Insurance Law Newsletter

Insurance: Winter 2015

Anti-Concurrent Clauses: Exclusion Causing Much Confusion

Amy Bach, Esq. and Dan Wade, Esq.
Exclusion profusion is wreaking havoc and confusion
Turning off buyers, who think insurers are liars
Who bought peace of mind, but instead only find
Exclusion profusion, wholesale disillusion
 
Let there be no surrender, lying down nor retreat
If insurance fuels our economy, courts must feel the heat
Or people and businesses will increasingly say
If I don’t have to buy it I won’t…there’s no way
 
Keep reminding the courts of the core set of rules
The principles of insurance, your fundamental tools
Insurance is different, the drafter had an edge
You can’t leave the policyholder out on an economic ledge
 
Where coverage is illusory there was bad faith in the issuance
Keep laying it out, you will help make the difference
 

Plaintiff side coverage and bad faith practitioners and their policyholder clients have endured some painful outcomes in recent decades as the political/judicial pendulum swung toward strict construction of policy exclusions and artificial caps on recoveries. But as we wring our hands over the ebbing of judicial precedents that recognize the uniquely important nature of insurance promises in contracts of adhesion, insurers can’t seem to resist pushing their luck (e.g. altering expert reports) and angering powerful people.

Today, middle class homeowners in coastal Florida are being charged $24,000 a year for a basic home insurance policy containing a flood, earthquake, earth movement and mold exclusion and a 5% hurricane deductible. Hurricane Sandy victims on average received a whopping $16,000 payout, then read headlines about expert reports having been altered by insurers. 

The authors believe that policyholder advocates must consistently, in a disciplined, non-emotional tone, remind courts of a set of core insurance principles.  Just as the “Rules of the Road” help juries focus on their job, judges will be reminded that allowing insurers to exploit their power to the detriment of coverage is bad for our economy. 

Much worse than a tongue twister

If you read a typical anti-concurrent causation clause (“ACC”) out loud to an audience, you’re guaranteed to get chuckles and groans...

“We do not cover loss to any property resulting directly or indirectly from any of the following…flooding, including storm surge and most water damage including sewer backup and overflow, earth movement, volcanic eruption…such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.

Classic legalese doublespeak.  A “tongue twister,” some have called it. But to people who need their insurance to pay to replace a home or business that’s been totaled due to a storm or hurricane, and to the lawyers who represent them, there’s nothing funny about these clauses.  As one reporter described it: “[t]he ACC clause can put the kibosh on your entire claim.”[1] And for tens of thousands of Americans, it has.

Untold numbers of people outside California have experienced financial devastation via this clause.  United Policyholders’ staff and volunteers have battled it mightily in legislative, regulatory and court arenas with few successes.[2] Our collective efforts are a work in progress.

In California and a few other states, the policyholder bar has rested easy that the ACC clause wouldn’t fly. In California this is thanks to a long line of unique statutory and case law on proximate cause.  Fire following earthquake?  Covered.  No problem.  A retaining wall that fails due to a combination of flooding and tree-fall?  Covered.  No problem. But a series of decisions and one pending in the Court of Appeal are shaking our confidence even in California.

Coverage killers

The ACC clause emerged as a coverage killer after Hurricane Katrina. It had been showing up in home policies since at least the 1980s, but it didn’t get much attention until 2005, when Hurricane Katrina walloped the Gulf Coast, costing insurers an estimated $38 billion in claims.[3] Suddenly the ACC became a devastating weapon for insurers to use to avoid paying claims.

Policyholder attorneys mounted numerous challenges with some success.  But overall, insurers prevailed in getting most courts to uphold and enforce the clause.  Their public relations message and rallying cry to courts and lawmakers: “If you rewrite our contracts after the fact and make us pay for claims we didn’t collect premiums for, we’ll go out of business.”  The strategy worked. Courts enforced these extreme exclusions in contracts of adhesion and left property owners soaking wet and policyholder advocates scratching our heads…what claims did they collect premiums for?  Only fire?  If that’s the case – then say so.

