Insurance Coverage for Hurricanes: Insurers May Dispute “Causation”

Jared Zola, Linda Kornfeld, John E. Heintz, and Alan Rubin

Like the 2017 Atlantic Hurricane season before it, the 2018 season brought devastating storms to the United States. A prime example: One of the most powerful hurricanes on record to hit Florida’s Panhandle wreaked havoc in October 2018 and left a trail of devastation in its wake as it weakened to tropical storm status but still brought large-scale destruction to southeastern states.

Hurricane Michael made landfall on October 10 approximately 20 miles southeast of Panama City, Florida, with biblical 155 mph sustained winds, violent waves, and heavy rain. The extent of the damage in Florida is still being evaluated, but it is extensive to the naked eye. Two hospitals were evacuated. Many homes were destroyed, power lines were downed, cars and trucks overturned and destroyed.

It took weeks before roads were cleared and electricity was fully restored. Even once businesses reopened, the storm’s destruction prevented employees from traveling to work. In addition, municipalities reported decreased tax revenues from business closures. The economic impact of storm-related losses for businesses and municipalities combined will be significant.

Insurance is a Key Asset

As the situation stabilizes in the weeks after the storm and the focus turns to economic recovery, businesses will begin to examine their operations, assess their losses, and look to their insurance for compensation. Many businesses and municipalities may have a valuable asset available in the form of insurance that can play an important role in helping them recover from this devastating storm. This insurance may provide coverage not only for physical damage to, and loss of, property, but also for financial losses arising from an inability to conduct business (either at all or at the same levels as before); the extra expenses incurred in dealing with the effects of the storm, including expenses incurred in advance to minimize or mitigate any damages and losses; and the costs incurred in establishing the extent of the losses.

The cause of loss will be an important issue in obtaining insurance coverage. After Harvey and other recent hurricanes, insurers relied heavily on flood exclusions to limit their liabilities, even where wind was a significant cause of damage. With Michael, it already appears obvious that most of the extensive damage was caused by extraordinary high winds and not flood. Florida case law makes clear that even if damage was caused by both high winds and flooding, the damage will be covered despite the presence of a flood exclusion.

The Doctrines

“All risk” property insurance policies cover all causes of loss, unless explicitly excluded. In cases involving multiple perils—one peril which is not excluded by the policy and one which is excluded (or, in some instances, subject to a sublimit)—resulting in loss, courts must determine whether recovery is permissible using a causal test. The two most common tests are the efficient proximate cause rule and the concurrent cause rule. These two rules were analyzed by the justices in Sebo v. American House Assurance Company Inc.:

  1. Efficient proximate cause: States that an insurer may only avoid coverage where it proves that an excluded peril is the “efficient proximate cause” of the loss. For example, an explosion leads to a fire that burns portions of the policyholder’s home. If the policy excludes loss caused by explosion and does not exclude loss caused by fire, and the insurer fails to prove that the efficient proximate cause of the resulting loss was an excluded peril (here, explosion), the entire loss will be covered.
  2. Concurrent cause doctrine: States that a policyholder may recover where two or more perils contribute to the loss and at least one of the causes is not excluded under the terms of the policy. For example, wind and rain from a hurricane both cause loss to a policyholder’s home. If wind is not an excluded cause under the policy and loss caused by flooding is excluded, pursuant to the concurrent cause test, the loss will be covered.

See American Home Assurance Co. v. Sebo., 141 So. 3d 195, 203 (Fla. 2d DCA 2013).

The Florida Supreme Court determined that the concurrent cause doctrine applied, rejecting the Second District’s concern that “a covered peril can usually be found somewhere in the chain of causation, and to apply the concurrent causation analysis would effectively nullify all exclusions in an all-risk policy.”

Why the Florida Supreme Court Got It Right

While the Court’s decision is not binding outside of Florida, other courts nationwide may consider adopting the justices’ reasoning:

  1. Contract interpretation: Typically, ambiguities in insurance contracts of adhesion are interpreted against the insurer. Thus, when a loss is caused, even partially, by a non-excluded peril, any exclusion that the insurer advances should be interpreted against the insurer to allow for coverage. The notion of contra proferentem, or interpretation against the drafter, is more aligned with the concurrent cause doctrine. And insurers can still offer policies with clear anti-concurrent cause language to contract around this assumption.
  2. Judicial economy: In most situations, the efficient proximate cause of a loss will need to be litigated. Where an insurer asserts that an excluded peril caused a loss that involves both excluded and non-excluded contributing causes, the insurer bears the burden of proving that the insured’s loss was caused by an excluded cause. This is an issue of fact and may result in a battle of the experts during litigation in order to instruct and convince a finder of fact. Using the concurrent cause doctrine takes out this burdensome, and costly, step.
  3. Public policy: Because it is consistent with the rules of contract interpretation, conserves judicial resources by reducing the likelihood and scope of coverage litigation, and makes default a standard that both reduces insurers’ ability to deny coverage and eases the burden on policyholders to establish it, the concurrent cause doctrine is good public policy.

Other Decisions

Courts in the Gulf Coast region addressed causation issues in the aftermath of Hurricane Katrina. In Vanderbrook v. Unitrin Preferred Ins. Co. (In re Katrina Canal Breaches Litigation) 495 F.3d 191 (5th Cir. 2007), the Fifth Circuit predicted that the Louisiana Supreme Court would find that water damage from Hurricane Katrina was caused only by flood (a cause often excluded from coverage) and that, therefore, no multiple cause analysis was necessary. Id. at 221-23. The insureds, however, argued that negligent design, construction, and maintenance of levees, rather than flood, caused the damage. Id. at 223. Many courts have shown a willingness to apply a multiple cause analysis to determine whether the damage caused by Hurricane Katrina is covered where the insured argues that another natural cause, such as wind, contributed to or caused its damage in concert with flood. See, e.g., Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 429-31 (5th Cir. 2007); Tuepker v. State Farm Fire & Cas. Co., 507 F.3d 346, 356 (5th Cir. 2007).

Conclusion

Businesses and municipalities impacted by Michael should put their insurers on notice as soon as is reasonably practicable. If the insurer responds by asserting that the loss was caused by an excluded cause, policyholders will be well served to keep in mind that (1) it is the insurer’s burden to prove the cause and that it is excluded; and (2) state law varies on the appropriate legal test governing a causation analysis. See Petroterminal de Panama v. QBE Marine & Specialty Syndicate 1036, No. 14-8614; 2017 U.S. Dist. LEXIS 7638 (S.D. N.Y. 2017) (the policyholder “need not prove the precise cause of loss; just that the loss was fortuitous”). Many policyholders in Florida may benefit from the decision in Sebo to recover insurance proceeds if any one of several contributing causes of loss is not excluded.