Filed Under:Agent Broker, Coverage Issues

Wildfire claims and coverage questions

Anti-concurrent causation language in a policy could apply to landslides, mudslides and water exclusions. (Photo: Thinkstock)
Anti-concurrent causation language in a policy could apply to landslides, mudslides and water exclusions. (Photo: Thinkstock)

In 2015, more than 9 million acres were burned in the United States as a result of wildfires. The National Interagency Fire Center reports that significant fire potential was normal across most of the United States for the first few months of 2016, with above normal potential in the Great Lakes states, the Ohio and Tennessee valleys, and the Hawaiian Islands in March and April.

Late in 2015, global risk and reinsurance specialist Guy Carpenter estimated that insured losses for the year due to wildfires could reach $1.75 billion.

Wildfires themselves are not the only cause of damage — the aftermath can be just as destructive, with landslides and flash floods occurring where fire has burnt away trees and plants that prevent erosion.

While loss caused directly by fire would generally be covered, property policies, such as the ISO Homeowners policy, usually contain anti-concurrent causation language applicable to the earth movement exclusion, which includes landslide, mudslide, and mudflow. The anti-concurrent causation language also applies to the water exclusion, which excludes losses caused by flood and surface water. The form states that loss from such perils is excluded “regardless of any other cause or event contributing concurrently or in any sequence to the loss.”

Fire loss and proximate cause

The Ninth Circuit Court of Appeals was recently asked to interpret this language when a wildfire destroyed all the vegetation on a hillside, and a month later flooding and mudslides destroyed a home located nearby in Stankova v. Metropolitan Property & Cas. Ins. Co., 788 F. 3d 1012 (9th Cir. 2015).

Magda Stankova and Victor Nikolaev owned a home and detached garage in Alpine, Ariz. A massive wildfire that burned for over a month destroyed vegetation on the hillside near their home, as well as their detached garage. A month later, there was a mudslide on the hillside, which destroyed the home.

The homeowners insurer, Metropolitan, provided coverage for the loss of the garage but not for the house, stating that the home was destroyed by flood water and earth movement, which were both excluded under the policy. The insureds argued that the fire was the proximate cause of the loss. The court pointed out that Arizona has not adopted the efficient proximate cause doctrine.

Arizona state statutes require that all fire insurance policies conform to the New York standard policy of 1943. If a policy conflicts with the standard form's provisions, the standard policy prevails. The court's central question was whether the fire directly caused the mudslide.

Because the state is bound by the New York standard policy, the Ninth Circuit looked to New York law for guidance on what was meant by “direct” cause. It cited a 1998 case in which a New York appeals court stated, “Loss by fire within the policy's coverage is not limited to fire danger; rather, all losses are covered which are directly, proximately, or immediately caused by fire or combustion.” The New York court went on to say that insurer liability is not “confined to loss by actual burning and consuming, but they [insurers] are also liable for all losses which are the immediate consequences of fire or burning, or for all losses of which fire is the proximate cause.”

The Ninth Circuit also looked to Appleman's Insurance Law & Practice, a treatise that has been cited in Arizona court cases for guidance in explaining the purpose of fire insurance policies, which are “intended to cover every loss, damage, or injury proximately caused by fire, and every loss necessarily following directly and immediately from such peril or from the surrounding circumstances.”

Using Appleman's reasoning, the court said that the fire possibly did directly cause the mudslide, which caused the destruction of the insureds' home in an unbroken sequence. While the court acknowledged that the efficient proximate cause doctrine is not appropriate in Arizona, it said that the doctrine was not necessary “to find that the damage here could have been directly and proximately caused by the wildfire. A more limited analysis reaches the same result.”

The insureds produced evidence that no mudslides or floods had occurred on that property before and that wildfires can cause mudslides. There were no unusually heavy rains the year of the mudslide, and only a month separated the wildfire and the mudslide.

The court also found direction in Liristis v. American Family Mut. Ins. Co., 61 P.3d 22 (Ariz. Ct. App. 2002), which involved mold contamination that developed from water used to extinguish a house fire. While loss by mold was excluded on the policy, the court in this case found that fire caused the mold damage, so it was covered.

Metropolitan argued that Liristis was distinguishable because fire caused the mold, but the mold did not cause the property loss, while in this case, the excluded flooding and mudslide caused the loss. The court disagreed, countering that the insureds claimed the fire was the cause of the loss of their home because without the fire, the water would not have caused the earth movement. The case was remanded for trial or further proceedings.

The 2016 wildfire season may not be in full swing yet, but insurers and insureds should be aware of other possible losses that accompany wildfires. As the Stankova case illustrates, these fires can lead to flood and mudslide damage, and such losses may or may not be covered.

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