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COVERAGE OF FLOOD, MUDSLIDE AND EARTH MOVEMENT CLAIMS AND THE “EFFICIENT PROXIMATE CAUSE” DOCTRINE IN CALIFORNIA

In the past year, California faced wildfires and subsequent heavy rains, resulting in floods, mudslides and other earth movement that caused significant property loss. By way of example, January mudslides in Montecito, near Santa Barbara, destroyed or damaged more than 400 homes and businesses and killed 21 people in an area devastated by the record-breaking Thomas Fire the month before. To no one’s surprise, the events in Montecito have led to a number of insurance claims.

The California Department of Insurance (the “Department”) estimates that the mudslides in Santa Barbara County resulted in over $421 million in insured losses (in addition to the earlier pure fire losses), some attributable to policies with clauses specifically excluding coverage for such an occurrence. How can this be? Chalk it up to California’s “efficient proximate cause doctrine” as codified in the California Insurance Code and interpreted by the courts.

Because California is one of a minority of states that applies this doctrine to insured losses involving more than one cause, it is important for insurers, particularly those based outside the Golden State, to understand the concept of efficient proximate cause (especially as it relates to loss of or damage to property from mudslide following fire).

California’s Efficient Proximate Cause Doctrine

Historically, anti-concurrent causation clauses in insurance policies have been held to be unenforceable under California law. [1] Pursuant to California Insurance Code §530, “[a]n 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 he is not liable for a loss of which the peril insured against was only a remote cause.”

Section 532 goes on to state, “[i]f a peril is specially excepted in a contract of insurance and there is a loss which would not have occurred but for such peril, such loss is thereby excepted even though the immediate cause of the loss was a peril which was not excepted.”

As applied by the courts, these statutory provisions indicate that where a covered peril is the efficient proximate cause or predominant cause of a first-party loss, there will be coverage even if the immediate cause was an excluded peril under the policy. [2] Indeed, it was held in Finn that “in determining whether a loss is within an exception in a policy, 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 preceding the disaster.” [3] Of note, the court in Finn defined the efficient proximate cause as “the predominating cause, not necessarily the triggering cause.” [4] Not surprisingly – and more recently – it was determined that “a remote cause of a loss could not be the proximate cause of the loss.” [5] Parenthetically, a separate line of cases interprets the application of the analogous “concurrent cause doctrine” to third-party (liability) claims. [6]

The efficient proximate cause doctrine does not, itself, establish whether a particular loss is covered because an assessment of the cause of a loss – which is integral to a determination of coverage – is a question of fact, not of law and, in litigation, something for a jury and not a court to decide. [7] To be precise, the doctrine does not establish what the cause of a loss is in any particular circumstance, as that must be determined based on the specific facts surrounding the loss. In that regard and to avoid claims of bad faith, an insurer electing to deny a claim for which there are multiple causes must thoroughly investigate the cause(s) of the claimed loss and make a reasonable determination as to coverage based on the conclusions of that investigation.

The court in Howell applied the efficient proximate cause doctrine to a loss (damage to a home) due to a landslide that occurred six months after vegetation on an adjacent hill was destroyed by fire. According to the geotechnical expert hired by the insureds, the landslide would not have occurred but for the destruction of vegetation in the preceding fire (heavier rains in years past had caused no landslides). That testimony raised a triable issue of fact as to whether the burning of the slope was the “predominating cause” or the one that set the others in motion. [8]

Recent Developments

While the efficient proximate cause doctrine is well established in California, there have been recent regulatory and legislative activities, prompted in part by the Montecito mudslides, seeking to reinforce and clarify it.

On the regulatory front, the Department issued a notice (the “Notice”) on January 29, 2018, directed to insurers providing homeowners and commercial property insurance in the area impacted by the Montecito mudslides. The Notice addressed coverage of flood, mudslide and earth movement claims relating to the Thomas Fire, and stated that “while ‘homeowners’ and certain commercial property insurance policies frequently exclude losses caused by mudflow, debris flow, mudslide, landslide or other similar events . . ., under the ‘efficient proximate cause’ doctrine established by the Insurance Code and articulated by California courts, these exclusions are not be [sic] enforceable if the facts establish that the wildfire (a covered peril) was the efficient proximate cause of the subsequent flooding, mudflow, debris flow, mudslide, landslide or other similar events.” [9] The Notice closed with the following advisory and reminders to insurers:

“Based on preliminary information evaluated by the Department, there is a substantial basis to indicate that the Thomas fire was the efficient proximate cause of the flooding, mudflow, debris flow, mudslide, landslide and other similar events in Santa Barbara County following the Thomas fire. If it is established that the Thomas fire or another peril covered by the applicable policy was the efficient proximate cause of the damage resulting from these mudslides and other similar events in Santa Barbara following the fire, such damage is covered by the policy regardless of any exclusion in the applicable policy. Once the insured shows that an event falls within the scope of basic coverage under the applicable policy, the burden is on the insurer to prove a claim is specifically excluded. [Citation omitted.]

