Current Issues in Concurrent Causation

Transcription

1 Current Issues in Concurrent Causation James M. Hoey Erin E. Moran Clausen Miller P.C. 10 South LaSalle Street Chicago, Illinois (312) Return to course materials table of contents

2 JAMES M. HOEY is a partner in the Chicago law firm of Clausen Miller P.C. He is a member of the ABA and is active in the Property Insurance Law Committee. Mr. Hoey has lectured extensively in matters relating to property insurance and has authored and coauthored articles concerning such topics as boiler and machinery insurance, builders risk insurance, business interruption, and appraisal. He is admitted to practice in Illinois and a member of the Federal Trial Bar.

3 Current Issues in Concurrent Causation Table of Contents I. Introduction II. Efficient Proximate Cause: What Does It Mean in Different Jurisdictions? III. The Enforceability of Anti-Concurrent Causation Provisions IV. Ensuing Losses A. What Is an Ensuing Loss? B. Water Damage and Mold Claims as an Ensuing Loss C. Construction Defects Resulting in Ensuing Losses V. Conclusion Current Issues in Concurrent Causation Hoey, Moran 277

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5 Current Issues in Concurrent Causation I. Introduction In the insurance context, courts have developed various rules for dealing with first party property losses involving two or more causes. Many courts, when faced with the issue of multiple causes in a first party context, have adopted the efficient proximate cause rule. As discussed herein, the efficient proximate cause rule has been defined and applied differently in various jurisdictions, and some jurisdictions permit insurers to contract around the doctrine through the use of anti-concurrency language. Section II of this article discusses the efficient proximate cause rule as applied in different jurisdictions. Section III analyzes the effect of anticoncurrency language in various jurisdictions. Section IV addresses the effect of ensuing loss provisions in claims relating to losses involving water, mold and defective construction. II. Efficient Proximate Cause: What Does It Mean in Different Jurisdictions? A majority of jurisdictions use the efficient proximate cause doctrine in adjudicating all risk insurance policies where a covered and a noncovered peril contribute to a loss. Pioneer Chlor Alkali v. National Union Fire Ins. Co., 863 F. Supp. 1226, 1230 (D. Nev. 1994) (citing Villella v. Public Employees Mut. Ins. Co., 725 P.2d 957, 962 (Wash. 1986)). Under the efficient proximate cause doctrine, if the efficient proximate cause of the loss is covered, but excluded causes contribute to the loss, the entire loss will be covered. See Bowers v. Farmers Ins. Exch., 991 P.2d 734, 738 (Wash. Ct. App. 2000) ( When the insured can identify an insured peril as the proximate cause, there is coverage even if subsequent events in the causal chain are specifically excluded from coverage. ) Efficient proximate cause has been defined in various ways, and therefore it is essential in making a coverage determination that the definition set forth by the applicable law of the jurisdiction governing the loss be applied. For example, efficient proximate cause has been defined as the risk that sets other causes in motion. In Toumayan v. State Farm Gen. Ins. Co., 970 S.W.2d 822 (Mo. Ct. App. 1998), the court explained proximate cause as follows: Where a risk specifically insured against sets other causes in motion in an unbroken sequence between the insured risk and the ultimate loss, the insured risk is regarded as the proximate cause of the entire loss, even if the last step in the chain of causation was an excepted risk. [Citations omitted.] It is not necessarily the last act in a chain of events which is, therefore, regarded as the proximate cause, but the efficient or predominate cause which sets into motion the chain of events producing the loss. [Citation omitted.] Id. at See also Associated Aviation Underwriter s v. George Koch Sons, Inc., 712 N.E.2d 1071, 1075 (Ind. Ct. App. 1999) (where an insured risk itself sets into operation a chain of causation in which the last step may have been an excepted risk, the excepted risk will not defeat recovery). Similarly, the court in Burgess Farms v. New Hampshire Insurance Group, 702 P.2d 869 (Idaho Ct. App. 1985), relying on a Washington state opinion, described proximate cause as follows: Proximate cause was defined as: that cause which, in a natural and continuous sequence, unbroken by any new, independent cause, produces the event, and without which that event would not have occurred. [Citation omitted.] 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 predominant cause which Current Issues in Concurrent Causation Hoey, Moran 279

