Commentary and analysis on the
law of insurance coverage
Author: Carl A. Salisbury
Ordinarily, an insurance policy is like an on/off switch. A claim is either covered or it’s not. In close cases, where the policy language leaves some doubt about whether the cause of the loss comes within coverage, we ask judges or juries to resolve the dispute for us. “Causation” is a concept that is as old as the law, itself. A very long time ago — in 1928, to be precise — Benjamin Cardozo, who would ultimately serve with great distinction on the United States Supreme but was then a Justice on New York’s high court, wrote the opinion in one of the most famous cases ever decided, Palsgraff v. Long Island Railroad Co. (read the opinion here). Helen Palsgraff, unlucky woman, was standing on a station platform waiting for her train to arrive. Two gentlemen were running along the platform to catch a departing train that was in motion. A conductor held the door open for the first gentleman, who successfully boarded. The second gentleman, however, accidentally dropped the package he was carrying as he jumped onto the now fast-moving train. The package contained fireworks, which exploded when they hit the tracks. The impact shook the platform and caused a set of heavy scales to fall on poor Mrs. Palsgraff, who was standing some distance apart from the action. Justice Cardozo concluded that the gentleman carrying the package could not have apprehended that his negligence would cause a Rube Goldberg sequence of unlikely events such as those that injured poor Mrs. Palsgraff. Accordingly, her injuries went uncompensated.
There was an equally famous and influential dissent in Palsgraff, in which another Justice of the Court explored the legal concept of “proximate cause.” There is wonderfully evocative language and jewels of thoughtful reasoning in the dissent that make it well worth reading simply for the pleasure of it. Rarely do judges admit anymore, as Justice Andrews candidly did in his Plasgraff dissent, that important legal concepts do not rely for the force of their authority on logic or unerring distinctions between right and wrong but often, instead, involve nothing more than prosaic (and arbitrary) considerations of “convenience” and “practical politics.” So he explains the vital concept of “proximate cause” thus: “An overturned lantern may burn all Chicago. We may follow the fire from the shed to the last building. We rightly say the fire started by the lantern caused its destruction. A cause, but not the proximate cause. What we do mean by the word ‘proximate’ is, that because of convenience, of public policy, of a rough sense of justice, the law arbitrarily declines to trace a series of events beyond a certain point. This is not logic. It is practical politics.”
A good deal of philosophy animates Justice Andrews’s opinion on the concept of causation, philosophy that helps us consider the question the Florida Supreme Court recently answered in the case Sebo v. American Home Assurance Co., Inc., No. SC14-897 (Dec. 1, 2016)(get a copy here). There is, for example, this gem: “A boy throws a stone into a pond. The ripples spread. The water level rises. The history of that pond is altered to all eternity. It will be altered by other causes also. Yet it will be forever the resultant of all causes combined. Each one will have an influence. How great only omniscience can say. You may speak of a chain, or if you please, a net. An analogy is of little aid. Each cause brings about future events. Without each the future would not be the same. Each is proximate in the sense it is essential. But that is not what we mean by the word. Nor on the other hand do we mean sole cause. There is no such thing.” That is elegant and unassailable: “There is no such thing” as a “sole cause.” But whether damage to A was the result of this cause or that one will often determine whether an insurance company must pay for the harm or will be allowed, instead, to walk away. Which brings us to Sebo.
John Sebo insured his Naples, FL mansion for more than $8 million. It’s not unreasonable for a homeowner to expect that a house worth nearly eight figures shouldn’t leak when it rains. But leak it did. It leaked in the foyer. It leaked in the living room. It leaked in the dining room, and the piano room, and the exercise room, and the master bathroom, and the upstairs bathroom. Ultimately, the water damage rendered the house irreparable; it had to be demolished. Sebo’s insurance company denied all coverage except for a $50,000 sub-limit for mold. It argued that the first cause of the loss was the construction defects and that coverage for them was precluded by a construction-defect exclusion in the policy. Sebo argued, instead, that while an excluded cause may have contributed to the loss, the non-excluded cause of rain infiltration was equally responsible for the damage to the home and denial of coverage for this plainly covered cause of loss would amount to a repudiation of very the protection his premiums had purchased. Lawsuits followed as a matter of course.
It’s not unreasonable for a homeowner to expect that a house worth nearly eight figures shouldn’t leak when it rains.
