September 12, 2005

Flood Insurance and Exclusions, Proximate and Concurrent Causation

In the wake of Hurricane Katrina, journalists, government representatives and "just folks" around the world are raising important questions that must be answered. Not all of the answers will be simple or easy to accept.

For one, folks are now facing the reality that their homeowners insurance does not cover that part of the storm damage caused by flooding, whether the flooding is a direct result of Hurricane Katrina's storm surge or the overtopping and breach of inadequate levees. Those whose homes or businesses were damaged in part by direct action of wind, looting or fire following a flood may find their loss partially covered. But for thousands of people, their homes will be condemned solely because of damage from weeks of soaking in toxic flood waters.

(typo in 9/12 original corrected to replace "RAIN" with "WIND" in Safeco policy quoted in Guyton)

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Insurance policies routinely include front page warnings like that on my own policy: "NOTICE! This policy does not cover flood loss or damage. Call your (name of company) representative ... to obtain a flood insurance policy."

For decades, federally subsidized flood insurance has been available, has been widely promoted and sold through local insurance agents by the National Flood Insurance Program (NFIP), a division of FEMA. See Annotation, "Rain, flood, or water damage insurance; National Flood Insurance Act," 43 Am. Jur. 2d Insurance § 486. Every year, a large percentage of those eligible to buy federally subsidized flood insurance do not. Like public officials who knowingly choose to invest only enough money in flood control to survive a Cat III hurricane but not a Cat IV hurricane, homeowners gamble their property on the theory that "flood insurance is too expensive."

After every major disaster involving extensive flooding, we see politicians and class action attorneys taking aim at the flood exclusion in homeowners policies, looking for ways to overcome decades of legal precedent behind that part of the insurance contract. Sometimes they succeed, after which insurance companies examine their policies and make adjustments so that their policies are as clear and unambiguous as possible that damage due to flood is not covered. They then file those policy contract forms with state insurance regulators and negotiate the terms until they can obtain approval from the state and issue them to policyholders.

Some of those encounters with creative policyholder advocates are instructive and involve principles that should be familiar to any seasoned insurance practitioner. General practice lawyers may be hearing more about them in coming months. One of those is the principle of "concurrent causation," another the concept of "efficient proximate cause."

The principle of concurrent causation has been widely recognized for many decades and works in favor of policyholders. To understand it, you have to keep in your head the difference between cause and effect. An insurance policy specifies what causes it covers (usually called "hazards" or “perils”). It also specifies what effects it covers (usually called "loss" or "damage") and which perils and losses are excluded from coverage. Those details are found in various sections of the policy language, such as “Perils Insured Against” and “Exclusions”.

Concurrent causation principles say that if two causes combine to produce loss or damage, and one of the two causes is excluded (e.g. flood) and the other cause is covered (e.g. windstorm), the loss will be covered. Insurance companies have been drafting their policies in light of this basic principle for over a century, tweaking policies from time to time as fine points were re-interpreted, often in response to disasters that revealed unanticipated exposures. Many of those disasters, and the law interpreting the policies, comes out of the state of California and its earthquakes, mudslides, floods and brushfires.

Although Alabama, Louisiana and Mississippi are not California, the latter state has a more substantial body of law interpreting policy provisions in light of many varied circumstances. A look at some of its law illustrates the complexity of the issues faced by insurers following Hurricane Katrina. California's law derives from interpretation of decisions of its Supreme Court, especially Sabella v. Wisler, 59 Cal. 2d 21, 377 P.2d 889 (1963) and State Farm v. Partridge, 10 Cal.3d 94, 514 P.2d 123 (1973).

Sabella established that when more than one cause is sequentially involved in a loss, the court must determine the single cause that set into motion the other causes or chain of events leading to the damage. In that case, a building contractor negligently installed a sewer line to a house it constructed on uncompacted fill. The sewer ruptured and flowed water into the fill, which settled under the house, cracking the foundation. The insurer denied coverage due to an earth movement exclusion. The court found that because the "efficient moving cause" (builder's negligence) was covered, the loss or damage was covered, even though an intervening cause (earth movement) was expressly excluded, because the efficient moving cause set in motion the intervening cause.

Partridge established that a different approach must be used when two entirely independent causes combined to result in loss or damage, but neither set into motion the other. In such a case, "coverage under a ... policy is equally available to an insured whenever an insured risk constitutes simply a concurrent proximate cause of the injuries."

On September 10, 1976, Hurricane Kathleen dropped heavy rains in California, overwhelming the old levees that protected the community of Palm Desert in the Coachella Valley, flooding it. The community had historically been subject to flooding that had been controlled for decades by levees built by government authorities. Insurers denied claims by homeowners for damage due to flooding and a lawsuit followed.

Safeco's policies included industry standard language designed to cover "all risks" not excluded by the contract language. The contracts included, in bold letters:

In the lawsuit, policyholders pointed out that although the cause or hazard of flooding was excluded by the policy, there was no exclusion for the independent concurrent cause of negligence in design or maintainance of levees. They successfully argued that because the loss resulted from the concurrence of an excluded hazard and a covered hazard, it was covered under California law. Although it ruled that Safeco had to pay the loss, the court did find that Safeco had not acted in bad faith in denying the claims, because the issue had been legally uncertain before its decision. Safeco Ins. Co. v. Guyton, 692 F.2d 551 (9th Cir. 1982).