6 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. [Citation omitted.] The question of proximate cause is normally one for the jury. Id. at 873. Indeed, the question of exactly which cause is the efficient proximate cause is often a question for the jury. See Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, , 257 Cal. Rptr. 292, , 770 P.2d 704, (Cal. 1989) ( Coverage should be determined by a jury under an efficient proximate cause analysis. [W]e conclude the question of causation is for the jury to decide; If the earth movement was the efficient proximate cause of the loss, then coverage would be denied. On the other hand, if negligence was the efficient proximate cause of the loss, then coverage exists. These issues were jury questions because sufficient evidence was introduced to support both possibilities. ) Other courts have defined the efficient proximate cause as the predominating or dominant cause. The Judicial Council of California Civil Jury Instruction 2306 states, in part: 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. See also Pioneer Chlor Alkali v. National Union Fire Ins. Co., 863 F. Supp. 1226, 1231 (D. Nev. 1994) (finding that the predominating cause of the loss was the appropriate standard to be applied); King v. North River Ins. Co., 297 S.E.2d 637, 638 (S.C. 1982) ( [I]t is generally sufficient to prove the event insured against was the efficient cause of the loss, even though not the sole cause. Where an expert has testified that the accumulated water on the roof would not by itself have caused the roof to collapse, a reasonable jury could find that the clogging of the downspouts was the efficient and proximate cause ); and Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, , 257 Cal. Rptr. 292, 770 P.2d 704, 708 (Cal. 1989) (the efficient proximate cause is the predominating cause, not necessarily the triggering cause). California courts have consistently applied the efficient proximate cause analysis where two or more distinct actions, events or forces combined to create the damage. Chadwick v. Fire Ins. Exch., 21 Cal. Rptr. 2d 871, 874 (Cal. Ct. App. 1993), citing Sabella v. Wisler, (1963) 59 Cal. 2d 21, 26, 31 32, 27 Cal. Rptr. 689, 377 P.2d 889 (negligent construction of sewer and inadequate compaction of fill (covered perils), both causing settling (excluded peril)); Sauer v. General Ins. Co., (1964) 225 Cal. App. 2d 275, 278, 37 Cal. Rptr. 303 (leakage of water from plumbing system (covered) and sinking of earth (excluded)); Gillis v. Sun Ins. Office, Ltd., (1965) 238 Cal. App. 2d 408, 419, 47 Cal. Rptr. 868 (windstorm (covered) and water (excluded)); Garvey v. State Farm Fire & Cas. Co., 48 Cal.3d 395, , 257 Cal. Rptr. 292, 770 P.2d 704 (negligent construction (covered) and earth movement (excluded)); Howell v. State Farm Fire & Cas. Co., 218 Cal. App. 3d 1446, , 267 Cal. Rptr. 708 (fire (covered) and earth movement (excluded)); State Farm Fire & Cas. Co. v. Von Der Lieth, 54 Cal. 3d at , 1133, 2 Cal. Rptr. 2d 183, 820 P.2d 285 (third party negligence in failing to stabilize underwater earth (covered) and earth movement and rising groundwater (excluded)); Brian Chuchua s Jeep, Inc. v. Farmers Ins. Group, (1992) 10 Cal. App. 4th 1579, , 1583, 13 Cal. Rptr. 2d 444 (earthquake (covered) and leaking gasoline storage tank (excluded)). In Album Realty Corp. v. American Home Assurance Co., 607 N.E.2d 804, 592 N.Y.S.2d 657 (N.Y. 1992), a sprinkler head froze and ruptured, causing water to fill the subbasement of the insured premises to a depth of 13 feet. Id. at 658. The builders risk policy excluded loss or damage (1) caused by or resulting from extremes of temperature or (2) caused by freezing. The insurer rejected the claim based on these exclusions. In determining whether the loss was within the exclusionary clause relating to freezing, the court stated: 280 Insurance Coverage and Claims Institute April 2005

7 The answer depends on whether the parties contemplated that the exclusion would apply in a circumstance such as that presented; that is, did they expect a loss arising in this manner to be characterized as being caused by freezing? (See Bird v. St. Paul Fire & Mar. Ins. Co., 224 N.Y. 47, 51, 120 N.E. 86 (1918)). The loss can be traced back to freezing, but [w]e are to follow the chain of causation so far, and so far only as the parties meant that we should follow it. (Goldstein v. Standard Acc. Ins. Co., 236 N.Y. 178, 183, 140 N.E. 235 (1923)). In determining the intent of the parties, [o]ur guide is the reasonable expectation and purpose of the ordinary business [person] when making an ordinary business contract. See Bird v. St. Paul & Mar. Ins. Co., 224 N.Y. at 51, 120 N.E. 86 (1918), supra. Id. The court rejected the appellate court s determination that the freezing was the proximate, efficient, and dominant cause of the flooding. Instead, the court found that a reasonable business person would conclude that the loss was caused by water damage and would look no further for alternate causes. Id. See also Pan American World Airways, Inc. v. Aetna Cas. & Sur. Co., 505 F.2d 989, 1006 (2d Cir. 1974) ( the causation inquiry stops at the efficient physical cause of the loss; it does not trace events back to their metaphysical beginnings ). Under the train of events test as described by the court in Farrell v. Royal Insurance Co. of America, 989 F. Supp. 159 (D. Conn. 1997), the active efficient cause that sets in motion a train of events that brings about a result without intervention of any force started and working actively from a new and independent source is the proximate cause. Id. at 164 (citing Frontis v. Milwaukee Ins. Co., 156 Conn. 492, 499, 242 A.2d 749 (1968)). In determining whether a loss is within an exception in a policy, where there is a concurrence of two causes, the efficient cause the one that sets the other in motion is the cause to which the loss is to be attributed, though the other cause may follow it and operate more immediately in producing the disaster. Id. Thus, according to the Farrell court, under an all risk policy where the efficient cause of loss is a covered risk, coverage is not defeated merely because an excluded risk contributed to the loss or constituted the loss (unless the policy expressly excludes such loss regardless of the antecedent cause). Id. Under the train of events test set forth in Jussim v. Massachusetts Bay Insurance Co., 610 N.E.2d 954 (Mass. 1993), if the efficient proximate cause is 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 The court in Ariston Airline & Catering Supply Co., Inc. v. Forbes, 511 A.2d 1278, 1287 (N.J. Super. Ct. Law Div. 1986), found that coverage of either the first or last event was sufficient. In Ariston, the insured brought an action to recover for damages to its warehouse floor caused by frost heave, design or construction defect, and other factors. The court stated: Numerous cases hold that coverage is provided whenever the policy does not exclude the efficient cause of the damage even though it excludes other contributing causes. If the efficient cause of the loss was a design or construction defect, it was a cause which set in motion a series of events, the last of which was the formation of ice lenses and the consequent heaving of the earth which caused the damage. This opinion holds that both first and last events are covered. Either is enough. Id. at (citing 5 Appleman, Insurance Law and Practice 3083 (1970)). Similarly, the court in Cavalier Group v. Strescon Industries, Inc., 782 F. Supp. 946 (D. Del. 1992), predicted that the Delaware Supreme Court would adopt the Appleman rule that where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk, recovery may be allowed. Id. at Current Issues in Concurrent Causation Hoey, Moran 281

