are three situations that can exist: (1) both
perils are covered; (2) neither peril is covered; or (3) one is covered
and the other is not. In the situations where both perils are either
covered or not covered, the analysis is simple. However, when a loss
involves both covered and noncovered perils, the analysis is more
complex.
The first question that must be asked is whether the damage at issue
can be easily attributable to a peril that caused the damage. For
instance, in the instance of windstorm that causes both wind damage and
flood damage, if the roof of a building is damaged and the flood water
was only 3 feet deep, it is fairly safe to attribute the roof damage to
being caused by wind. Similarly, most of the damage below 3 feet will
likely be attributable to the flood.
The common situation that often results in disputes between insureds
and their insurance carriers is when two perils (one covered and one
not) jointly contribute to the damage.
Common Law Allocation
In the absence of policy language to the contrary, many states have
adopted the efficient proximate cause doctrine to determine whether the
loss is covered.[1] When that doctrine applies, if the efficient
proximate cause of the loss is covered, the loss is covered; if the
efficient proximate cause is not covered, the loss is not covered.[2]
Basically, an all-or-nothing result.
Texas courts have not adopted the efficient proximate cause doctrine.
Rather, when multiple perils contribute to a loss, Texas courts apply
the doctrine of concurrent causes.[3] Under that doctrine, when covered
and noncovered perils contribute to a loss, “the insured is entitled to
recover only that portion of the damage caused solely by the covered
peril(s).”[4] In other words, under Texas law, the insured is entitled
to recover the portion of the loss that is attributable to the covered
peril.
The burden is on the insured to allocate between a covered and
noncovered loss.[5] Failure to do so can result in a complete bar to
recovery. For example, in Wallis v. United Services Automobile Ass’n,
a jury found that 35 percent of the insured’s foundation damage was
caused by plumbing leaks, a covered peril.[6] However, because the
insured presented no evidence to allocate the damage among the various
perils, the trial court determined that there was no evidence upon which
the jury could have based its finding. As a result, the trial court
entered a take-nothing judgment for the insurance carrier, which was
affirmed on appeal.
Similarly, in Hamilton Properties v. American Insurance Co.,
the court granted summary judgment for the insurance carrier because the
insured failed to make a showing they could allocate damages between a
hailstorm occurring during the policy period and pre-existing,
noncovered damage.[7]
Anti-Concurrent Causation Clause
The doctrines discussed above apply when an insurance policy is silent
on how damage caused by multiple perils should be allocated. However,
often insurance policies contain what is known as an anti-concurrent
causation clause. Such clauses typically provide that if an excluded
peril contributes in any way to damage, that damage is excluded.
On April 24, 2015, the Supreme Court of Texas addressed, for the first
time, the viability of an anti-concurrent causation clause in JAW the Pointe LLC v. Lexington Insurance Co.[8]
In that case, JAW owned an apartment complex that sustained both wind
damage (a covered peril) and flood damage (an excluded peril) as a
result of Hurricane Ike. After Lexington’s consultant allocated the
extent of damage due to wind versus flood, Lexington paid JAW for the
wind damage.
Due to the extent of damage at issue, JAW was required to bring the
building up to the current code requirements, which included raising the
building 3 feet. To do so, JAW was going to have to completely demolish
and rebuild the buildings — a cost of over $6 million. During the
permit application process, JAW simply submitted an estimate for the
repair cost without a breakdown for damage caused by wind versus damage
caused by flood. Similarly, the city’s notification that JAW had to
bring the building into compliance with existing codes did not segregate
the damage caused by wind versus flood.
When JAW submitted a claim to Lexington for the cost to bring the
building up to code, Lexington advised JAW that it would not pay for
flood damage or the cost to comply with the city ordinances because the
enforcement of those codes was the result of the flood damage.
On appeal to the Supreme Court of Texas, the issue was whether the
policy’s Ordinance or Law Coverage provision or Demolition and Increased
Cost of Construction provision provided coverage for the cost JAW had
to incur to comply with the city’s code requirements. The parties agreed
that those provisions only apply when “a covered loss causes the
enforcement of the law or ordinance.”[9]
To determine whether a covered loss caused the enforcement of the
city’s code requirements, the court noted that the evidence conclusively
established that the building sustained both wind and flood damage and
that the city based its decision to enforce the ordinance on the
combined total of the two.[10]
Lexington argued that in light of the policy’s anti-concurrent
causation clause, since the flood damage contributed to the city’s
determination to enforce the code, those costs are excluded. The clause
at issue stated that Lexington “will not pay for loss or damage caused
directly or indirectly by [flood]. Such loss or damage is excluded
regardless of any other cause or event that contributes concurrently or
in any sequence to the loss.”
