A recent ruling by the Florida Supreme Courts (FSC) is creating a stir in Florida insurance markets and may have national repercussions. In December of 2016 the FSC handed down its review of a decision by the Second District Court of Appeals (DCA) in American Home Assurance Co. v. Sebo (141 So. 3d 195 (Fla. 2d DCA 2013).
Here are the facts of the case. In the spring of 2005, Sebo purchased a four-year-old home in Naples, Florida for $8,000,000. American Home Assurance Company (AHAC) insured the home with a policy characterized as an “all risk” and issued by the private client group on a “manuscript” form created especially for Sebo. Major intrusions of rain were reported to the resident property manager as early as May 31, 2005. By late June of 2005, major sources of leaks were identified and it became evident that there were “major design and construction defects.” Hurricane Wilma struck the Naples area in October of 2005 and further damaged the Sebo home. Sebo reported the water intrusion and other damages to AHAC in December 2005. AHAC investigates the claim and in April of 2006 denied most of the claim. There was $50,000 of mold coverage under the policy and AHAC tendered that amount to Sebo. He was unable to repair the residence and subsequently demolished the house. Sebo filed suit against several defendants including the seller, the architect and the contractor. In November of 2009, Sebo amended his complaint to include AHAC alleging that his homeowners policy covered his damages. Most of the defendants settled with Sebo but a trial proceeded against AHAC. The jury decided in favor of Sebo and entered a judgement for full value of the house against AHAC.
Two scenarios complicate the determination of the causes of loss under insurance policies. One scenario is when a loss results from different causes of loss in one policy where one cause is a covered cause of loss and the policy excludes another cause of loss. A typical example of this problem is hurricane damage. Hurricanes have high winds and flooding caused by storm surge. Wind damage is a covered cause of loss but most property insurance policies exclude damage caused by flooding. The second scenario occurs when a loss involves two or more different policies. This type of occurrence might involve coverage under liability coverages of two different insurance contracts. A typical example could be the liability coverage of a personal auto policy and the liability coverage of a homeowners policy. Two common law doctrines of causation have emerged because of these to different scenarios.
“Efficient proximate cause” (EPC) is the older and more traditional legal doctrine. The FSC defines EPC as “that where there is a concurrence of different perils, the efficient cause – the one that set the other in motion – is the cause to which the loss is attributable.” This definition implies a linear and/or sequential relationship between the efficient cause, intermediate causes and the ultimate outcome or loss. One can imagine a series of dominos, stacked on end and parallel to one another. You push over the first domino and it strikes the second domino, which strikes the third domino and so on. You have an uninterrupted or unbroken causation between the first domino and the last domino. Traditionally under this doctrine, if the cause that pushes over the first domino were a covered cause of loss, then, regardless of the intermediate causes, the loss resulting from the last domino would be a covered loss. Conversely, if the cause that pushes over the first domino were not a covered cause of loss, then, regardless of the intermediate causes, the loss resulting from the last domino would not be a covered loss. Therefore, if the EPC is a covered peril then the loss is covered but if the EPC is not a covered peril than the loss is not covered.
What if the causes of loss are not linear and/or sequential, but rather the causes are independent and/or simultaneous. In the Sebo case, there are construction defects and weather events both of which contribute to the loss but the causes are independent of one another. The homeowners’ policy in question covers the wind and rain causes of damage but excludes construction defect damage. In this case, both causes contribute to the need to demolish the house, but neither cause can be determined to be an EPC. This type of scenario resulted in the development of the second legal doctrine of causation called the “Concurrent Cause Doctrine.” (CCD)
In the Sebo case, CCD “provides that coverage may exist where an insured risk constitutes a concurrent cause of the loss even when it is not the prime or efficient cause.” In other words, when a covered cause of loss contributes to damage, even if not a prime or efficient cause, there may be coverage for the loss. An early articulation of the CCD was by the California Supreme Court in 1973 (State Farm Mut. Auto Ins. Co. v. Partridge, 514 P.2d 123, 133 (Cal. 1973)). Subsequent to the Partridge case, insurers began to include anti-concurrent causation wording in the exclusion section of insurance policies. Often this wording is a preamble to the entire exclusion section of the policy. The following is the initial paragraph of the ISO Homeowners policy exclusions section:
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. These exclusions apply whether or not the loss event results in widespread damage or affects a substantial area. (Emphasis added.)
In the Sebo manuscript policy form, the Court quotes the construction defect exclusion; however, the FSC concludes, “(b)ecause AHAC did not explicitly avoid applying the CCD, we find that the plain language of the policy does not preclude recovery in this case.” Since the AHAC homeowners policy is a non-standard form, the above quoted anti-concurrent causation wording was not tested in the Sebo case. One can only speculate as to the outcome of Sebo if the ISO wording had been in use.
There is some concern that cases such as Sebo are exposing policy limits to claims where the insurance policy excludes a contributing cause of loss. In a recent article in the Insurance Journal, Demotech, an insurance company rating service, announced it is suspending insurer-rating criteria in Florida and may issue downgraded rating to several insurers in Florida. ‘”The operating environment in Florida is not the same as it was and is not the same as other jurisdictions so we need to respond,” Petrelli (president of Demotech) said. “We are not 100 percent certain what the evolution will be – it is a fluid situation. However, we know the situation is not better today than it was several months ago, and we need to have a suspension of guidance while these situations play out.”’
One can be sympathetic with the principle that the law of insurance contracts is biased against the insurer. Coverage is interpreted broadly and exclusions narrowly. Insurance companies write insurance policies so the responsibility is on them to use clear and unambiguous language and any lack of clarity or ambiguity should favor the policyholder. However, to make the insurer pay the full value of a claim when an excluded peril clearly caused part of the damage may disrupt the insurers’ ability to quantify their exposure and, subsequently, disrupt the property insurance markets. It could result in property coverage becoming hard to get and inordinately expensive. If one takes the Sebo opinion to its logical conclusion, we would not need a flood policy to cover the rising water damage in a hurricane. The property insurance policy providing coverage for the wind damage would have to pay for the damage caused by the excluded but concurrent damage resulting from flooding.
Stuart Powell, Jr., MA, CPCU, CIC, CLU, ChFC, ARM, AMIM, AAI, ARe
Executive in Residence
Walker College of Business
Appalachian State University