Only those who have been dead for the past nine months are unaware that the great city of New Orleans was hit by Category 4 Hurricane Katrina, which caused levees between the city and Lake Pontchartrain to break, flooding the city. Across the state line in Mississippi, the full brunt of the hurricane pushed storm surge over towns, tearing them apart. This created an insurance dilemma; windstorm is a covered peril, but damage from flood waters or storm surge is not, unless one has flood insurance. Most did not. Now they have nothing, their homes are destroyed, and the Federal Emergency Management Agency is doing very little to help them.
Homeowners' and commercial property policies, such as the Insurance Services Office's forms, are quite clear in what they will not cover in the event of a multitude of disasters. As the typical Homeowners' 3 policy reads, "We (the insurer) insure against risk of direct physical loss to property described in Coverages A (Dwelling) and B (Other Structures). We do not insure, however, for losses excluded." It no longer says all risk of loss, just risk of direct physical loss, and the exclusions are thick and voluminous. Included in those exclusions are a variety of factors such as ordinance or law, earth movement, water damage (including flood, surface water, waves, tidal water, overflow of a body of water or spray, whether or not driven by wind), power failure, neglect, war, nuclear hazard, intentional loss, and governmental action.
A separate section states, "We do not insure for loss to property … caused by any of the following. However, any ensuing loss to property described … not precluded by any other provision in this policy is covered. 1. Weather conditions …. 2. Acts or decisions, including the failure to act or decide, of any person, group, organization, or governmental body. 3. Faulty, inadequate, or defective: planning, zoning, development, or surveying; design, specifications, workmanship, repair, construction, renovation, remodeling, grading, or compaction; materials used in repair, construction, renovation, or remodeling; or maintenance of part or all of the property whether on or off the 'residential premises.'"
That's quite a mouthful of what those insurers won't cover. It's as if the underwriters had sat down with a gypsy tea leaf reader and said, "Tell us what's going to happen in the future," and she said, without even consulting the crystal ball in the back room, "New Orleans is going to flood and Mississippi will be washed away!" So those boys in the front offices got busy and plugged all the potential leaks and loopholes in their policies and, sure enough, along came Katrina.
The Efficient-Proximate-Cause Rule
Casualty adjusters know about proximate cause. It's part of the tort formula: Breach of a duty owed as proximate cause in an unbroken chain of events with resulting damages. It's the little ritual that adjusters are supposed to perform in their investigations of liability claims before they pass out the money. Until the 1980s, however, few connected proximate cause with property insurance. The rule comes with other names, including concurrent causation or predominant cause.
In Washington, proximate cause was established through court decisions as a rule of construction. In Graham v. Public Empl. Mutl. Ins Co. (98 Wash. 2d 533, 656 P.2d 1077 [1983]), the Court established the rule in order to resolve issues arising from the eruption of Mt. St. Helens. The Court said, "Where a peril specifically insured against sets other causes into motion which, in an unbroken sequence and connection between the act and the final loss, produce the result for which recovery is sought, the insured peril is regarded as the 'proximate cause' of the entire loss."
The rule was established to override an otherwise unambiguous exclusion, where some unexcluded cause (someone's negligence, for example) was a contributing cause of loss. Hence, coverage would apply to the loss even if the other events were excluded. The rule creates coverage where none was intended. But such rules of law have not always been held applicable.
Even in Washington, the state's Supreme Court is reluctant to apply the rule. In Findlay v. United Pacific Insurance Co. (129 Wash.2d 368, 917 P.2d 116 [1996]), the Court said, regarding an excluded earth-movement and rain claim, "If the efficient proximate cause, the cause that triggers other causes to result in a loss, is a specifically named unambiguous excluded peril in the policy, we will not mandate coverage. We will not, under the guise of public policy, rewrite a clear contract between the parties. The efficient-proximate-cause rule should be applied to enforce the reasonable expectations of the parties based on the language of the insurance contract and not to create a new contract for the parties."
Alaska's Supreme Court also upheld an insurer's exclusion of efficient proximate cause in an earth-movement claim (State Farm v. Bongen, [#S6526. 1996]). Not all courts, however, offer insurers the option of excluding efficient-proximate-causation losses, although a majority do. For instance, in Front Row Theater Inc. v. Am. Mfgs. Mutl. Ins. Co. (18 F.3d 1343 [6th Cir., 1994]), the Court said, "When damage to an insured's property is caused by both a covered and an excluded event, coverage must be expressly precluded by language in the policy."
While much of the litigation over the efficient-proximate-cause rule has found for insurers where the exclusions anticipated the rule, there have been exceptions. In the Georgia case of Cox v. State Farm (459 S.E.2d 446 [Ga. App. 1995]), the Appellate Court ruled that the earth-movement exclusion did not apply to damage to the homeowner's property caused by vibrations from blasting. The Court's findings suggested that the "natural or external forces" language in the sub-clause of the policy did not unambiguously mean man-made and since "external" was not defined by its literal definition of "apart, beyond, exterior, or connected to the outside," it did not encompass man-made earth movements. Cases for and against the rule have been adjudicated in Nevada, Colorado, Utah, Indiana, Wyoming, and elsewhere.