8 The court in Paulucci v. Liberty Mutual Fire Insurance Co., 190 F. Supp. 2d 1312, 1318 (M.D. Fla. 2002), explained the difference between the concurrent cause doctrine and the efficient proximate cause doctrine as follows: The concurrent cause doctrine and efficient proximate cause doctrine are not mutually exclusive. Rather, they apply to distinct factual situations. The concurrent cause doctrine applies when multiple causes are independent. The efficient proximate cause doctrine applies when the perils are dependent. Causes are independent when they are unrelated such as an earthquake and a lightening strike, or a windstorm and wood rot. Causes are dependent when one peril instigates or sets in motion the other, such as an earthquake which breaks a gas main that starts a fire. Using this last example of dependent perils, the court notes that if an earthquake is an excluded/proximate cause but fire is a covered/secondary cause, coverage would not exist under the efficient proximate cause doctrine. Conversely, if the earthquake is a covered/ proximate cause but fire is an excluded/secondary cause, coverage would exist under the efficient proximate cause doctrine. However, under a different factual setting where the excluded earthquake and covered fire were independent such as where loss is caused by an unrelated simultaneous earthquake and lightning strike, the efficient proximate cause doctrine would be inapplicable. In this scenario, the concurrent causation doctrine would apply and mandate coverage regardless of which peril was covered and which peril excluded. Id. at The law is unsettled in Illinois on the efficient proximate cause doctrine. Presently, Illinois follows the efficient proximate cause doctrine. See Mattis v. State Farm Fire & Cas. Co., 454 N.E.2d 1156, 1161 (Ill. App. Ct. 1983) (where a policy expressly insures against loss caused by one risk but excludes loss caused by another risk, coverage is extended to a loss caused by the insured risk even though the excluded risk is a contributory cause). However, federal courts have predicted that if the Illinois Supreme Court were to face a proximate cause issue in an insurance context, it would hold that the importation of tort principles of proximate cause into the construction of insurance policies is inappropriate. Spearman Indus., Inc. v. St. Paul Fire & Marine Ins. Co., 139 F. Supp. 2d 943, 948 (N.D. Ill. 2001) (quoting Transamerica Ins. Co. v. South, 125 F.3d 392, 398 (7th Cir. 1997)). III. The Enforceability of Anti-Concurrent Causation Provisions Some jurisdictions permit insurers to contract around the effect of the efficient proximate cause doctrine through the use of anti-concurrency language. For example, in Alf v. State Farm Fire & Casualty Co., 850 P.2d 1272 (Utah 1993), the court stated: Although some states have adopted the efficient proximate cause doctrine, either judicially or by statute, numerous others either have refused to adopt it or have determined that the express exclusionary terms of insurance policies override it. We believe that the proper path to follow is to recognize the efficient proximate cause rule only when the parties have not chosen freely to contract out of it. Id. at 1277 [footnotes omitted]. See also Pioneer Chlor Alkali v. National Union Fire Ins. Co., 863 F. Supp. 1226, 1232 (D. Nev. 1994) (the efficient proximate cause doctrine is a default rule that gives way to the language of the contract); State Farm Fire & Cas. Co. v. Bongen, 925 P.2d 1042, 1045 (Alaska 1996) ( We therefore align ourselves with those courts holding that an insurer may expressly preclude coverage when damage to an insured s property is caused by both a covered and an excluded risk ); Kane v. Royal Ins. Co. of Am., 768 P.2d 678, Insurance Coverage and Claims Institute April 2005

