Shortly after federal district Judge LT Senter Jr. issued his August 15 opinion
in Leonard v. Nationwide Mutual
Insurance, No. 1:05CV475, (Southern District of Mississippi 2006),
insurers and their trade association representatives quickly applauded the
ruling, largely because the court upheld the "flood exclusion" in
Nationwide's policy.
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 amid 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.
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 Leonards' 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. Case law 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.