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Drafting and Interpreting Policies

The Enigma of Causation in Insurance Contract Interpretation

Kenneth Wollner | January 1, 2003

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Insurance policies are long, convoluted, and abstruse documents. Three unruly doctrines—proximate cause, concurrent cause, and efficient proximate cause—cause an inordinate amount of litigation. We would be well served by getting rid of these terms and other jargon as a prologue to the development of a set of simple and cogent doctrines.

I recently played a few old recordings, including Dennis Miller's "rant" on lawyers. One quip is that the lawyers use language that is "so cryptic, so utterly puzzling and arcane, that Moses, Hammurabi, and Judge Judy working 24 hours for 20 years could not understand it."

When it comes to insurance policies, it occurs to me that Mr. Miller is being too easy on the legal system. True, insurance policies are long, convoluted, and abstruse documents. It would be refreshing to roll back 200 years to a time when an insurance policy consisted of one page including a benediction and a John Hancock written by a person with authority to pay covered losses. But Mr. Miller misses a more pernicious problem—interpretation of policy provisions in ways that are not obvious to most people engaged in transacting insurance.

Causal Concepts

The law of causation is a prime example of the information few people know about and even fewer use when purchasing insurance. The law is comprised of doctrines that are incompatible, vary from jurisdiction to jurisdiction, and lend themselves to "logic chopping." Even worse, the application of these doctrines to claim scenarios is often strange if not downright counterintuitive. For instance, one doctrine (a version of efficient proximate cause) raises this conundrum regarding business interruption coverage for loss arising out of September 11: Was Reagan National closed because of damage to the World Trade Center and the Pentagon or because of concern about more terrorist attacks?

How important are causal concepts in insurance? Over the past 20 years there have been fundamental changes relating to causation in both the rules of insurance policy interpretation and the wording of insurance policies. (These subjects are covered in Chapter 12 of my book How to Draft and Interpret Insurance Policies.) As a result, considerable and growing resources are devoted to claim investigation and coverage analysis focusing on causation issues.

Within the last few years, the highest courts in at least 18 states have weighed in on the issue of causation in insurance contract interpretation. Causation is at the heart of many of today's major coverage disputes, including (in addition to September 11 claims) mold claims under first- and third-party liability policies, trade dress claims under the advertising injury provisions of commercial general liability policies, and directors and officers liability claims against executives and the "entity." Litigation has proliferated.

A great deal of material is available purporting to explain causation theory, much of it representing the respective viewpoints of attorneys who sue or defend insurance companies. This article takes a slightly different tack on the subject. The purpose of this article is to critique three unruly doctrines: proximate cause, concurrent cause, and efficient proximate cause.

Proximate Cause

What causes a loss? On its face, this seems to be a simple question. Peril A causes Loss X: a snowstorm causes a roof to collapse. But real life is rarely that uncomplicated. In most cases, many events and circumstances combine to produce a particular result or set of results. For example, the roof collapse may be attributed to many causes, such as rot, insect infestation, inadequate maintenance, or defective workmanship or materials.

In wrestling with the insurance implications of multiple cause-and-effect relationships, courts have developed a two-part analysis. First, there must be "causation in fact." The causation in fact or "logical causation" requisite is satisfied if the harm would not have taken place but for the event asserted to be the cause of the harm. The second prerequisite, called "proximate causation," is a concept that is more difficult to explain.

Proximate cause imposes normative limits on scope of legal liability based on "our more or less inadequately expressed ideas of what justice demands, or of what is administratively possible and convenient" (W. Keeton, D. Dobbs, R. Keeton, D. Owen, Prosser and Keeton on the Law of Torts, § 41, at 264 (5th ed. 1984)). For example, we do not hold a doctor responsible for the death of a victim murdered by a child conceived as a result of the doctor's error in failing to prescribe an effective contraceptive. Nor are courts engaged in tracing events back to their metaphysical beginnings.