9 (Colo. 1989) (efficient moving cause rule must yield to qualifying or enlarging words agreed to by the parties and included in the insurance policy); Lexington Ins. Co. v. Unity/Waterford-Fair Oaks, Ltd., 2002 U.S. Dist. Lexis 3594 (N.D. Tex. 2002) (anti-concurrency language is valid). In Toumayan v. State Farm General Insurance Co., 970 S.W.2d 822 (Mo. Ct. App. 1998), the insured, relying on the efficient proximate cause doctrine, argued that water saturation from the broken sewer pipe was specifically covered by a Back-Up of Sewer or Drain Endorsement, and it therefore did not matter that the resulting damage was caused by an excluded event, earth movement. Id. at 825. However, because the policy contained anti-concurrency language, the court held that the loss was excluded. The court stated: The parties to an insurance contract can contract out of the efficient proximate cause doctrine by exclusionary language. State Farm s policy contains exclusionary language in the lead-in clause (Clause 2) which excludes any loss which would not have occurred in the absence of earth movement regardless of the cause of the loss or whether other causes acted concurrently or in sequence with the earth movement to produce the loss. This exclusionary language is unambiguous and prevents application of the proximate cause doctrine. Clause 2.b. of the policy excludes coverage for losses caused by earth movement, regardless of the existence of any other contributing causes in any sequence. Id. at 826 [emphasis in original]. In Ramirez v. American Family Mutual Insurance Co., 652 N.E.2d 511 (Ind. Ct. App. 1995), the insured s argued that their water damage claim was caused by the weight of ice that had accumulated on power lines resulting in a power outage, which was a peril covered by the policy. Id. at 516. The court found that the insured s water damage claim fell within the exclusion in their renters policy for losses caused by failure of a sump pump regardless of any other cause or events contributing concurrently or in any sequence to the loss. The insured contended that a genuine issue of material fact existed regarding the proximate cause of their loss. The court stated: The Ramirezes contention necessarily fails in light of the clear and unambiguous language of the exclusion. The exclusion unequivocally states that loss resulting from sump pump failure is not covered regardless of any other cause or event contributing concurrently or in any sequence to the loss. Thus, the fact that the sump pump failure was preceded by a power outage resulting from the accumulation of ice on the power lines does not remove the Ramirezes claim from this exclusion. Id. at 516. Similarly, in Contardi v. American Family Mutual Insurance Co., 680 N.W.2d 828 (Wis. Ct. App. 2004), the insureds experienced water leaks in their home as a result of ice damming from excessive snow fall on the roof. Id. at 829. The insurer investigated and paid the insured $1, for the initial damage from the roof leak. In the process of repairing the water damage, the insureds discovered mold in the ceiling and throughout the entire house. Id. The insurer denied all subsequent claims to repair the damage. Id. The court found that the policy specifically excluded coverage from mold arising from any concurrent or other contributing cause and granted the insurer s motion for summary judgment. Id. at The reviewing court held that the summary judgment order disposed of the entire matter in litigation. Id. at 831. In Paglarini v. Owners Insurance Co., 2001 Minn. App. Lexis 834 (2001), the policy stated that loss to covered property was excluded if that loss was caused directly or indirectly by [water damage], whether or not any other cause or event contributes concurrently or in any sequence to the loss. The court stated: Although insurance contract exclusions must be construed narrowly against an insurance company, Paglarini has suggested no alternate reading of this clause that gives it meaning. While the clause contains broad language, it nevertheless applies. Id. at *8 9. Current Issues in Concurrent Causation Hoey, Moran 283

10 Some jurisdictions hold that insurers may not contract around the effect of the efficient proximate cause doctrine. For example, anti-concurrent language is not valid in Washington. See Safeco Ins. Co. v. Hirschmann, 773 P.2d 413, 414, 416 (Wash. 1989). Similarly, anti-concurrent language is not valid in California. In Howell v. State Farm Fire and Casualty Co., 267 Cal. Rptr. 708 (Cal. Ct. App. 1990), the court held that a property insurer may not contractually exclude coverage when a covered peril is efficient proximate cause of loss even though an excluded peril has contributed to or was necessary for the loss. The court relied upon section 530 of the California Insurance Code: 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. In its holding the court stated: [I]f we were to give full effect to the exclusion clauses contained in State Farm s policies the insurer would be exempt even though an insured peril was the proximate cause of the loss. Such a result would be directly contrary to the provision in section 530, in accordance with the general rule, for liability of the insurer where the peril insured against proximately resulted in the loss. [Citation omitted.] In short, the exclusion clauses are contrary to section 530, which provides that an insurer is liable for a loss proximately caused by a covered peril. Consequently, the exclusion clauses are not enforceable to the extent they purport to limit the insurer s liability beyond what is permitted by California law. Id. at [emphasis in original]. Similarly, in North Dakota, a property insurer may not contractually preclude coverage when the efficient proximate cause of a loss is a covered peril. See Western Nat l Mut Ins. Co. v. University of N.D., 643 N.W.2d 4, 13 (N.D. 2002) (noting that North Dakota has statutorily adopted the efficient proximate cause doctrine and anti-concurrency language is not valid.) IV. Ensuing Losses A. What Is an Ensuing Loss? An ensuing loss is one that occurs subsequent to the excluded loss. Vermont Elec. Power Co. v. Hartford Steam Boiler Inspection & Ins. Co., 72 F. Supp. 2d 441, 445 (D. Vt. 1999). Ensue has been defined as to follow. Webster s Third New International Dictionary 756 (1993); Webster s Ninth New Collegiate Dictionary 414 (1983). An ensuing loss clause brings within coverage a loss from a covered peril that follows as a consequence of an excluded peril. Sentinel Mgt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 301 (Minn. Ct. App. 1997) We interpret the ensuing loss provision to apply to the situation 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. Id. at [emphasis in original]. See also Lake Charles Harbor & Terminal Dist. v. Imperial Cas. & Indem. Co., 857 F.2d 286, 289 (5th Cir. 1988) (coverage existed under ensuing loss clause for damage to ship loader where the excluded peril of machinery breakdown caused an object to fall and damage ship loader); and Allstate Ins. Co. v. Smith, 450 S.W.2d 957, 959 (Tex. App. 1970) (where defective pipe burst, coverage existed for ensuing floor and wall damage but not for replacement cost of defective pipe under inherent defect exclusion). 284 Insurance Coverage and Claims Institute April 2005

