Gerri Willis of CNN reported that "the insurers are clearly winners here"
and Ernie Csiszar's comment on behalf of the Property and Casualty Insurers
Association of America was representative of insurer response. In Csiszar's
view, "Judge Senter's ruling has taken much of the wind, literally and figuratively,
out of the plaintiff attorney's argument."
Judge Senter's ruling, of course, was not the first time the exclusion had
been upheld in the state (See for example, a 1949 Fifth Circuit opinion, Home Insurance Company v. Sherrill, 174 F.2d
945), but amidst the combative atmosphere surrounding relationships between
the insurance industry and plaintiffs' lawyers, the decision represented a symbolic
defeat for the leading nemesis of insurers in post-Katrina Mississippi, the
Richard Scruggs Katrina Group. Yet, before celebrating the victory, insurers
should recall a well known Yogi Berra observation, "It ain't over 'til it's
over." Indeed, as policyholder attorneys and insurer defense counsel duel, a
few points in Leonard raise the question of whether the opinion may be a Trojan
Horse for insurers. These points are discussed below.
The Facts of Leonard
Assuming that bad facts make bad law, some plaintiff lawyer critics of Leonard suggest that it was poor plaintiff litigation
strategy to pursue the case without a jury trial. Succinctly, here are the facts.
Paul and Julie Leonard's home is about 515 feet from the beachfront in Pascagoula.
For football enthusiasts, that is the length of about one football field and
three quarters of another, measuring goal line to goal line. The 2-story home
with an attached garage and fence is about 12 feet above sea level.
At the height of the storm surge, the bottom level of the Leonard's home
was inundated with approximately 5 feet of water. The home was still standing
after Katrina passed, leaving behind roof damage and lower level damage to home
and contents, but no damage on the upper level. A tree fell across the fence.
It is undisputed that the Leonards did not reside in a Flood Zone A location
and had no flood insurance. The Leonards contend that they chose not to buy
flood insurance on the advice of their insurance agent, but the judge could
find no evidence to hold the agent responsible. Besides, Nationwide included
a notice with its renewal offers reminding the Leonards that they did not have
flood coverage and that this coverage was available through the National Flood
Insurance Program. Accordingly, Judge Senter held that "The provisions of the
Nationwide policy that exclude coverage for damages caused by water are valid
and enforceable terms of the insurance contract."
Other Rulings: Concurrent Causation in Leonard Is Ambiguous
Much of the opinion deals with the concurrent causation language of Nationwide's
policy. Historically, concurrent causation language was introduced by insurers
to rein in adventurous courts that, in insurers' eyes, stretched policy language
involving coverage well beyond the best intentions of policy drafters. (See
especially Safeco Insurance v. Guyton, 692 F.2d
551, a 1982 California case.)
Concurrent causation, in insurance talk, means "A single loss caused by two
or more perils, acting either simultaneously or in succession." (Popow, p. 1.34) Black's Law Dictionary defines concurrent
cause as "One of two or more causes that simultaneously create a condition that
no single cause could have brought about" and "One of two or more causes that
simultaneously create a condition that any one cause could have created alone."
Neither definition represents a good description of the concept.
Causation, of course, deals with cause and effect; that is, a cause produces
an effect. Failure to produce an effect eliminates a condition (or, in scientific
language, "stimulus" or "treatment") as a cause. In the social sciences, concurrent
causes are viewed as two or more causes that are independent of each other, a point that
is not always mirrored in insurance policy language which focuses on "perils"
as causes of loss. Weather-related perils (wind, rain, hail, tornadoes, lightning,
and flood, for example) often occur as part of the same weather system and,
arguably, are interdependent, not truly independent. Given this view, exclusion
of either wind, water, hail, or flood is not technically a concurrent causation
exclusion; rather, it is nothing more than simply saying, "We will not cover
losses attributable to certain aspects of the same natural phenomenon," however
defined or ill-defined. In other words, the industry's concurrent cause provisions
really don't amount to concurrent causes in the strictest sense.
Some insurers take the position that if two or more "causes" contribute to
loss and an excluded peril is among the culprits, the loss is not covered. When
segregation of covered and excluded possible causes of loss is impossible, these
insurers insist that the tie favors the insurer—a position at odds with the
usual rule in claims adjudication.
Not surprisingly, this very restrictive insurer view is not universally accepted.
Caselaw reveals two competing views, one of which is reflected in State Farm Mutual Automobile Insurance v. Partridge,
514 P.2d 123 (Cal. 1973), which held that when two causes operate independently
of each other, a loss is covered if one of the causes is a covered peril. (See
Jerry at pp. 477-503 for a discussion of causation in the litigation context.)
A third view is the efficient proximate cause or predominant cause approach.
Under this theory, if covered and noncovered perils combine to effect a loss,
the loss is covered if the predominant cause is a covered peril. A well-known
test stating this perspective is the Washington Supreme Court's decision in Graham v. Public Employees Mutual Insurance,
656 P.2d 1077 (Wash. 1983), a case resulting from the eruption of Mt. St. Helens:
-
Where a peril specifically insured against sets other causes in motion
which, in an unbroken sequence and connection between the act and final
loss, produce the result for which recovery is sought, the insured peril
is regarded as the proximate cause of the entire loss….