The truth is, “[w] hen disaster strikes it seems to happen all at once. Electric lines spark, windows shatter, roofs tear off, sump pumps stop and the lights go out. Homeowners see it this way. Insurance companies -- and often the courts -- see it differently.”[4]

Insurers have long been in the business of using policy exclusions to avoid risk as a strategy for minimizing payouts and boosting profits.[5]  Now, in the face of climate change, they’ve upped their game and added percentage deductibles to the mix. 

 The policies they write are contracts of adhesion – homeowner: take it or leave it. Contrary to popular belief, regulators are not even reviewing, let alone rejecting, exclusionary clauses that defeat policyholders’ reasonable expectations of coverage. 

Judges mull the tongue twister

Despite the fact that insurers call it the anti-concurrent causation clause, in reality it might as well be called the anti-concurrent and sequential cause clause. Huh?

A standard form homeowner’s policy provides coverage for “all perils not specifically excluded.”[6] This means the policy pays for losses or damages resulting from any causes not specifically listed under the policy’s exclusions. However, the situation is much more complicated when, in the case of a hurricane, multiple perils contribute to the same loss.

A little history: after the San Francisco Earthquake of 1906, many homeowners were shocked to find that their standard fire insurance policy excluded both the earthquake damage and the ensuing fire under a causation exclusion. Litigation ensued.  See, e.g., Pac. Heating & Ventilating Co. v. Williamsburgh City Fire Ins. Co.[7] The California legislature responded by enacting a series of reforms regarding ensuing loss provisions.[8]

Now, a typical ensuing loss provision reads:

“In the event an excluded cause of loss…results in a covered cause of loss, the [insurance] company will be liable only for such resulting loss or damage.”

That’s how we got coverage for fire following earthquake.  See, e.g., Acme Galvanizing Co. v. Fireman’s Fund Ins. Co (“…[coverage] where there is a ‘peril,’ i.e., a hazard or occurrence which causes a loss or injury, separate and independent but resulting from the original excluded peril, and this new peril is not an excluded one, from which loss ensues.”); But See Loughney v. Allstate Ins. Co. (“ensuing loss” provision is only applicable when an insured alleges damage resulting from a secondary peril which is covered).[9]

But that’s the easy part. What about when multiple perils contribute to the same loss and occur either simultaneously or in close proximity? Confusion abounds.

At the time Hurricane Katrina hit the Gulf Coast, only 15 states enforced ACC clauses.[10] That’s changing. Courts in Alabama, Alaska, Arizona, Colorado, Indiana, Louisiana, Massachusetts, Michigan, North Carolina, New Hampshire, Nevada, New Jersey, New York, Pennsylvania, South Carolina, South Dakota, Tennessee, and Texas have expressed their approval of the ACC.[11]

The ACC has only been formally rejected by courts in California, North Dakota, Washington, and West Virginia.

And then some courts, such as in Mississippi, have split the baby and enforced ACC clauses but have refused to extend it to loss or damage caused by a covered peril. See, e.g., Leonard v. Nationwide Mut. Ins. Co  (“I] f wind blows off the roof of the house, the loss of the roof is not excluded merely because a subsequent storm surge later completely destroys the entire remainder of the structure; such roof loss did occur in the absence of any listed excluded peril.”).[12]

Is California causation law on shaky ground?

California, as a minority jurisdiction, has traditionally rejected the ACC. See, e.g., State Farm Mut. Auto. Ins. Co. v. Partridge (“Under certain circumstances, an [insurer] may be liable for coverage so long as the covered peril was one of two or more independent, concurrent proximate causes of harm, even if the covered peril was not the efficient proximate cause.”).[13]

California instead has applied the “Efficient Proximate Cause” (“EPC”) doctrine for nearly half a century. See, e.g., Sabella v. Wisler (“a] n 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 is not liable for a loss of which the peril insured against was only a remote cause.”). [14]

The California Insurance Code states, in relevant part: “[a] n 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.” [15]

More recently, in Garvey v. State Farm Fire Cas. Co., the California Supreme Court held:

“…whether a claim is covered or excluded under the terms of the policy turns not on whether the alleged cause of the loss was a concurrent cause of the damage, but whether it was the `efficient proximate cause' of the loss.” [16]

But California courts continue to confront the EPC issue with mixed results. [17] Some recent decisions suggest that the EPC doctrine is intact, while others suggest that insurers are free to contract around it. See Julian v. Hartford Underwriters Ins. Co. (“[a] n 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.”)[18] But See De Bruyn v. Sup. Ct. ([EPC] does not preclude an insurer from providing coverage for some, but not all, manifestations of a peril, as long as the policy makes clear which perils are and are not covered.”). [19]

Vardanyan v. AMCO Ins. Co., a case with potentially far-reaching impacts is pending in a California Court of Appeal.[20] In the case, the trial judge refused to give the appropriate jury instruction on predominant cause (i.e., EPC), which reads as follows:

“You have heard evidence that the claimed loss was caused by a combination of covered and excluded risks under the insurance policy. When a loss is caused by a combination of covered and excluded risks under the policy, the loss is covered only if the most important or predominant cause is a covered risk.”

The judge instead relied upon a policy provision that excludes coverage unless the covered peril was the sole cause of loss. [21]  In other words, the trial court held that there is no coverage when any unnamed condition, no matter how remote in time or effect, was in the causal chain.

Stay tuned for this one. United Policyholders will be filing an amicus curiae brief.

BeCAUSE they can, but pigs get fat and hogs get slaughtered

Like the child who eats an entire jar of peanut butter when no one’s looking and gets a horrible stomach ache, insurers that get too greedy in drafting exclusions will pay the price of bad publicity and a loss of reputation and market share.  In recent years, journalists, United Policyholders and the Consumer Federation of America have lambasted Farmers for the overbroad mold exclusion in its “Next Generation” policies, and Allstate for a blatantly unfair ACV-only on roofs over 10 years old “House and Home” policy.  At a recent convention of state insurance regulators in Washington D.C., United Policyholders urged disapproval of the sale of policies containing “Purely Cosmetic Damage” exclusions that bar coverage for “marring, scratching, denting that doesn’t impair function.”[22] 

And thanks to the Internet, more and more consumers are sharing their insurance horror stories publicly:

“Allstate refuses to cover replacement of my hail-storm damaged roof. A severe hailstorm hit our neighborhood July 2014, and now 40-50 homes in my small neighborhood are receiving a new roof through their insurance carriers. But, Allstate the adjuster found " insufficient" damage to my roof and my neighbors roof. They offered a few hundred dollars to "patch" the damaged areas. I have been a customer with Allstate for many years, Home and auto. Don't sign up with them they are not the company they used to be. You're in bad hands...with Allstate.”[23]

The core principles of insurance

We must consistently remind courts of the essential principles that bear on coverage and bad faith cases:

  • Insurance policies are contracts of adhesion; consumers have no power to alter their terms.[24] See, e.g., D'Ambrosio v. Pa. Nat. Mut. Cas. Ins. Co.[25]

The Legal Information Institute at Cornell Law School says this about contracts of adhesion:

“Courts carefully scrutinize adhesion contracts and sometimes void certain provisions because of the possibility of unequal bargaining power, unfairness, and unconscionability. Factoring into such decisions include the nature of the assent, the possibility of unfair surprise, lack of notice, unequal bargaining power, and substantive unfairness. Courts often use the “doctrine of reasonable expectations” as a justification for invalidating parts or all of an adhesion contract: the weaker party will not be held to adhere to contract terms that are beyond what the weaker party would have reasonably expected from the contract, even if what he or she reasonably expected was outside the strict letter of agreement.”