11 However, recently, the court in Arnold v. Cincinnati Insurance Co., 688 N.W.2d 708 (Wis. Ct. App. 2004), held that, under the terms of the policy language, an ensuing loss did not have to be a separate and independent peril to be covered. Id. at 719. In Arnold, during the construction of the Arnolds home in 1992, the cedar siding was stained with a Hallman Lindsay stain. Id. at 711. The siding was restained with the same product in Id. In late 1998, Arnold observed that the siding was darkening from the original medium brown to a much darker, blackish color and determined that mold was growing on the siding and attacking the stain. Id. Hallman Lindsay and American Building Restoration Products ( ABRP ) recommended that the cedar siding be cleaned and stripped and restained using ABRP s products. Id. In the process of removing the old stain and rinsing with a pressure washer, other parts of the house were damaged. Id. at 711. According to the Arnolds submissions, during the first stage of the project, Arnold noticed that the ABRP stripping product was causing damage to the exterior of the aluminum windows and to the caulking around the windows. Id. at 712. There was damage to the windows, gutters, driveway, porch, patio, roof, and doors due to direct contact with ABRP s stripping product, as well as damage to the interior of their home, including the walls, ceiling, and carpeting, due to water and the stripping product leaking in from the damaged seals of the windows and skylights. Id. The Arnolds filed suit in May 2002 alleging that the ABRP materials caused extensive damage to the exterior and interior of their house. Id. at 711. The complaint also named Cincinnati, alleging that its policy was in effect when the home was damaged by the process of removing the stain and applying the new stain. Id. at 712. Cincinnati moved for summary judgment on the ground that the Arnolds damages were the direct result of faulty workmanship and faulty materials, which were excluded under the policy. Id. The circuit court concluded that certain damages to the exterior and the interior of the Arnolds home were excluded under either the faulty workmanship exclusion, faulty materials exclusion, or both. Id. at 711. The appellate court agreed with the circuit court that the damage to the exterior of the house was excluded under either the faulty workmanship exclusion, the faulty materials exclusion, or both. Id. The court also agreed that the damage to the interior of the house caused by use of the pressure washer was excluded. Id. However, the court found that any damage to the interior of the house that was caused by rain in conjunction with the damaged caulking was a loss ensuing from the excluded loss caused by faulty workmanship or faulty materials, and was therefore covered. The Exclusions section of the policy contained the following exclusions: 2. We do not insure for loss to property caused by any of the following. However, any ensuing loss to property described in Coverages A and B not excluded or excepted in this policy is covered. c. Faulty, inadequate or defective (1) planning, zoning, development, surveying, siting; (2) design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; (3) materials used in repair, construction, renovation or remodeling; or (4) maintenance; of part or all of any property whether on or off the resident premises. Id. at The Arnolds contended that the ensuing loss clause was ambiguous because the term ensuing loss is so broad that a reasonable insured could understand it to include the damages from: (1) water penetration into the home, which resulted from the damage done to the caulking; (2) the damage to the metallic surfaces of the windows, which resulted, at least in part, from the damage done by the tape and plastic used to Current Issues in Concurrent Causation Hoey, Moran 285

12 shield the windows and doors; and (3) the damage to the roof and driveway, which resulted from the failure to protect them from the stain in the stripping process. Id. at 715. Cincinnati argued that the ensuing loss clause was unambiguous and applied only if there is a peril [that is] separate and independent in nature from the perils which precede[d] it and that is covered. Id. The court, stating that there were errors in each party s analysis, noted that Ensue means to 2: take place afterward, either a: to follow as a chance, likely, or necessary consequence or b: to follow in chronological succession. Webster s Third International Dictionary 756 (1993). Id. at The court stated: Although ensue thus has two common meanings, we conclude that only one is reasonable in the context of the ensuing loss clause in this policy. A reasonable insured would understand that an ensuing loss is not simply any loss to covered property that chronologically follows a loss excluded in subsection 2. If there were no relationship other than this chronology between the excluded loss and the ensuing loss, there would be no logical reason to refer to the ensuing loss in this subsection. Thus, a reasonable insured would understand, based both on logic and on the use of However at the beginning of the sentence, that the meaning of ensuing here is a loss that follows the excluded loss as a chance, likely, or necessary consequence of that excluded loss. Using this common meaning in the context of the faulty workmanship and faulty materials exclusions, an ensuing loss is a loss that is not directly caused by faulty workmanship or faulty materials, but nonetheless follows as a chance, likely, or necessary consequence of the loss caused by faulty workmanship or faulty materials. We conclude that a reasonable insured would understand that, in addition to being a loss that follows as a chance, likely, or necessary consequence of the excluded loss, an ensuing loss must result from a cause in addition to the excluded cause. Id. at 716. Regarding the loss consisting of the deterioration of the caulking, the discoloration or other damage to the window frames, door frames, and other parts of the exterior of the house and the driveway, the court found that these losses were all caused only by faulty workmanship, faulty materials, or some combination of the two and were excluded. Id. at 718. Regarding the damage to the interior of the house, there was evidence that some of this damage occurred due to faulty workmanship through use of the pressure washer and some occurred because rain came in through the damaged caulking around windows and skylights. Id. The court held that the damage due to the pressure washer was excluded as caused by faulty workmanship. Id. Regarding the damage caused by rain, the insurer argued that this was not an ensuing loss because it was not a separate and independent peril. Id. The court noted that the policy did not define coverage in terms of perils, and thus there was no requirement in the policy that a loss must be caused by a peril in order to be covered. Id. The insurer relied on Acme Galvanizing Co., Inc. v. Fireman s Fund Insurance Co., 221 Cal. App. 3d 170, 270 Cal. Rptr. 405 (1990); however, the Arnold court noted that the policy in Acme had a differently worded ensuing loss clause, which did refer specifically to peril in defining an ensuing loss. Id. at The Perils Excluded section of the policy in Acme contained an exclusion for latent defects, followed by this clause: unless loss by a peril not otherwise excluded ensues and then the Company shall be liable only for such ensuing loss. Id. at 719. Because the policy in Arnold did not refer to peril in the ensuing loss clause, the court stated: We conclude there is no basis in the policy language for limiting the cause of an ensuing loss to a separate and independent peril. There must, as we have already stated, be a cause in addition to the excluded cause, but nothing in the policy language defines the nature of that cause as Cincinnati proposes. We therefore conclude that loss caused by rain leaking in through the damaged caulking is an ensuing loss. 286 Insurance Coverage and Claims Institute April 2005