-
It is the efficient or proximate cause which sets into motion the chain
of events producing the loss which is regarded as the proximate cause, not
necessarily the last act in a chain of events.
Professionals trained in distinguishing cause-effect relationships in statistical
operations may interpret the Washington court's efforts as attempts to deal
with the problem of multicollinearity, a
situation that occurs when independent variables (the perils in insurance policies)
are highly correlated with one another. In such situations, academic researchers
normally conclude that efforts at sorting out how much each variable contributes
to variation in the dependent variable (loss in the insurance context) is meaningless.
In commentary that may prove to be relevant to Katrina litigation, the Washington
court stated:
In the present case, the mudflows which destroyed the appellants' homes would
not have occurred without the eruption of Mt. St. Helens. The eruption displaced
water from Spirit Lake, and set into motion the melting of the snow and ice
flanking the mountain. A jury could reasonably determine the water displacement,
melting snow and ice and mudflows were mere manifestations of the eruption,
finding that the eruption of Mt. St. Helens was the proximate cause of the damage
to appellants' homes. The issue is not a question of law, but a question of
fact….
Nationwide's Concurrent Causation Language
The court divided Nationwide's policy terms into two parts. The language
in concurrent causation exclusion 1 states:
- 1. We do not cover any loss to any property resulting directly or indirectly
from any of the following. Such a loss is excluded even if another peril
or event contributed concurrently or in any sequence to cause the loss.
* * *
- b) Water or damage caused by water-borne material. Loss resulting from
water or water-borne material damage described below is not covered even
if other perils contributed directly or indirectly to cause the loss. Water
and water-borne material damage means:
- (1) flood, surface water, waves, tidal waves, overflow of a body
of water, spray from these whether or not driven by wind.
* * *
- Resulting direct loss by fire, explosion, or theft is covered.
In interpreting this language, Judge Senter determined that "loss," "such
a loss," and "the loss" refer to damage caused by rising water but does not
include damage attributable to wind occurring at or about the same time. "The
wind damage is covered, the water damage is not," he wrote.
Concurrent causation exclusion number two reads:
-
2. We do not cover loss to any property resulting directly or indirectly
from the following if another excluded peril contributes to the loss:
-
c) Weather conditions, if contributing in any way with an exclusion listed
in paragraph one of this section.
The court's comments about this verbiage are somewhat harsh. "Read literally,
this provision would exclude any otherwise covered loss, e.g., windstorm damage,
in any instance where "weather conditions," i.e., the windstorm, combined with
an excluded cause of loss, e.g., flooding, to damage the insured property,"
Judge Senter concluded.
For both insurers and policyholders, though, it is the court's ultimate decision
that may have the most far-reaching implications for subsequent litigation: Both concurrent causation provisions were held
to be ambiguous. Thus, key policy provisions on which insurers rely to
limit their exposure on the Gulf Coast bear the stigma "ambiguous." It is a
cardinal rule of insurance contract construction that ambiguities are resolved
in favor of the insured.
Nationwide's Regulatory Approval Defense Was Rejected
A principal function of insurance regulation is the approval or disapproval
of forms and rates. In most insurance departments, this task is parceled out
to personnel who review property and casualty forms and rates and those who
perform similar functions for life and health products. The task can be an arduous
one and is sometimes guided by specific language in the relevant insurance codes.
Based on legal theories of preemption or primary jurisdiction, insurers frequently
rely on the approval/disapproval authority of regulators as a defense. Nationwide
argued, for example, that since the Mississippi Insurance Commissioner had approved
its homeowners policy for sale, regulatory approval "conclusively establishes
that the terms of its policies are clear and unambiguous."
Defendant Nationwide's reliance on Mississippi regulatory approval was readily
dismissed by the court. The court stated that "the construction of the terms
of any insurance policy are subject to judicial review, notwithstanding the
fact that they have been approved by the Mississippi Department of Insurance."
Summary and Conclusion
Despite early reports of insurers "winning" the Leonard case, the opinion, nevertheless, does not necessarily dampen the spirits of
plaintiffs who challenge insurer determinations of coverage for damage wrought
by Katrina. A main policy provision relied on by insurers to restrict coverage
has been ruled ambiguous and a common defense—regulatory reliance—has been dismissed.
That the opinion is based on facts that are not necessarily the most policyholder-friendly
evidence to bring before a court reinforces the notion that insurers are not
yet out of the litigation waters of Katrina. For example, how will juries treat
homes that are totally destroyed? How will "sequence" be interpreted? Could
jurors view "hurricane" in the same manner as the Washington Supreme Court construed
a volcanic eruption? How often will jurors conclude that wind caused total destruction
but water washed away the evidence?
A series of cases in the Southern District of Mississippi emphasizes that
final determinations of what is covered are fact driven. Assuming that many
of these fact-driven issues will eventually be decided by Mississippi jurors
sets the stage for potentially dramatic arguments. Anyone see a wooden horse
outside the marble gates?*
References
Jerry, Robert H, II. Understanding Insurance
Law. 2nd ed. New York: Matthew Bender, 1996.
Palumbo, Dennis J. Statistics in Political
and Behavioral Science. New York: Meredith Corporation, 1969.
Popow, Donna. Property Loss Adjusting.
3rd ed. Malvern, PA: American Institute of Chartered Property Casualty Underwriters/Insurance
Institute of America, 2003.