A jury ultimately ruled that Sebo’s insurer, American Home Assurance Company, or AHAC, owed coverage for the loss of the home. AHAC appealed and the middle level appeals court in Florida reversed. The court examined two theories of causation for insurance purposes, the “concurrent causation” theory and the “efficient proximate cause” theory. The law loves legal concepts that are easy to define but impossible to apply to the universe of events that occur in the real world. Here is how one court expressed the concurrent causation concept: Where two or more causes work together to cause a single loss, “it seems logical and reasonable to find the loss covered by an all-risk policy even if one of the causes is excluded from coverage.” An important insurance treatise expresses the concept in similar but more expansive terms: ““An incidental peril outside the policy, contributing to the risk insured against, will not defeat recovery.… In other words, it has been held that recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.” 5 Appleman, Insurance Law and Practice (1970), § 3083.
The “efficient proximate cause” theory, on the other hand, posits that “where there is a concurrence of different causes, the efficient cause—the one that sets others in motion—is the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster.” In other words, it is the first cause in a chain of causative events that courts will examine to decide if there is coverage. If the first cause is excluded, it will not matter that the series of other less-remote causes that contributed to the loss might be covered, the entire claim will be excluded by virtue of the “first” cause in the chain. There are several serious problems with applying the efficient proximate cause concept to insurance.
First, there is the problem of remoteness. Justice Andrews’s stone in the pond provides an illustration. If a deluge follows moments after the boy has tossed his stone into the pond, and the water from the pond barely creeps over the porch of a pond-side home, ruining an expensive Turkish rug with water stains, identify the efficient proximate cause of this loss. Was the boy’s heedless toss of a stone into the pond a first cause? Can we say with scientific certainty that the small but perceptible rise of water level caused by that act didn’t contribute to the molecules of water that barely crept onto the surface of the porch and into the fibers of the rug? Would not the choice to ignore the toss of the stone in the chain of causation be an arbitrary one?
The second problem, far more practical and less metaphysical, is that insurance companies — and the trade association that drafts policies for the insurance industry — plainly know how to write clauses that will eliminate concurrent causes from a chain of excluded causation. Such clauses are so common, in fact, that a number of states, California, North Dakota, Washington, and West Virginia have passed statutes that either prohibit the inclusion of “anti-concurrent causation” clauses in insurance policies sold in those states, or that limit their affect. A typical anti-concurrent causation clause says, “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any other sequence to the loss.”
“We draw an uncertain and wavering line, but draw it we must as best we can.”
Third is the problem identified by the middle level appeals court in Sebo. There, the court rejected application of the concurrent cause doctrine on the ground 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.” The converse, however, is often equally true: a non-covered peril can usually be found somewhere in the chain of causation and to apply the efficient proximate cause analysis can nullify the coverage that policyholders purchased with their up-front premium payments. As we’ve seen, choosing from among the universe of causes the purported “first” cause usually involves convenience, or public policy, or a rough sense of justice, rather than science or logic or truth. Justice Andrews, again, describes the task with perfect lucidity:
“Is the result too remote from the cause, and here we consider remoteness in time and space. Clearly we must so consider, for the greater the distance either in time or space, the more surely do other causes intervene to affect the result. When a lantern is overturned the firing of a shed is a fairly direct consequence. Many things contribute to the spread of the conflagration—the force of the wind, the direction and width of streets, the character of intervening structures, other factors. We draw an uncertain and wavering line, but draw it we must as best we can.” That last sentence, incidentally, describes the very essence of our legal system in this country. It is fundamentally what we expect from judges and juries in a lawsuit; nothing more and nothing less. I have used that line many times over the years in arguments in court. We bring our disputes before a judge and we ask her to draw a line — uncertain and wavering though it must be — and to draw it as best she can.
Ultimately, it was the second problem of the efficient proximate cause doctrine, identified two paragraphs above, that convinced the Florida Supreme Court about how to draw the line in John Sebo’s case. Finding no dispute that “the rainwater and hurricane winds combined with the defective construction to cause the damage to Sebo’s property,” and finding further that there was “no reasonable way to distinguish the proximate cause of Sebo’s property loss—the rain and construction defects acted in concert to create the destruction of Sebo’s home,” the Supreme Court rejected the notion that applying the concurrent causation theory to coverage would nullify all the exclusions in the policy. Instead, the Supreme Court observed that AHAC “explicitly wrote other sections of Sebo’s policy to avoid applying the concurrent causation doctrine.” In other words, as mentioned above, the carrier knew how to draft an anti-concurrent causation clause when it chose to do so. That it failed to write one for the construction-defect exclusion means that coverage would apply when concurrent covered and non-covered causes contributed to the loss.
The concurrent causation problem comes up in insurance coverage disputes all the time. Policyholders can hope that courts will look to the Florida Supreme Court’s decision in Sebo for guidance when drawing the lines that inevitably determine the outcome of these disputes.