Concurrent Causation
Perhaps the most infamous efficient-proximate-cause case occurred in California. Widely publicized as the Garvey case, it triggered a tightening of most property policy language to specifically exclude the rule. The case involved an expensive home built on a hillside that slid down the hill and collapsed as a result of heavy rains. The insured's claim was denied on the basis of the earth-movement exclusion.
James J. Markham, director of curriculum for the Insurance Institute of America, in Property Loss Adjusting, Vol. 1, 1st Ed. (IIA, 1990), explains, "The case began when Mr. Garvey sought coverage for damage to his home under an all-risks policy. He alleged that the damage was caused by a contractor's error, a non-excluded event, as well as by landslide, an excluded event. The Court ruled that since Mr. Garvey had coverage for any event unless it was excluded, coverage would apply. The contractor's error was therefore covered." In overruling that appellate decision three years later, the California Supreme Court found that for first-party claims under an all-risks policy, there is no coverage if the predominant cause of the loss is excluded.
A Best's Review article entitled "Searching for a Cause," by Rick Cornejo (February, 2006) reports, "Many people did not have flood coverage because it was not required by their mortgage companies, they were not in a federally designated flood zone, or their property had withstood 1969′s Hurricane Camille." They had wind insurance, but that is not what did the damage. He adds that "waves washed completely over many of the homes destroyed south of the [CSX railroad tracks in Mississippi] in the surge zone, flattening the buildings and leaving the roofs 'without a shingle gone,'" evidence that the predominant, or efficient proximate cause of the damage, was water-related, not wind-related.
The ones I fear for are the agents who ought to have told their wind insurance customers the facts of life and did not. Also, those buying only minimum flood insurance ($250,000) should have been told by those agents that excess flood insurance was available. I doubt many agents did, which could open the door to agent E&O claims.
I recall a photo from Hurricane Camille that I ran in the Crawford Risk Review, of which I was editor. It showed a two-story house standing on four corner posts with the entire first floor missing, and the upper story and roof without a scratch. The cause was storm surge. Years later, I encountered a claim in Pensacola where the adjuster had been assigned a claim on a house on the beach that was ultimately destroyed by wave wash. He had written it up as wind, submitted it, and then changed his mind, rewriting it as flood. His superiors at federal flood argued that it must have been wind, since that was his initial thought, while the windstorm insurer argued that it had to be flood because the adjuster had corrected his report. Caught between the devilish wind and the deep blue sea, both insurers paid a little and the adjuster paid the rest!
Politicians Get Involved
"Flood Exclusion Puts Insurers In Middle of Political Firestorm," read a headline in the Oct. 10, 2005, issue of National Underwriter. "Litigators, lawmakers seek to bail out those without coverage," wrote Arthur D. Postal. "A bill proposed by Rep. Gene Taylor, D-Miss., would offer victims of Hurricanes Katrina and Rita the ability to buy retroactive coverage from the National Flood Insurance Program."
In the Sept. 26 issue of the same magazine, Steven Tuckey reported, "A lawsuit filed by Mississippi Attorney General Jim Hood [in Chancery Court of Hinds County] to force companies to cover flood damages in addition to those caused by wind-driven rain has prompted insurance industry representatives to lay out frightening scenarios not only for insurers, but for the nation as well." By February, not much more had been heard about his lawsuit, but he was getting "ataboys" from Mississippi's Senator Trent Lott, who also lost his home in the storm.
For those in Mississippi who are hoping that their state attorney general's lawsuit will move heaven and earth to declare storm surge as windstorm, the odds may be against them. I suspect that even if Mississippi's Supreme Court were to uphold such a ruling, the decision likely would be appealed to the federal courts and heard well beyond the Gulf Coast. But I could be wrong! On March 20, 2006, Steve Tuckey reported in the National Underwriter that Federal District Court Judge Tom S. Lee ruled that a state court should hear the suit.
As Tuckey explains, "While the defendants [various homeowners' insurers] sought federal jurisdiction because of the [federal flood insurance] issue, another motive might have been the fact that federal courts have proven to be a generally more favorable venue for industry defendants — but that could change as tort reform measures have resulted in Mississippi no longer seeming to offer a haven for plaintiff attorneys."
If Wishes Were Horses …
An old proverb says, "If wishes were horses, beggars would ride!" Wishful thinking on the part of New Orleans Katrina victims will probably not change the fact that flooding — even if caused by the stupidity of contractors who built the levees or the government that failed to strengthen them when it knew they were weak — was an efficient proximate cause of their losses. As for the case in Mississippi, undoubtedly the appeals will go on for years. How much sympathy should insurers have for those who failed to purchase flood insurance and who lost everything as a result? Contracts are intended to mean what they say. Politicians notwithstanding, wind ain't flood, and flood ain't wind, even if the wind causes the flood.
Ken Brownlee, CPCU, is a former adjuster and risk manager, based in Atlanta. He now authors and edits claim-adjusting textbooks.
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