JAW argued that application of the anti-concurrent causation clause
would conflict with the common law concurrent causation doctrine.
However, the court found JAW’s claim is governed by the terms of the
policy and that the concurrent causation doctrine is limited to cases
where the policies did not include a similar clause.[11] Accordingly,
the court concluded:
To determine coverage under the policy, we look first to “the language
of the policy because we presume parties intend what the words of their
contract say.” The clause included in Lexington’s policy provides that
Lexington will not pay for any loss resulting “directly or indirectly”
from an excluded peril, regardless of whether a covered peril
contributes “concurrently or in any sequence” to the loss. Under this
language, if the covered wind damage and the excluded flood damage
contributed to cause the enforcement of the city ordinances, then the
policy excludes coverage.[12]
Since the evidence presented established that the city’s determination
to enforce the code was the result of combined flood and wind damage,
the court found that there was no coverage for the cost to comply with
the city’s code requirements.
The Supreme Court of Texas described the ultimate holding from this
case by quoting from case law from the Fifth Circuit on the topic:
The Fifth Circuit in particular has had the opportunity to develop case
law on anti-concurrent causation clauses in situations involving
combinations of covered wind damage and excluded flood damage, and has
concluded that “[t]he only species covered under [a policy with an
anti-concurrent causation clause] is damage caused exclusively by wind. But [when] wind and water synergistically cause[ ] the same
damage, such damage is excluded.”
We agree with the Fifth Circuit that,
under Texas law, the anti-concurrent-causation clause and the exclusion
for losses caused by flood, “read together, exclude from coverage any
damage caused by a combination of wind and water.”[13]
Although the JAW case dealt with the common example of wind
and flood, the holding in this case can be applied to any case where an
anti-concurrent causation provision is present.
[1] See, e.g., Fidelity Co-op. Bank v. Nova Cas. Co., 726 F.3d 31 (1st Cir. 2013) (applying Massachusetts law); Kula v. State Farm Fire & Cas. Co.,
212 A.D.2d 16, 628 N.Y.S.2d 988, 991 (N.Y. App. Div. 1995) (“The
efficient proximate cause of a loss is the cause that originally sets
other events in motion.”); State Farm Fire & Cas. Co. v. Von Der Lieth, 54 Cal.3d 1123, 2 Cal.Rptr.2d 183, 820 P.2d 285 (1991).
[2] Von Der Lieth, 54 Cal.3d at 1131-32, 2 Cal.Rptr.2d at 189, 820 P.2d at 291.
[3] Wallis v. United Servs. Auto. Ass’n, 2 S.W.3d 300 (Tex.App.‑San Antonio 1999, writ denied); Travelers Indem. Co. v. McKillip, 469 S.W.2d 160, 163 (Tex. 1971); Paulson v. Fire Ins. Exch., 393 S.W.2d 316, 319 (Tex.1965); Warrilow v. Norrell, 791 S.W.2d 515, 527 (Tex.App.—Corpus Christi 1989, writ denied).
[4] Wallis, 2 S.W.3d at 304.
[5] Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597,
606 (Tex. 1993) (“When covered and excluded perils combine to cause an
injury, the insured must present some evidence affording the jury a
reasonable basis on which to allocate the damage.”) (citing Paulson v. Fire Ins. Exch., 393 S.W.2d 316, 319 (Tex.1965)).
[6] Wallis, 2 S.W.3d at 304.
[7] C.A. No. 3:12-CV-5046-B, *4-*7 (N.D. Tex. July 7, 2014).
[8] — S.W.3d — (Tex. Apr. 24, 2015).
[9] Id. at *7
[10] Id. at *8.
[11] Id.
[12] Id. (quoting Gilbert Tex. Constr. LP v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010). Other internal citations omitted.
[13] Id. (quoting Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 429–31 (5th Cir.2007) (interpreting Mississippi law)).