13 Id. at 719. The court completed its analysis by determining that loss caused by rain was not excluded elsewhere in the policy. Id. Thus, the court held that any loss caused to the interior of the house by rain in conjunction with the damaged caulking was an ensuing loss. Id. Therefore, it is clear that exactly what an ensuing loss is will often depend upon the specific language of the policy involved, as well as the case law interpreting ensuing loss from the applicable jurisdiction governing the loss. B. Water Damage and Mold Claims as an Ensuing Loss Several recent cases have addressed the issue of whether mold damage resulting from water damage claims are ensuing losses. For example, in Hood v. State Farm Lloyd s, 2004 WL , Slip Copy, (S.D. Tex. 2004), a homeowner filed a claim for mold damage caused by a leaky roof. The court granted summary judgment in favor of the insurer holding mold was not an ensuing loss: The policy does not cover losses caused by wear and tear or deterioration. Hood s roof has deteriorated, resulting in substantial roof leaks that caused mold damage. The mold damage is not an ensuing loss covered under the policy because its cause, deterioration, is not covered under the policy. [Citation omitted.] In addition, Hood cannot argue that the deteriorated roof caused the leaks, and the leaks are water damage that caused the mold. Mold almost always develops from some kind of water problem, but water problems are not always water damage. Traditional water damage is caused by severe storms, a bursting pipe, or broken glass that lets water inside the house. Mold is not an ensuing loss from water damage just because it is caused by water. In this case, a bad roof not water damage caused the mold. Even if water damage causes mold, it should not be covered as an ensuing loss in most cases because of its explicit exclusion from coverage. [Citation omitted.] It could be covered if a house is flooded and the heat and humidity caused mold to grow rapidly in a [sic] days. It also could be covered if mold appeared a short time after a pipe burst. Those are not the facts of this case. Id. at *2. In Prudential Property & Casualty Insurance Co. v. Lillard-Roberts, 2002 U.S. Dist. Lexis (D. Or. 2002), the insured claimed coverage under her homeowner s policy for water, mold, and mycotoxin contamination. Id. at *10. The insurer s adjuster determined that there was mold in the house from water damage due to defective workmanship in a repair to the roof, flashing surrounding the dormer and chimney, and water intrusion. Id. at *11. The insured argued that her claimed mold damage, caused by faulty workmanship, was covered under her policy s ensuing loss clause. The court disagreed and held that the policy did not provide coverage: Because mold is a natural and expected, as opposed to a separate and independent, result of water damage, it cannot be an ensuing loss. An ensuing loss requires an unexpected loss due to an intervening or contributing cause other than mere passage of time. Id. at *61. Similarly, in Sapiro v. Encompass Insurance, Case No., 221 F.R.D. 513 (N.D. Cal. 2004), the court analyzed a claim for damage to a home caused by 20-year-old defective construction. Although the relevant policy s defective construction exclusion had an ensuing loss provision, the court found: In fact, none of the supposedly ensuing losses plaintiffs identify can be categorized as ensuing losses, if even losses at all. Plaintiffs alleged moisture and fungal losses are directly attributable to the initial negligent contracting. Plaintiffs reconstruction costs are neither separate nor ensuing by any legitimate measure; they are the price of repairing the predicate damage. Current Issues in Concurrent Causation Hoey, Moran 287

