Rethinking Concurrent Causation and the Flood Exclusion: Further Comments on Katrina-Related Coverage Disputes

This article explores a brief background of how the insurers sought to insulate themselves from water damage liability, insurers' attempts to deal with problems of causality, and how their policy language torpedoed their alleged concurrent causation exclusion.

Background of Concurrent Cause Exclusions

When courts began to construe losses involving both covered and excluded causes of loss in favor of coverage for insureds, insurance companies responded by seeking exclusionary language to overcome judicial threats. The Insurance Services Office, Inc. (ISO), for example, adopted the following wording in 1991:

We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.

Many observers believed this or similar terminology addressed insurer fears. Of course, there is no definition of concurrent causation in the insurance policies; however, this has not prevented industry sources from offering an industry view of what it means. One text defines it as "A single loss caused by two or more perils, acting either simultaneously or in succession." The text continues, asserting that the industry's position is that "a loss is excluded if caused by an excluded cause, whether or not that cause is the predominant one" (Popow, p. 134). Over time, this industry understanding became Conventional Wisdom. As is so often the case, Conventional Wisdom can be and has been wrong.

Causal Thinking Among Insurers

Insurers have what psychologists might term an approach-avoidance attitude toward causation. In underwriting and rating of policies, insurers do not feel compelled to demonstrate causation; instead, correlation, a statistical relationship in which two variables merely appear together, is sufficient. Thus, if an insurer posits a correlation between one's credit score and auto claims, Shazam! Underwriters use credit scores to underwrite policies. The same is true for age, gender, type of vehicle, territory, and other popular underwriting factors.

Causation takes center stage, however, when claims are under review. At this stage, claimants often have the burden of proving a causal link between their loss and a covered cause of loss. Policy requirements for proof of loss, examination under oath, and cooperation may be applied to establish causation. (In this regard, open perils policies are more consumer friendly because they shift the burden of proving exclusions to the insurer.)

Despite the fact that causation is an ancient philosophical, medical, and scientific issue provoking extensive debate, insurers show little evidence of having given serious thought to the concept. (See Blalock for an extended discussion.) Their ill-fated attempts to rely on concurrent causation in Hurricane Katrina cases illustrate the deleterious consequences.

Concurrent causation, it turns out, has enjoyed a long and easily recognizable presence in social and medical sciences. Concurrent causation occurs when two independent, unrelated causal variables (perils) contribute to the same effect (loss). This definition is also recognized in caselaw, as indicated by a Florida court's distinction between proximate cause and concurrent causation in Jeno F. Paulucci v. Liberty Mut. Fire Ins., 190 F. Supp. 1312 (2002).

The concurrent cause doctrine and efficient proximate cause doctrine are not mutually exclusive. Rather, they apply to distinct factual situations. The concurrent cause doctrine applies when multiple causes are independent. The efficient proximate cause doctrine applies when the perils are dependent. Causes are independent when they are unrelated, such as an earthquake and a lightning strike, or a windstorm and wood rot. Causes are dependent when one peril instigates or sets in motion the other, such as an earthquake that breaks a gas main that starts a fire.

In a hurricane, there are multiple perils: varieties of wind, rain, wind-blown objects, water-borne objects, and storm surge. These perils are not independent; hence, the appropriate causal language for describing a hurricane's perils are reciprocal causation and multiple causation. Logically, given custom and practice in the social, medical, legal, and scientific disciplines, concurrent cause terminology is inapplicable to hurricanes because the causes involved are not independent.

State Farm, Allstate, Nationwide, and Concurrent Cause

Below is the language from State Farm's homeowners policy.

To restate the language, State Farm says, "We do not insure under any coverage for any loss which would not have occurred in the absence of flood, surface water, waves, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, all whether driven by wind or not."

This provision essentially requires State Farm adjusters to ask the following question before invoking the water damage exclusion: "If we control for the effects of water, would wind have been sufficient to cause the loss?" If State Farm cannot muster a preponderance of evidence to show that wind would not have caused the damage, it cannot deny coverage based on the water exclusion. Unambiguously, the language does not say the company will not pay if water and wind combine in a loss.

Allstate's Policy: Back to Predominant Cause

Allstate's policy language states as follows.

Note that this section of the policy is in the conjunctive. Allstate's policy directly addresses the question of multiple causation, i.e., the possible conjunction of more than one cause of a loss. Instead of adopting a concurrent cause position though, the Allstate policy actually incorporates proximate cause as reflected in Garvey v. State Farm Fire & Cas., 770 P.2d 704 (Cal. 1989). Invoking its flood exclusion dictates that its claims procedure demonstrate that "the predominant cause of loss is flood, including, but not limited to surface water, waves, tidal water or overflow of any body of water, or spray from any of these, whether or not driven by wind."

"Predominant" means "having ascendancy, authority, or dominating influence over others; superior." (Webster's New World College Dictionary, 4th Edition.)

Stating the exclusion differently, if inquiry demonstrates that the predominant cause of loss is a covered peril, Allstate must pay the entire claim.

Nationwide's Policy: No Ambiguity Here Either

The Nationwide policy exclusion states as follows.

Nationwide's policy is the only one of the three purporting to exclude "water-borne material." Apparently, this is an attempt to circumvent Sterling v. City of West Palm Beach et al., 595 So. 2d 295 (Fla. App. 1992), which held that since the policy at issue did not mention raw sewage in its definition of water damage, sewage backup was a covered peril.

Nationwide, like State Farm, incorporates a concurrent cause exclusion, albeit one different from State Farm's policy. Nationwide states that "Such a loss is excluded even if another peril or event contributed concurrently or in any sequence to cause the loss." The court in Leonard v. Nationwide (Memorandum Opinion, U.S. District Court, Southern District of Mississippi, No. 1:05CV475 LTS-RHW, 08/15/2006) explained why this provision failed to limit coverage to the insurance industry's most restrictive interpretation of concurrent causation (if water damage is present, there is no coverage) as follows:

The "loss," "such a loss," and "the loss" referred to in this paragraph, is, in this instance, damage caused by rising water during Hurricane Katrina. These three terms refer to this particular excluded loss, i.e., damage caused by rising water, but this paragraph does not affect the coverage for other losses (covered losses), i.e., damage caused by wind, that occur at or near the same time. Thus, this language does not exclude coverage for different damage, the damage caused by wind, a covered peril, even if the wind damage occurred concurrently or in sequence with the excluded water damage. The wind damage is covered; the water damage is not.

I agree. The language unambiguously supports the court's interpretation.

Conclusion

As demonstrated above, there is no such thing as THE concurrent cause provision of three major insurers. Accordingly, commentators must be careful to avoid oversimplification in discussions of alleged policy exclusions. Oversimplification may serve media interests in reporting about complex subject matter, but greater parsimony is essential for fair resolution of coverage disputes. Moreover, industry spokespersons could benefit from better understanding of statistical argot, which, in turn, could lead to insurers adopting policy terminology more closely mirroring a company's intent.

The fact that none of the policies discussed in this commentary included a genuine concurrent cause provision reinforces this notion. At the claims stage, this means that the claims procedure for each company, done properly, mandates different approaches to claims investigations.

Blalock, Hubert M. Statistical Inferences in Nonexperimental Research. Chapel Hill: University of North Carolina Press, 1961.

Popow, Donna J. Property Law Adjusting, 3rd Edition. Malvern, PA: American Institute of Chartered Property Casualty Underwriters/Insurance Institute of America, 2003.