The classic case on proximate causation in insurance contract interpretation is Bird v St. Paul Fire & Marine Ins. Co., 224 NY 47, 120 NE 86 (1918). A freight yard fire triggered explosives, igniting another blaze, which in turn detonated dynamite stores in the yard. The second blast damaged a canal boat that was insured against "the sounds, harbors, bays, rivers, canals and fires." In ruling that the loss was not covered, Benjamin Cardozo, a giant in American jurisprudence, opined that while fire initiated a chain of causation, parties to the insurance contract did not reasonably foresee that fire would trigger explosives.

The particular solution in Bird v St. Paul Fire & Marine Ins. Co.—selection from the chain (or net) of causation of the event closest (most proximate) in time (or distance) to the injury or damage—is the genesis of proximate cause in tort and insurance contract law. However, proximate cause is an anachronism because in modern contract analysis proximate cause means something different from the opinion espoused by Justice Cardozo. Rejection of the closest in time/distance test may have been one of the ideas the author or authors of California Insurance Code had in mind when they drafted these sections:

530. An insurer is liable for a loss of which a peril insured against was the proximate cause; although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.

532. If a peril is specially excepted in a contract of insurance and there is a loss which would not have occurred but for such peril, such loss is thereby excepted even though the immediate cause of the loss was a peril which was not excepted.

This provision was enacted in 1935, the year when Eric Arthur Blair, the secular saint of clean writing and clear thinking, first published under the pseudonym "George Orwell." Why bring George Orwell into this? Because this is the kind of doublespeak Orwell decried in such works as Animal Farm and 1984.

George Orwell argued that bad thinking and bad language are mutually reinforcing. In his essay "Politics and the English Language," Mr. Orwell observed that communication "becomes ugly and inaccurate because our thoughts are foolish, but the slovenliness of our language makes it easier for us to have foolish thoughts." When Mr. Orwell wrote these words, he was mainly concerned with political euphemisms such as "Collectivism." However, his general point is germane to a discussion of any jargon that obscures rather than enlightens. "Proximate cause" serves only to screen the fact that the law on causation is indeterminate.

Concurrent Causation

"Concurrent causation" is another archaic term derived from tort law. In an insurance context, it refers to loss caused by one covered event and at least another event or circumstance that is not covered. Under a popular version of the concurrent causation doctrine, if a covered cause was a substantial factor in producing the injury or damage, the loss is covered, even though an excluded cause also may have been a substantial factor. In Derksen v 539938 Ontario Ltd., the Supreme Court of Canada explained the rationale:

There is no compelling reason to favour exclusion of coverage where there are two concurrent causes, one of which is excluded. A presumption that coverage is excluded is inconsistent with the well-established principle in Canadian jurisprudence that exclusion clauses in insurance policies are to be interpreted narrowly and generally in favour of the insured in case of ambiguity in the wording.

A practical difficulty with the concurrent causation doctrine is that there is no general basis for distinguishing causes. This is problematic in interpreting broad form insurance policies because the determination of coverage depends on finding at least one covered cause.

In State Farm Mutual Automobile Insurance Company v Partridge, 109 Cal Rptr 811, 514 P2d 123 (Cal 1973), the California Supreme Court signaled a tendency to stretch the concurrent causation doctrine beyond common sense. The insured fabricated a hair trigger on a gun and placed the gun on the steering wheel of his car. A passenger in the car was paralyzed when the gun discharged while the car was driven over rough terrain in pursuit of jackrabbits. The insurance company argued since the cause of the injury was negligent driving with a gun in hand, there was no coverage by virtue of the automobile exclusion in the homeowner's policy. The court disagreed, finding that there were two causes: filing of the gun to produce a hair trigger (a covered cause) and use of the car (an excluded cause). The court did not pin blame on the wily jackrabbit.

Efficient Proximate Cause

It did not take the legal community much time to figure out that bifurcation of causation into a covered cause and a not covered cause had the effect of avoiding application of policy exclusions. Doing so did not take much imagination as illustrated by a "comprehensive general" liability policy case and an "all risk" property insurance policy case. In Braxton v United States Fire Insurance Co., 651 SW2d 616 (Mo App 1983), a customer of the insured gas station sued for injuries sustained when the customer was shot by an intoxicated employee of the gas station. The commercial general liability (CGL) insurance policy excluded coverage for "bodily injury or property damage arising out of the ownership or use of any firearm." The court found that coverage was not excluded because the suit alleged negligent supervision of the employee by the insured (a covered cause).

