El Niño may cause a flood of insurance claims

The upcoming El Niño is also likely to have an impact on homeowners and commercial property policies. The claims will probably arise from flood, leaking roofs, windows, mudslides and potentially mold.

First-party claims

A search of the internet already shows policyholder counsel are advertising for El Niño-related claims. One such site states:

"Since 1978, 37 percent of all flood insurance claims in California came from just two El Niño winters — one in 1982 and the other in 1997. If the trend continues, thousands of homeowners will be submitting insurance claims in 2016. With so many claims piling up, you can be sure that some insurance companies will be unfairly denying claims, delaying payments, offering "low-ball" settlements, refusing to abide by the terms of their own policies, and inadequately processing or investigating claims."

First-party claims will certainly be on the rise. Some will be covered by property coverage forms, and some will not. Coverage issues will depend upon the forms and the specific claim being made.

Generally, claims resulting from flood are not covered under the standard "all risk" commercial and homeowners property policies. Both standard forms have "water" exclusions, which exclude damages from flood, surface water or overflow of any body of water. "Flood" has been defined by California courts as "an overflowing or inundation of water usually over dry land." [See, Northrop Grumann Corp. v. Factory Mut. Ins. Co. (9th Cir. 2009) 563 F.3d 777.] "Surface water" means water on the surface of the ground, usually created by rain or snow. [See Georgetown Square v. United States Fidelity & Guarantee Company (1995).]

Damage caused by flooding, including water build-up around the property as a result of flooding is unlikely to be covered under standard policies, but coverage may be available through the National Flood Insurance Program.

First party property exclusions, such as the "water" exclusion, only apply where the excluded cause of loss was the "efficient proximate cause", i.e. the predominant cause. Under California Insurance Code section 530, "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 the insurer is not liable for a loss of which the peril insured against was only a remote cause."

Insurance Code section 530 has become known as the efficient proximate cause doctrine. Pursuant to this doctrine, when a loss is caused by a combination of covered and excluded risks, the loss is covered if the covered risk was the efficient proximate cause of the loss.

However, the loss is not covered if the covered risk was only a remote cause of the loss, or the excluded risk was the efficient proximate or predominant cause. It should be noted that the burden is on the insurer to establish that the predominant cause of the damage falls within the subject exclusion.

Related: A look at replacement cost value vs. actual cash value

In a photo provided by Caltrans, water and mud cover Interstate 5 at Fort Tejon, about 75 miles north of downtown Los Angeles, on Thursday, Oct. 15, 2015. Flash flooding sent water, mud and rocks rushing across Interstate 5, stranding hundreds of vehicles and closing the major north-south thoroughfare. (Caltrans via AP)

The slippery slope

The danger of mudslides is another anticipated result of the expected rainy season. Mudslide risk will be increased over normal rainy seasons due to the years of drought that preceded the rain events, since the drought reduced or eliminated vegetation that would have normally grown on the hillsides, a major element of holding the soils in place during rains.

But again, unless the property owner has specialized insurance, or the mudslide is predominantly caused by a covered peril, the property owner is unlikely to have coverage under standard all risk policies, as both forms exclude coverage for earth movement, including mudslides. Further, standard commercial and homeowners policies contain an exclusion for "weather conditions," which apply only in conjunction with other specific exclusions, such as flooding or mudslides.

In 2005, the Supreme Court addressed application of the weather condition and earth movement exclusions and determined these provisions operated together to exclude damages caused by a rain- induced landslide, despite the efficient proximate cause doctrine. [Julian v. Hartford Underwriters Insurance Company (2005) 35 Cal.4th 747.]

In Julian, the Supreme Court considered whether an insurer may deny coverage for a loss resulting from a rain-induced landslide by invoking a provision that excluded coverage for losses caused by weather conditions that contribute in any way with an excluded cause or event, such as a landslide. In that case, the insureds argued that Insurance Code section 530 and the efficient proximate cause doctrine prohibited carriers from invoking the "weather conditions" exclusion.

The Supreme Court found otherwise, holding that an insurer may rely upon the weather conditions exclusion to deny coverage for losses proximately caused by landslide, and could do so consistently with Insurance Code section 530.

In reaching its conclusion, the Supreme Court in Julian stated:

"Here, however, we address only the application of the weather conditions clause to a loss occasioned by a rain-induced landslide. The peril of rain inducing a landslide is a genuine one, not a mere drafting fiction. Rain inducing a landslide is a commonly understood risk of loss and the frequent and direct causal relationship between rain and landslide is widely and easily understood.

