Insurance contracts are constructed with the intent to provide coverage for certain risks of loss, but not for all of them. Therefore, the insurer who drafts those policies must design the appropriate policy language to accomplish both objectives. Property insurance (1st party) is constructed to cover your business property and your personal property—your stuff! But sometimes triggering the necessary coverage perils can be a very trying experience.

Playing a major role in insurance policy construction are the "Theories of causation". Many times one event can lead to another event. Sometimes both events are meant to be covered but in other cases, one is intended to be covered and the other is not. Several of these theories that play a role in loss determination are "proximate cause"; "efficient proximate cause"; "concurrent causation"; and, "anti-concurrent causation". This latter theory has been the cause of many insurance disputes—mainly in recent years. Just the name sounds bad! Kind of—Anti-insurance!!

Proximate cause has been a fundamental doctrine and a basic principle of insurance for a very long time. This doctrine will generally favor policyholders, since, through a "chain of events", a covered event results in property damage. Even if some of the intervening events leading to the loss are excluded perils the loss will still be covered. Thus, an unbroken chain of events, the chain of causation, will result in proximate cause being found.

Montana apparently follows the theory of efficient proximate cause—or the predominant cause of the loss. The only case cited goes back to 1927, "Park Saddle Horse Co. v Royal Indemnity Co"., Montana Supreme Court, 1927.(the case is an interesting read-leading to the predominant cause). It appears that a large number of states follow the same "efficient proximate (predominate) cause theory. This theory basically is analogous to the proximate or legal causation analysis in tort law. Even if a cause factually contributes to a loss, if that cause is not the leading or predominant cause, then that cause may not be considered in evaluating coverage. However, under this theory, "once the predominate cause of loss is identified, coverage turns on whether it is a covered or excluded cause of loss under the policy. If that predominant cause is excluded, the entire claim may be excluded, even if there are covered events that contributed along the chain of events".

A fewer number of states follow the concurrent causation theory. Basically this concept allows coverage whenever two or more causes contribute to a loss and at least one of them is covered under the policy. Kind of a but for analysis similar to the direct causation theory employed in tort law. "If the damages would not have occurred but for the contribution of a covered cause of loss, then there is coverage for the claim. This is the case even if multiple contributing causes are clearly excluded under the policy". Anyone who is familiar with the insurance coverage problems that followed Hurricane Katrina and Superstorm Sandy can see where this concurrent causation theory lead!

While many seem to think that Katrina instigated the theory of "anti-concurrent causation", this is not true. It appears that the major changes in insurance exclusions took place in 1983. Many insurers have attempted to contract around the "efficient proximate cause" doctrine by including an ‘anti-concurrent causation' clause in their policies. Such a clause excludes damage caused by an excluded loss even if it is partially caused by a covered cause of loss. When a policy contains this clause the insurer may deny an otherwise covered claim-like fire or wind-regardless of the sequence of events. Here is the lead-in wording, usually found starting the exclusions section on the property insurance policy: (supplied by ISO-Insurance Services Office)

"We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss".

Then, following the lead-in wording are listed the numerous perils excluded. Interestingly, one that probably policyholders here in Billings and surrounding can identify with is "surface water". If surface water resulting from a severe storm contributed in some way to a loss, concurrently or in any sequence, the insurer could deny the claim.

Some states specifically disallow any anti-concurrent causation wording in property insurance policies. North Dakota and Washington, close neighbors, are examples. North Dakota has even codified theirs while Washington has two leading Supreme Court cases, "Wright v Safeco Ins. Co., Wash. 2004", and "Safeco v Hirschman, Wash.1989". The latter Washington case is interesting because of a deposition of a Safeco VP of Personal Lines underwriting: Question: "Doesn't the language of your lead-in exclusionary clause attempt to exclude a cause no matter how slight that cause may contribute to the loss?" Answer: "Yes, that is the intent." It would certainly be welcome to see Montana take steps like North Dakota did—set the rules now! (other neighbors: Wyo.-has two cases-State Farm v Paulson-Wyo.1988 and Miles v Continental Cas. Co. Wyo. 1963. This latter most clearly followed ‘efficient proximate cause but was a health & accident policy. Idaho-has no case law).

Katrina's "wind and water" claims problems arose again after Superstorm Sandy. In both storms, and unique to coastal areas, policyholders will, or should have, both property insurance and flood insurance policies. One or the other would then respond. Unfortunately, that is apparently not happening in the aftermath of Sandy. A little over two years after Sandy an influx of litigation in response to insurance companies denying or limiting coverage is occurring. Potential insurance company fraud regarding altered claims reports has been, and is being, investigated. The primary investigation apparently has focused on altered engineering reports that seemed to point away from damage caused by flood. The main insurers being investigated-Wright Nat'l Flood Ins. Co.; Hartford Insurance Company of the Midwest (Hartford); and Travelers Insurance Company d/b/a Standard Fire Insurance Co.-all deny wrong doing. The complaint against one insurer goes on to allege breach of contract and mail and wire fraud as predicates for a Racketeer Influenced and Corrupt Organizations Act claim, allege bad faith, and seeking class certification.

So, how's your insurance program doing today!! Hopefully you're watching.

Article By: Dennis Gambill - The author is an Insurance Litigation consultant. Adjunct professor at EMC for 8 years-Risk & Insurance. 40+ years-both MGA and agency experience.