[Consequently,] . . . insurers should not deny these claims before undertaking a diligent investigation regarding the cause of loss and after carefully considering the facts.” [10]

The California legislature has been mindful of the issue as well. Last January, State Senator Hanna-Beth Jackson, whose district includes the areas affected by the Thomas Fire and subsequent mudslides, introduced Senate Bill 917 which, according to its terms, would add Section 530.5 to the California Insurance Code to explicitly address efficient proximate cause in the case of earth movement following a covered peril such as fire. The new statutory language, as proposed, would read:

“If a loss or damage results from a combination of perils, one of which is a landslide, mudslide, mudflow, debris flow or other similar earth movement, coverage shall be provided if an insured peril is the efficient proximate cause of the loss or damage and coverage would otherwise be provided for the insured peril. Coverage shall be provided under the same terms and conditions as would be provided for the insured peril. [11]

The legislative analysis for SB 917 indicates that its primary purpose is to reduce the confusion surrounding the issue of when mudslide damage is covered. If enacted, the legislation, like the Notice, would not serve to change the legal requirements for handling multiple cause claims. Instead, it would merely codify and clarify the existing doctrine and facilitate compliance by making the rule a matter of statutory record. As of this writing, the bill is pending in the Assembly, having passed the Senate.

Handling Claims

When an insured submits a first-party property claim for loss caused by a flood, landslide or mudslide in a region affected by fire, insurers should adhere to the following claims handling best practices in light of the efficient proximate cause doctrine:

  • Verify that the claimant was insured at the time of the loss (the loss is the trigger for coverage, not the event that caused the loss);
  • Determine whether the loss may have more than one cause (i.e., was the property affected by both fire and mudslide, or did the mudslide occur or originate in an area affected by fire);
  • If it appears the loss may have had more than one cause (at least one of which is a covered peril), investigate, using appropriate experts, to determine the predominant (efficient proximate) cause of the loss, and document both the investigation and conclusion; and
  • Approve or deny the claim based on the above application of the efficient proximate cause doctrine to its particular facts.

Conclusion

As noted above, the determination of the cause of a loss is a factual one (and oftentimes technical and complex) that must be done on a claim-by-claim basis. Appropriate investigation may require retention of experts – such as soil or geotechnical engineers – to determine whether a mudslide that was the immediate cause of a loss would have occurred in the absence of earlier fires or whether the fires established the conditions necessary for the mudslide to occur. Denial of mudslide claims without such investigations and based solely on policy exclusions exposes insurers to bad faith claims. On the other hand, if after having conducted a thorough investigation, an insurer concludes, based on evidence, that a fire was not the efficient proximate cause of a particular mudslide loss, the insurer should be protected from allegations of bad faith, even if it is later determined, through litigation, that the fire was the predominant event.

Nicole Zayac is counsel at Michelman & Robinson, LLP, a national law firm with offices in Los Angeles, Orange County (California), San Francisco, Chicago and New York City. Mrs. Zayac is an insurance regulatory specialist who represents producers, adjusters, MGAs, insurers, reinsurers, and investors in connection with regulatory issues, compliance and mergers and acquisitions. She can be contacted at 415-882-7770- or nzayac@mrllp.com.

References

[1] Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446, 1458 (1990).

[2] Finn v. Cont’l Ins. Co., 218 Cal.App.3d 69, 71 (1990) (citing Sabella v. Wisler, 59 Cal.2d 21, 31-32 (1963)).

[3] Id.

[4] Finn, 218 Cal.App.3d at 71 (citing Garvey v. State Farm Fire & Casualty Co., 48 Cal.3d 395, 403-404 (1989)) .

[5] Weis v. Accidental Death & Dismemberment Plan, 442 F.Supp.2d 850, 855 (N.D. Cal. 2006).

[6] See , e.g., Md. Cas. Co. v. Gonzalez, 848 F.Supp.2d 1144, 1147 (E.D. Cal. 2012).

[7] Howell, 218 Cal.App.3d at 1459.

[8] Id . at 1459-1460.

[9] Notice at p.1.

[10] Id. at p. 2.

[11] S.B. 917, 2018 Leg. XXXth Sess. (Cal. 2018).