14 Id. at 522. Similarly, in Cooper v. American Family Mutual Insurance Co., 184 F. Supp. 2d 960 (D. Ariz. 2002), a plumbing leak damaged dry wall and flooring in the insured s master bedroom and hall closet. Id. at 961. Pursuant to the insured s homeowners policy, the insurance company paid for repairs to the drywall and flooring, but denied coverage for mold damage allegedly caused by the leak. Id. The insured argued that the resulting loss clause following the mold exclusion contradicted the policy s exclusion for mold. Id. at 964. The court disagreed and noted that the resulting loss clause only reaffirmed coverage for resulting loss not excluded or excepted in the policy. Id. The court concluded: Here, there is no separate and independent peril. The claimed damage is mold. The proposed remediation is removal of the mold. Calling it a pollutant does not change the result. It is still mold. The policy expressly excludes any losses that are caused by and result from mold. The resulting loss clause does not resurrect the excluded peril to provide coverage. Id. at 965. However, in Home Insurance Co. v. Dennis D., 2000 WL (Tex. App. 2000) (unpublished opinion), the roof on the new addition to Dennis D. and Claudia McClain s Texas home leaked. The McClains subsequently discovered that the leaking water had soaked the studs behind the interior walls, damaging the walls, ceilings, and subfloors. Mold developed and the McClains residence became uninhabitable. The policy at issue excluded losses caused by rust, rot, mold or other fungi, but did cover ensuing loss caused by water damage if the loss would otherwise be covered under this policy. Id. at *3. The McClains argued that the policy covered ensuing loss from water damage, or the loss from the mold and fungi. Id. at *2. The appeals court agreed: To be an ensuing loss caused by water damage, the mold and fungi would necessarily have to follow or come afterward as a consequence of the water damage. Id. at *3 [Citation omitted.] The court concluded that: [T]he water from the leaking roof pooling in the crawl spaces caused the mold and fungi. Consequently, the loss that followed the water damage was caused by water damage. Therefore, under the facts of this case, the exclusion for fungi and mold damage does not apply. Id. at *4. C. Construction Defects Resulting in Ensuing Losses Courts have warned that ensuing loss clauses should not be read so broadly as to swallow the original exclusion. For example, in LaQuila Construction, Inc. v. Travelers Indemnity Co. of Illinois, 66 F. Supp. 2d 543 (S.D.N.Y. 1999), aff d, 216 F.3d 1072 (2d Cir. 2000), a general contractor contracted with a subcontractor to provide concrete for a new building construction. Id. at 544. The general contractor determined that the concrete used for the structural slab of the fifth floor was below specification and ordered the work to cease. Id. The concrete on the fifth floor was later replaced, and as a result, other parts of the building required shoring and reinforcing, and other subcontractors were required to remove and replace previously completed work such as air conditioning and plumbing. Id. The contractor sought coverage for the costs of repairing the fifth floor slab under an approved corrective plan. Id. These costs included not only removing and replacing the defective concrete slab at issue, but also the costs of shoring the full height of the building while corrective work on the fifth floor took place and the other trade contractors having to remove and reinstall their work. Id. The insurer denied coverage based upon a policy exclusion that stated the policy would not insure: Cost of making good faulty or defective workmanship or material, but this exclusion shall not apply to physical damage resulting from such faulty or defective workmanship or material. Id. The court noted that the exception to an exclusion should not be read so broadly that the rule (the exclusion clause) is swallowed by the exception. Id. at 545. The court agreed with the insurer and held that the claim fell squarely into the exclusion clause simply as a cost incurred to make good the defective concrete. Id. The court provided an example of when the ensuing loss provision would have been triggered under the facts of 288 Insurance Coverage and Claims Institute April 2005

15 the case, noting that had the fifth floor slab in HRH s building collapsed and damaged machinery, plumbing and electrical fixtures, or even neighboring property, such losses wholly separate from the defective materials themselves would qualify as non-excluded ensuing losses under Travelers policy. Id. at 546. Similarly, the court in Allianz Insurance Co. v. Impero, 654 F. Supp. 16 (E.D. Wash. 1986), had to determine if the costs for repairing walls that were defective due to improper testing of the concrete fell under the exclusion, cost of making good faulty or defective workmanship, or the exception to the exclusion, damage resulting from such faulty or defective workmanship. Id. at 17. The court held that the damage fell within the exclusion. Id. at 18. It reasoned that the defective concrete did not cause any damage to any other portion of the structure, other persons or property. Id. The court also noted that if it had damaged other property, then the case may have had a different outcome. Id. The court found that allowing recovery for the costs of making good the defect was not contemplated by the policy, and no reasonable person could have read the policy differently. Id. See also Alton Ochsner Med. Found. v. Allendale Mut. Ins. Co., 219 F.3d 501, (5th Cir. 2000) (agreeing with the insurer that unless physical damage not excluded by this Policy results means damage that is different in kind and does not include the cost of repairing faulty workmanship); and City of Burlington v. Hartford Steam Boiler Inspection & Ins. Co., 190 F. Supp. 2d 663, 674 (D. Vt. 2002), aff d, 346 F.3d 70 (2d Cir. 2003) (finding resulting damage to be the same as ensuing loss, which did not encompass the costs to repair or replace faulty welds). In Aetna Casualty and Surety Co. v. Yates, 344 F.2d 939 (5th Cir. 1965), the plaintiff discovered that the joints and sills of their home were almost completely rotted away. The court, applying Texas law, held that the rot present on the insured party s joists, sills, and subflooring of his home was not a covered loss. Id. at 941. The cause of the loss was that the crawl space under the house was inadequately supplied with vents. Contact between air trapped in the crawl space and the subfloors and sills, which had been chilled by air conditioning, produced condensation of moisture and consequent rotting. Id. at 940. The following exclusion was present in the insured party s all-risk policy: [l]oss caused by inherent vice, wear and tear, deterioration, rust, rot, mould or other fungi; dampness of atmosphere, extremes of temperature; contamination; vermin, termites, moths or other insects. Id. at The court held we do not think that any acceptable reading [of the policy] permits compensation for the loss that plaintiffs incurred as a result of the defective design of their home. Id. at 941. The court found that several parts of the exclusion applied, stating: Plaintiffs loss could be said to be caused by the defective construction of the house, arguably an inherent vice ; it was a deterioration, although perhaps not caused by deterioration; it surely was caused by rot ; the rot almost certainly had been caused by fungi ; and dampness of atmosphere has produced the condition in which the fungi could grow and do their work. Id. at 941. The Policy contained a clause that stated that the exclusion would not apply to ensuing loss caused by water damage. Id. Plaintiffs argued that because the loss was caused by condensation of moist air into water, the exception from the exclusion prevailed. The court rejected this argument, stating: The result of their construction would be that a clause intended to narrow the exclusions for rust, rot, mould or other fungi and dampness of atmosphere would very nearly destroy them. A likely case for application of the clause would be if water used in extinguishing a fire or coming from a burst pipe flooded the house and in turn caused rust or rot; loss from rust or rot so caused would be a loss ensuing on water damage. That is not this case, where the rot may have ensued from the presence of water but not from water damage. Id. The court found that plaintiffs could not bring themselves within either of these readings, both of which require that rot and water damage be in some sense separable events. Id. The court stated: Current Issues in Concurrent Causation Hoey, Moran 289

