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?*

*As indicated above, Leonard also addressed the issue of agent liability. That subject will be addressed in a future commentary.

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.