Most property insurance policies provide "all-risk" coverage requiring insurer to indemnify the insured for any loss unless specifically excluded. Among the exclusions in standard property policies is the so-called acts or decisions exclusion.
This exclusion is generally worded something along the lines of the following: "This insurance does not apply to the following.
Taken literally, this exclusion could swallow the entire coverage provided by a property insurance policy because, in almost every instance imaginable, there is some act or decision, or failure to act, in the chain of causation of every loss. For example, in a fire loss caused by faulty wiring, negligence by the contractor who installed the wiring would result from an act or failure to act, leading to the fire. Consequently, the exclusion could be read to apply, precluding coverage for the loss. Likewise, a windstorm loss could be traced back to the roofer's decision to use a certain method of fastening, as opposed to a stronger method of fastening, or the township's decision not to enact and enforce a higher level of building code.
Fortunately, most courts have recognized the inordinate breadth of the acts or decisions exclusion if applied literally and have refused to accept such an invitation from insurers. In one of the leading cases construing this exclusion, the court looked to the efficient proximate cause of loss, as opposed to an act or a decision that fell somewhere within the chain of causation.
In Jussim v. Massachusetts Bay Insurance Co., 597 N.E. 2d 1379 (Mass. App. Ct. 1992), the insureds sought a declaratory judgment that they were entitled to coverage under an insurance policy. The loss resulted from the movement of home heating oil onto the plaintiffs' property as the result of a negligent spill on a neighbor's property. The insurance policy at issue was an "all-risk" policy, but excluded "'loss . . . caused by … release, discharge or dispersal of contaminants or pollutants….'" Id. at 1380 (quoting the insurance policy).
While the insurance company claimed the plaintiffs' loss was excluded under this exclusion, the insureds argued that their loss was caused by the negligence of others and, therefore, the loss was covered (the parties stipulated that the spill resulted from negligence). The court concluded that the loss was covered, holding that, "where the excluded event is not the cause of the loss, but rather the result of a covered risk, the insured may recover." Id. at 1381. It quoted a previous decision of the court where it relied on "'the well-established principle that recovery on an insurance policy is allowed where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk….'" Id. at 1381 (quoting Standard Elec. Supply So. v. Norfolk & Dedham Mutual Fire Ins. Co., 307 N.E. 2d 11, 13 (Mass. App. Ct. 1974).
The insurer also argued that an acts or decisions exclusion barred recovery. While the insurer conceded that the policy covered negligent acts that caused covered losses, it argued that the acts or decisions exclusion barred coverage where negligence caused an excluded loss. The court rejected that argument, holding that the acts or decisions exclusion could not be taken literally because if it were, "it would exclude coverage for all acts and decisions of any character of all persons, groups or entities." Id. at 1382. According to the court, this interpretation would have made the policy worthless. The court went on to affirm the trial court's grant of summary judgment against the insurer.
The Massachusetts Supreme Court affirmed the decision of the appellate court in Jussim v. Massachusetts Bay Insurance Co., 610 N.E. 2d 954, 957 (Mass. 1993). Commenting on the appellate court's decision, the Massachusetts Supreme Court explained that the purpose of the chain of causation test employed by the appellate court was to determine the efficient proximate cause of the loss. The Massachusetts Supreme Court held that, if the efficient proximate cause of the loss was an insured risk, "there will be coverage even though the final form of the property damage, produced by a series of related events, appears to take the loss outside of the terms of the policy." Id. at 955-56. The Massachusetts Supreme Court specifically agreed with the appellate court's conclusion regarding the acts or decisions exclusion. Id. at 957.
A similar causation analysis was used by the federal court in St. Paul Fire & Machine Co. v. General Injectables & Vaccines, Inc., No. 98-0737, 2000 U.S. Dist. LEXIS 2597 (W.D. Va. March 3, 2000). The court there addressed the insurer's request for a declaratory judgment that an all risks insurance policy it issued did not provide coverage for damaged vaccines. The insured stored its vaccines at freezing temperatures in several refrigeration units; a power interruption caused one of these refrigeration units to shut down after a sensor module tripped. Protec, the company hired by the insured to monitor the units, failed to reach anyone at the insured's place of business, only an off-duty employee at his home.