16 We do not think that a single phenomenon that is clearly an excluded risk under the policy was meant to become compensable because in a philosophical sense it can also be classified as water damage; it would not be easy to find a case of rot or dampness of atmosphere not equally subject to that label and the exclusions would become practically meaningless. In our case the rot may have ensued from water but not from water damage, and the damage ensuing from the rot was not the damage from the direct intrusion of water conveyed by the phrase water damage. Id. In Schloss v. Cincinnati Insurance Co., 54 F. Supp. 2d 1090, 1093 (M.D. Ala. 1999), aff d, 211 F.3d 131, the insured s home was damaged by rot and deterioration as a result of water intrusion caused by defective design and/or construction. The insurance policies excluded damage caused by deterioration or rot, but contained an ensuing loss provision that covered damage that was caused as an ensuing result of a covered risk. There were several policies involved in Schloss. The policy in effect from May 1986 until May 1990 issued by Vigilant stated that it did not cover wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, mold, wet or dry rot. The policy also provided that under the exclusion, any ensuing loss not excluded is covered. Id. at The policies that were in effect from May 1990 until May 1996 issued by Vigilant and then Pacific, provided that they did not cover any loss caused by wear and tear, gradual deterioration, rust, corrosion, fungi, mold, dry or wet rot. But we do insure ensuing covered loss unless another exclusion applies. Id. Schloss argued that the loss he suffered was the replacement of the wooden studs that constituted the support structure of his home and that his losses were not subject to the loss caused by rot exclusion because his losses were not caused by rot, but were rot. Id. at Schloss argued that the cost of replacing the wooden studs was itself the rot. With regard to the 1986 to 1990 policy, the court found that, even under Schloss s own theory, the policy did not cover losses for rot as he defined them. Id. at Because rot was excluded under the policy, the damages were excluded. Id. Schloss also argued under the 1986 policy (which did not contain a faulty construction exclusion) that the costs to remove the roof and siding to repair the rot were not excluded because such costs were ensuing losses of the rot. Id. The court noted that removal and replacement of the roof was done in order to correct the rot and to prevent future rot and the exterior and interior walls had to be repaired in order to get to the wooden studs that had rotted. Id. at These costs were, therefore, part of the cost to repair the rot and not a separate ensuing loss. Id. With respect to the 1990 through 1996 policies, the court stated: The cost of repairing the rot is excluded from the policy because it is the loss caused by the rot, but if the rot causes wood to fall and damage the floor, for example, then the cost of the repair for that ensuing loss is covered. In other words, costs from losses created by the rot can be covered, so there is no need to distinguish between rot, and the cost of replacing rot. Instead, loss caused by rot is the excluded cost of repair and replacement, and the ensuing loss provision can apply only if there is an additional loss. Because Schloss s interpretation renders the ensuing loss provision meaningless, the court finds that the provisions are not susceptible to the interpretation made by Schloss. Id. at Schloss also argued that coverage existed under the policies because his loss was an ensuing loss of a design or construction defect. The 1995 through 1996 policy contained the following exclusion: Faulty planning, construction or maintenance. We do not cover any loss caused by the faulty acts, errors or omissions of you or any other person in planning, construction or maintenance. But we do insure ensuing covered loss unless another exclusion applies. 290 Insurance Coverage and Claims Institute April 2005

17 Id. at The court noted that the critical language of the exception emphasized that to be covered by the policy, an ensuing loss must be covered and not within another exclusion. Id. at Giving the terms of the exception the meaning that a person of ordinary intelligence would reasonably think the language had, the court found that in order to be a covered ensuing loss under the policies, regardless of whether it occurred immediately as a result of the original loss or sometime thereafter, an ensuing loss must not be subject to another exclusion. Id. Regarding the policy issued by Cincinnati, this policy had an exclusion for loss caused by rot and for faulty or improper construction. Id. The parties agreed that faulty or defective design involving the roof was the cause of the water intrusion and the rotten frame of the home. The plain language of the exclusion applied to exclude coverage for the loss sustained because it was undisputed that the water that caused the loss caused by rot entered the home because of faulty or defective construction. Id. at Schloss argued that an ensuing loss exception provided him coverage. Id. The exception stated, any ensuing loss to property not excluded is covered. Id. The court found that all of Schloss s damages, including replacing the wooden studs and the roof, were part of the loss caused by rot, which was clearly excluded from the policy. Id. V. Conclusion A review of the case law teaches that each loss must be analyzed on a case-by-case basis. The facts of the loss must be scrutinized. The exact wording of the policy must be applied to the facts. The case law and any statutory law of the applicable jurisdiction must be referenced. We hope you have gained further insight into current issues in concurrent causation. Return to course materials table of contents Current Issues in Concurrent Causation Hoey, Moran 291

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