In Safeco Insurance Company v Motte (Fresno County, Cal Super, July 1984), the "all risk" property policy did not apply to the peril of "earthquake." However, the court ruled that the cause of earthquake (tectonic plate slippage) was not excluded. (One response to Motte has been the substitution of the term "earth movement" for "earthquake" in property insurance policy wording.) Furthermore, the court stated, even if tectonic plate slippage falls within the exclusion, the damage would still be covered because negligent design of the structure was a concurrent cause of loss.

In Garvey v State Farm Fire & Cas. Ins. Co., 48 Cal 3d 395, 257 Cal Rptr 292 (1989), the California Supreme Court reviewed its decisions in Partridge and a counterpart liability insurance case, Sabella v Wisler, 59 Cal 2d 21, 27 Cal Rptr 689, 377 P2d 889 (1963). According to the majority opinion, lower courts had "misinterpreted and misapplied" these decisions. What we meant, the majority opinion continued, is that the concurrent causation approach only applies to liability insurance. For property insurance, there is coverage if the "efficient proximate cause" is a covered cause of loss. It is instructive to note that both the judicial and academic literature on efficient proximate cause provide conflicting explanations of the doctrine.

What is the efficient proximate cause? The majority opinion in Garvey failed to provide a coherent definition. In his Garvey dissent, Stanley Mosk warned that the majority opinion would produce endless waves of future litigation. Justice Mosk was correct. Since Garvey, substantial financial and intellectual resources have been spent on manipulating efficient proximate cause to fit the respective coverage positions of insurance companies and policyholders.

One iteration is efficient causation refers to a cause in fact that sets in motion a chain (or train or net) of events that, unbroken by any intervening independent cause, produces that damage or injury and without which the damage or injury would not have occurred. An alternative test turns on whether a particular event is a "substantial factor" or a "predominant cause." A few commentators reject this position, arguing that coverage should be available even when the covered cause is a minor factor in producing the injury or damage. Others take the opposite extreme: the covered cause must be the most important factor. Some courts have alluded to the distinction between an "active agency" as juxtaposed to a passive condition or a preexisting latent infirmity. The fact that the same article or court opinion frequently adopts two or three of these alternative explanations attests to the state of confusion.

Justice Mosk also pointed out that the selection of the cause that sets others into motion could give rise to bizarre results. He provided an example. An insurance policy covers loss caused by fire, but coverage does not apply to loss caused by a falling tree. If fire originating in a house is the efficient proximate cause of the falling tree, the insurance company is obligated to pay for damage or destruction of the tree. But if the falling tree is the efficient proximate cause of the house fire, damage to the house is not covered.

One response to court decisions in California and elsewhere has been to add so called anti-concurrent causation clauses. (These clauses may be found in the lead-in to one or more exclusions, but such language may also appear in different places within an insurance policy.) Over-drafting to avoid any possibility of misinterpretation has reached the point of the absurd. For example, it has been noted in court decisions and other publications that under a hyper-literal reading of the "absolute pollution exclusion," a grocery store may not be covered for liability if a customer slips and falls on a container of Drano.

There is an old joke about a woman who needs auto insurance. The price list provided by an insurance agent shows $200 for fire, $150 for theft, and $50 for fire & theft. Why is the premium for fire & theft coverage so low, she asks? The insurance agent replies: "We don't get many claims for theft of a burned out automobile." If we continue the course of over-drafting exclusions and other coverage limitations, this anecdote may become a parable for the modern insurance policy.


The rules of insurance policy interpretation should comport with common sense and the understanding of the parties to the contract. That way, insurers and policyholders are in a much better position to make sound insurance transaction decisions. In the case of causation theory, we would be well served by getting rid of "proximate cause," "concurrent cause," "efficient proximate cause," and other jargon as a prologue to the development of a set of simple and cogent doctrines.

'Course, that's just my opinion. I could be wrong.

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