  • Many of the exclusions in property policies today were never analyzed or formally approved by a regulatory agency. Regulators do not have the resources or authority to scrutinize policy wording in every policy sold in their state. In many cases, you will find that coverage is illusory through cleverly worded clauses and exclusions. [26] 

  • The business of insurance is different, not like a radio, television or car.  It is affected with the public interest and a quasi-utility.[27] See, e.g., U.S. v. South-Eastern Underwriters (U.S. Supreme Court).[28]

  • The purpose of an insurance contract is to effectuate indemnity in case of loss. “Delayed payment based on inadequate or tardy investigations, oppressive conduct by claims adjusters seeking to reduce the amounts legitimately payable, and numerous other tactics may breach the implied covenant [of good faith and fair dealing] because they frustrate the insured’s right to receive the benefits of the contract in “prompt compensation for losses.” Waller v. Truck Ins. Exch., Inc.[29]

  • The financial security that insurance policies provide is essential to economic health of policyholders and the economy at large. When insurers don’t pay, the results can be catastrophic. Individuals fall down one or two rungs on the economic ladder. Businesses close. Bad news all around. See, e.g., Amerigraphics v. Mercury Casualty Co.[30]

  • “The obligations of insurers go beyond meeting reasonable expectations of coverage [and] ... encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary.” Egan v. Mutual of Omaha.[31]

  • The duty of good faith extends to the drafting of the contract itself.  If an exclusionary clause operates to defeat the reasonable expectations of indemnity, an insurer acts in bad faith by enforcing that clause.

United Policyholders files amicus curiae briefs in insurance cases nationwide, helping courts understand the real-life implications of coverage disputes.[32] Now, more than ever, we must not let judges forget that insurance contracts are not ordinary contracts and the black letter law contract law doesn’t exist in a vacuum.

In summary, it is helpful to revisit old Professor Williston who said it best:

The fundamental reason which explains [contra proferentem] and…judicial predisposition toward the insured is the deep-seated often unconscious but justified feeling or belief that the powerful underwriter, having drafted its several types of insurance contracts with the aid of skillful and highly paid legal talent, from which no deviation desired by an applicant will be permitted, is almost certain to overreach the other party to the contract. The established underwriter is magnificently qualified to understand and protect its own selfish interests. In contrast, the applicant is a shorn lamb driven to accept whatever contract may be offered on a ‘take-it-or-leave-it’ basis if he or she wishes insurance protection…insurance policies, while contractual in nature, are certainly not ordinary contracts, and should not be interpreted or construed as individually bargained for, fully negotiated agreements, but should be treated as contracts of adhesion between unequal parties. This is because…insurance contracts are generally not the result of the typical bargaining and negotiating processes between roughly equal parties that is the hallmark of freedom of contract. [33]

The authors are the Executive Director and Staff Attorney for United Policyholders, uphelp.org

 