The Hartford engineer's report attested that the type of slope failure involved in this case was "always" caused by water. The landslide here was not an independent causal agent in the Julians' loss; by all accounts it was dependent on the weather condition of heavy rains. And a reasonable insured would readily grasp the difference between a loss caused by weather conditions alone and a loss caused by weather conditions that induce a landslide, undermining the threat of illusory insurance. Accordingly, to the extent the weather conditions clause excludes the specific peril of rain inducing a landslide, there is no violation of section 530 or the efficient proximate cause doctrine."

Century Surety Co. v. Polisso (2006) 139 Cal. App. 4th 922 also applied the efficient proximate cause doctrine in a matter relying upon the flood exclusion, but with a different result. In that case, the insured's loss was damaged glass caused by contractor negligence after a flood. The court found that even though a flood precipitated the damage, the glass was not damaged by the flood, but by subsequent acts involving third parties who negligently scratched and gouged the glass. Thus, while the flood was the "but for" or precipitating cause of the damage, it was not the most important cause of the damage.

More mold claims

The rainy season is also likely to increase mold claims. Standard all risk policies exclude mold, fungus, and/or wet rot, however, such claims can be covered if the predominant cause is a covered peril. Ensuing losses may also be covered.

For example, a Georgia court found coverage where the predominant cause of the loss was lightning, which burned the valve of a water pump under the house, resulting in mold. [Atlantic Mut. Fire Ins. co. v. Chadwick (1967) 115 Ga.App. 850.]

Mold exclusions have been upheld by California courts where the predominant cause of the loss was an excluded peril.

In De Bruyn v. The Superior Court (2008) 158 Cal. App. 4th 1213, the California Court of Appeal upheld a mold exclusion. In that case, a homeowner with an all risk Homeowners policy made a claim on the basis that a toilet had overflowed, causing significant water damage to his home which then became contaminated by mold. There, the policy excluded mold losses even where caused by a sudden and accidental discharge of water. The Court of Appeal in De Bruyn reasoned that the insurer could specify in its policy that even though sudden water discharge was covered, mold resulting from covered water damage was not, and that this was not a violation of Section 530.

The mold exclusion was also upheld in Benavides v. State Farm Insurance Company (2006) 136 Cal.App.4th 1241. There, the Court found that even though a leak from the neighbor's apartment could have been a covered event, the mold exclusion still applied because the jury had determined that the leak was not the predominant cause of the insured's loss.

While commercial policies have a fungus exclusion, the standard forms have limited coverage exceptions to the exclusion. These include mold caused by fire or lightning, and specified causes of loss (unlikely to apply to El Niño). There is also a Limited Fungus Coverage of $15,000, which applies to fungus that results from specified causes of loss other than fire or lightning.

Under a typical Homeowners all risk policy, claims from leaking roofs or even leaking windows may also be covered, since there is no exclusion that directly applies to such claims. However, insurers will ordinarily not have an obligation to repair the roof or window, as such maintenance falls upon the homeowner.

Damage to personal property as a result of water entry resulting from a storm is unlikely to be covered since Homeowners personal property coverage is limited to specific perils and also incorporates the same exclusions as those applicable to the building. The personal property provisions in a standard all risk Homeowners policy identifies lightning and wind storm as covered perils. The wind storm peril does not include loss to the property contained in a building caused by rain, unless the direct force of wind or hail damages the building, causing an opening in a roof or wall and the rain enters through the opening.

Commercial property policies, however, contain "limitations" that exclude damage to property, including consequential damages to the interior of any building caused by rain, unless the building first sustains damage by a covered cause of loss to its roof or walls through which the rain enters. However, there is no coverage for interior water damage where a section of the roof has been removed for repair and replaced with plastic sheeting.

Due to the drought, El Niño is a welcome event in California. Whether it is a blessing to insurers remains to be seen, but it is certain that claim frequency will increase and will likely involve coverage issues and disputes long after the waters have receded.

Neil Selman is the managing partner at Selman Breitman LLP, specializing in insurance coverage issues. He may be reached nselman@selmanlaw.com.Meka Moore is a partner at Selman Breitman LLP, specializing in insurance coverage matters, including coverage and bad faith litigation and may be reached at mmoore@selmanlaw.com.