Following Guyton, the California state courts criticized the federal court decision and further developed the law of concurrent causation in that state. In 1986, applying the Sabella and Partridge cases, a California Court of Appeal decided it was a question of fact whether or not two concurring causes were independent or dependent causes of a homeowner's injury. This left to a jury the decision whether the loss was covered or not. Garvey v. State Farm, 227 Cal.Rptr. 209 (Cal.App. 1986).

Other states reached similar conclusions in similar situations. Legislation was introduced to clarify the law, for example, California Ins. Code §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."

At the same time, insurance companies scrambled to draft, file and get state approval of policy language to avoid the unexpected consequences of decisions like Sabella and Partridge. This included language excluding loss due to certain perils (such as flood and earth movement) "whether other causes acted concurrently or in any sequence with the excluded event to produce the loss."

In 1989, a federal court upheld the effectiveness of this "concurrent causation exclusion" in the face of a insured's argument that it violated §530. The United States Court of Appeals said that "an 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. * * * California Insurance Code §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 State Farm policy." State Farm v. Martin, 872 F.2d 319 at 321 (9th Cir. 1989).

Similar results have been reached elsewhere in cases involving floods resulting from the failure of dams due to alleged government negligence. On July 15, 1982, the Lawn Lake Dam in Rocky Mountain National Park failed, and the released water destroyed commercial property downstream. The property owners' "all risk" insurance policies included a provision that "The Company shall not be liable for loss * * * caused by, resulting from, contributed to, or aggravated by any of the following: * * * flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water, or spray from any of the foregoing, all whether driven by wind or not." The Supreme Court of Colorado rejected policyholder's claims that the "efficient moving cause" of the loss was third party negligence leading to the failure of the dam, finding that the rule regarding such causes "must yield to the language of the insurance policy in question." Kane v. Royal Ins. Co. of America, 768 P.2d 678, 78 A.L.R.4th 797 (Colo, 1989).

Mississippi was particularly hard hit by Hurricane Katrina, and has an instructive precedent regarding flood exclusions, resulting from Hurricane Georges in 1998, Eaker v. State Farm, 216 F.Supp.2d 606, 2001 WL 1900617 (S.D. Miss. 2001).

Eaker resolved claims against State Farm by a homeowner whose property was insured under both a National Flood Insurance Program Standard Flood Insurance Policy (SFIP) and under a commercial homeowners policy form HO-3. Both policies were written by State Farm, which wrote the SFIP as a "write your own" (WYO) fiscal agent of the United States government's NFIP. The insured failed to file within 60 days of loss a written, sworn Proof of Loss form as strictly required by the NFIP laws and regulations. In its opinion, the United States District Court for the Southern District of Mississippi discussed at length the purpose, provisions and requirements of the NFIP and the SFIP, and applied Mississippi state law to the following facts.

Following Hurricane Georges, the Eaker's home developed settlement and foundation problems that their expert witness, an architect, estimated would cost almost $90 thousand to fix and which he attributed to flood water from Hurricane Georges. The District Court discussed the National Flood Insurance Program's purpose "to provide previously unavailable flood insurance protection to property owners in flood-prone areas at rates that are at or below actuarial levels." As guarantor of the program, the United States government pays all flood insurance claims and the terms of the SFIP must be strictly complied with, said the court. The WYO insurer, a mere fiscal agent of the government, is powerless to alter, vary or waive any provision of the policy, including the requirement that the policyholder must file a written, sworn Proof of Loss within 60 days after the loss. The United States Supreme Court has affirmed that in such situations, the courts are powerless to uphold assertions that the insurer is estopped from insisting on compliance with the requirement, like those made by the Eakers. OPM v. Richmond, 496 U.S. 414 (1990).

The fact that the Eakers were unaware of the requirement of filing a written, sworn Proof of Loss within 60 days did not make a difference, according to the court, because the requirement was clearly set forth in the words of the policy. As a result, in the absence of compliance with the requirement, "all claims presented under the flood policy are barred." Eaker, 216 F.Supp.2d at 618.

The Eaker court also addressed the policyholder's claim that State Farm wrongly denied coverage under their homeowners policy. "The policy language clearly and unequivocally excludes coverage for the settlement of the foundation, the claim which the Plaintiffs are asserting." Ibid at 621. The court pointed to the "earth movement" exclusion, the "water damage" exclusion and the "settling/cracking exclusion," all of which were set out in detail in the court's opinion. The court also declined to apply the doctrine of "efficient proximate cause" asserted by the Eakers, because "the Mississippi courts have not specifically adopted the efficient proximate cause doctrine." Id. at 623.

There will be many tragic stories coming out of Hurricane Katrina. Many things will be learned, and some of those learnings will result in changed behavior. Let’s hope that some of the learning is about the realities of flood insurance and flood exclusions in homeowners policies.

You can find out about coverage from the National Flood Insurance Program through your local insurance agent or emergency management office. There is normally a 30-day waiting period before a new policy becomes effective.

For more information about protecting your life and property from floods, visit FEMA's "" website.

Posted by dougsimpson at September 12, 2005 04:56 PM
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