[1] Ed Leefeldt, Insure.com, 2 problems = Zero money: The anti-concurrent causation clause, May, 2013.
[2] See, e.g., United Policyholders’ amicus curiae brief in Tuepkee v. State Farm Fire and Casualty Co. (Case No. 06-61075 and 06-61076, S.D. Miss., 2007) (http://uphelp.org/tuepker-john-and-clare-vs-state-farm-fire-and-casualty).
[3] See David P. Rossmiller, Interpretation and Enforcement of Anti-Concurrent Policy Language in Hurricane Katrina Cases and Beyond, New Appleman on Insurance: Current Critical Issues in Insurance Law 43 (2007).
[4] Leefeldt, supra note 3.
[5]  See AAJ, Pattern of Greed 2007: How Insurance Companies Put Profits Over Policyholders (2007).
[6] The most common form is published by the Insurance Services Office, called the Homeowner’s Standard Form Policy or HO 3. Most insurers use a version of the HO 3. See Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law 391 (4th ed. 2007); Roy C. McCullough, Property Insurance, 1963 Ins. L.J. 75, 84.
[7] 111 P. 4 (Cal. 1910).  For an in-depth discussion of the San Francisco Earthquake and the history of the “ensuing loss” doctrine in California and elsewhere, see generally, Christopher C. French, The Ensuing Loss Clause in Insurance Policies: The Forgotten and Misunderstood Antidote to Anti-Concurrent Causation Exclusions, 13 Nev. L.J. 215 (2012).
[8] Cal. Ins. Code §§ 2081, 10088, and 10088.5 forced insurers to include ensuing loss provisions in policies.
[9] 465 F. Supp. 2d 1039, 1042 (S.D. Cal. 2006)
[10] See Michael C. Phillips & Lisa L. Coplen, Concurrent Causation Versus Efficient Proximate Cause in First-Party Property Insurance Coverage Analysis, 36 Brief 32 (Winter 2007).
[11] Bill Krekstein and Emmett McGowan, Anti Concurrent Causation Clauses in Property Insurance Policies: Deconstructing Judicial Construction and What It Means for Insurers, Gen Re Research (2014).
[12] 499 F.3d 419, 431 (5th Cir. 2007).
[13] 10 Cal.3d 94 (1973)
[14] 59 Cal.2d 21 (1963).
[15] Cal. Ins. Code §530.
[16] 48 Cal.3d 395, 401-404 (1989) (discussing section 530, citing Howell v. State Farm Fire & Cas. Co. (1990) 218 Cal.App.3d 1446; Cal. Civ. Code, § 1667 (That is not lawful which is: 1. Contrary to an express provision of law; 2. Contrary to the policy of express law, though not expressly prohibited).
[17] For an extensive discussion of EPC and the ACC clause, see Jacqueline Young, Notes - Efficient Proximate Cause: Is California Headed for a Katrina-Scale Disaster in the Same Leaky Boat? 758 Hastings L.J. 62 (2011).
[18] 2014 U.S. Dist. LEXIS 142870 (C.D. Cal. Oct. 7, 2014).
[19] 158 Cal.App.4th 1213 (2008).
[20] Case No. 11CECG02112, from a judgment by the Fresno Superior Court.
[21] California Civil Jury Instruction (CACI) 2306. Covered and Excluded Risks—Predominant Cause of Loss (2003).
[22]Disaster Insurance Gaps and Fillers,” Amy Bach, Esq., Professor Peter Kochenberger, University of Connecticut School of Law, NAIC/Consumer Liaison Committee, Monday November 17th, 2014.
[23] Jeff of Mt Airy, ME, Nov. 25, 2014, www.consumeraffairs.com.
[24] Kessler, Friedrich, Contracts of Adhesion-Some Thoughts About Freedom of Contract (1943). Yale Law School Faculty Scholarship Series. Paper 2731 (43 Colum. L. Rev. 629).
[25] 396 A.2d 780, 785 (Pa. Super. Ct, 1978)
[26] Regulatory Brief: State Insurance Regulation: History Purpose and Structure, National Association of Insurance Commissioners (only half the states require insurers to submit property-casualty forms for prior approval).
[27] “The insurers' obligations are ... rooted in their status as purveyors of a vital service labeled quasi-public in nature. Suppliers of services affected with a public interest must take the public's interest seriously, where necessary placing it before their interest in maximizing gains and limiting disbursements ... [A]s a supplier of a public service rather than a manufactured product, the obligations of insurers go beyond meeting reasonable expectations of coverage. The obligations of good faith and fair dealing encompass qualities of decency and humanity inherent in the responsibilities of a fiduciary. Insurers hold themselves out as fiduciaries, and with the public's trust must go private responsibility consonant with that trust." (Goodman & Seaton, Foreword: Ripe for Decision, Internal Workings and Current Concerns of the California Supreme Court (1974) 62 Cal.L.Rev. 309, 346-347.)
[28] 322 U.S. 533 (1944).
[29]  11 Cal. 4th 1 (1995) (citing Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136 (1990).
[30] 182 Cal.App.4th 1538 (2010) (when considering a punitive damages award, the court’s reprehensibility analysis focused on the fact that the insurer’s failure to pay caused the insured company to go out of business).
[31] 598 P. 2d 452, 24 Cal. 3d 809 (1979).
[32] United Policyholders (“UP”) is a non-profit advocacy group that serves as a voice and information resource for insurance consumers in all 50 states. UP does not sell insurance or accept funding from insurance companies.  UP hosts a library of claim tips, consumer help publications, and over 350 amicus curiae briefs at www.uphelp.org.
[33] Williston on Contracts, 49:15.