Because of the mistakes by Protec and the insured's maintenance staff, the refrigerator remained off for 2 full days, the vaccines reached a semi-liquefied state, and the Food and Drug Administration (FDA) refused to authorize the use of the vaccines because the vaccines had thawed. The court held that the loss was fortuitous because, although the refrigerator had failed on five prior occasions, there was uncertainty as to whether the refrigerator would fail again.
The insurer tried to establish that seven different exclusions precluded coverage, one of them being an acts or decisions exclusion. In its argument regarding the acts or decisions exclusion, the insurer claimed that the acts of the maintenance employees, Protec, and the FDA caused the loss of the vaccines. The court found that the exclusion did not apply because, while the acts cited by the insurer may have made the losses worse, the acts did not cause the loss. Therefore, the acts or decisions exclusion did not apply. In a footnote, the court noted that the acts or decisions exclusion was also "overly broad, ambiguous, and irreconcilable with other policy provisions and with the very concept of an all-risk insurance policy." Id. at 17 n.5. Further, the court quoted Jussim and commented that the acts or decisions exclusion's breadth was untenable. Id.
Even in cases where the acts or decisions exclusion is applied, it is in a very limited context. Thus, In Duarte & Whiting, Inc. v. Universal Underwriters Ins. Co., No. 05-1315, 2006 U.S. Dist. LEXIS 52339 (N.D. Cal. July 28, 2006), the district court applied an acts or decisions exclusion to preclude coverage for a loss. The insurer insured plaintiff's automobile dealerships. One of the buildings insured under the policy was the Ferry Building.
The insured submitted a claim for cracks in the Ferry Building's walls, which led to litigation over the cause of the cracking, the magnitude of the cracking before the inception of the policy, the tenant's contribution to the severity of the cracks, and the insured's knowledge concerning the cracking of the walls. After noting that the California Supreme Court followed a manifestation of loss rule (where liability falls on the insurer on the risk at the time the loss manifests, which is when appreciable damage occurs and is or should be known to the insured, such that a reasonable insured would be aware that his notification duty under the policy has been triggered), the court found that cracking had occurred before the policy incepted and that plaintiff was aware or should have been aware of the cracking. Consequently, there was no coverage under the manifestation rule.
The court went on to analyze whether coverage would have been afforded if the cracking manifested itself during the policy period and found that, even if that were the case, there still would be no coverage. Under the single cause theory presented by the insurer, the court found there would be no coverage because the cause of the cracking was seismic activity and ground destabilization due to flooding, two perils specifically excluded under the policy. With respect to the plaintiff's multi-causation theory, which was that seismic activity and the tenant's negligence both caused the cracking, the court found this argument would not prevent summary judgment. Under the efficient proximate cause theory, both causes were excluded. First, the policy excluded coverage for seismic activity. Second, concerning the tenant's actions, the court, without substantial discussion, concluded that losses caused by actions of third parties were specifically excluded under the policy's acts or decisions exclusion.
In one of the few cases to rely solely on the exclusion, a New York court held that the sole cause of loss was a decision by governmental authorities. Cytopath Biopsy Laboratory, Inc. v. U.S. Fidelity and Guaranty Co., 774 N.Y.S.2d 710 (N.Y. App. Div. 2004), involved an appeal of a grant of summary judgment in favor of the insurer. The insurance company disclaimed coverage because the insured laboratory failed to establish that its business interruption losses resulted directly from physical loss to property. The laboratory was shut down after other tenants in its building became sick due to a discharge of noxious fumes. While the laboratory claimed that this release was caused by a broken pipe, the court held that, if the laboratory's claims were true, the laboratory could have been reopened quickly had the pipe been repaired.
The court concluded that the losses were caused by the refusal of authorities to allow the laboratory to resume operations until the laboratory obtained proper permits and installed a new ventilation system. Because the insurance policy excluded coverage for losses resulting from acts or decisions of "any person, group, organization, or governmental body," the court found that the loss was not covered under the policy, and the appellate court affirmed the grant of summary judgment in favor of the defendant insurance company. Id. at 711
As these cases show, courts will generally apply exclusions in a common-sense fashion, refusing to take them literally if it would lead to an absurd result. Therefore, while an acts or decisions exclusion uses extremely broad language, to avoid absurd results, courts will enforce it in a limited fashion and only when no other covered cause of loss is involved.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.