"Efficient proximate causation" in the context of property insurance claims.

• Jurisdiction: United States
• Date: 01 July 1998
• Author: Wuerfel, Mark D.

Far from being a novelty, this principle of determining causation in property loss cases is used in most jurisdictions

AMONG the issues that most commonly arise in the evaluation of property insurance claims and the defense of insurers' non-coverage decisions is the effect of a combination of two recognized "causes" of the loss. One cause of loss usually is a peril excluded by the policy, while the other is either an enumerated peril or more commonly today a peril falling within the "all risk" coverage of "all risks of direct physical loss."

Defense counsel sometimes find it suggested, even by courts, that the resolution of the question of coverage of such a loss requires resort to a relatively novel doctrine of "efficient proximate causation." They also may find it suggested that this analysis was devised by California courts and that some more traditional analysis would result in a fairer interpretation of property insurance policies.

ORIGIN OF THE RULE

In fact, the efficient proximate cause rule is the all but universal method used in the United States for resolving coverage issues involving the concurrence of covered and excluded perils. The defense bar should not overlook a long train of case law applying this rule to the facts of claims, even when the policies themselves may have been drafted in terms significantly different from those employed today.

Schroeder v. State Farm Fire and Casualty Co.(1) illustrates the typical misapprehension as to the source of the efficient proximate cause rule. There the U.S. District Court for the District of Nevada considered an insurance coverage dispute in which a city water service pipe ruptured from age, rust and corrosion, causing the soil under the insured's building to become saturated and settled, which resulted in damage to the building. The policy (apparently an all-risk policy) excluded coverage of damage caused by earth movement, but the insureds argued that the true cause of the damage was "water," a non-excluded peril.

The court concluded that the ruptured pipe and saturated soil caused earth movement below the plaintiffs' property, and added:

Plaintiffs argue that the "efficient proximate cause" doctrine allows them to recover in this case. That doctrine, developed in California, provides that when a loss is sustained by a sequence or concurrence of at least two causes, one covered under the policy and the other excluded under the policy, the cause setting the chain of events in motion is the cause to which the loss is attributed. Thus, if the "first" cause is covered, the loss is covered even if an uncovered loss is involved in the chain of events.(2) The Schroeder court suggested that the efficient proximate cause is a novelty devised by the courts of California and an alternative to some other and perhaps preferable analysis of the question raised by concurring covered and excluded causes of loss.

In fact, the California Supreme Court has approved a rule of efficient proximate causation in two opinions well known to defense counsel in California and to the insurance industry at large. Those opinions confirm that the rule is neither a California invention nor novel.

In 1989 in Garvey v. State Farm Fire and Casualty Co.,(3) the California Supreme Court noted that it had "developed" a proximate cause analysis in Sabella v. Wisler,(4) in which a house settled and cracked because a lot was negligently compacted. After the house was built, the rupture of a sewer line beneath the house saturated the loose fill, and the settling followed. The homeowners' all-risk policy excluded loss from "settling."

The Sabella court reversed a decision in favor of the insurer's non-coverage position, concluding that there was coverage because the rupture of the sewer line was attributable to the negligence of a third party, rather than to settling, and was the efficient proximate cause of the loss. The court stated:

The policy excepted loss by settling and the findings of the court below indicate that the broken sewer line emptied waste water into the loose fill, setting in motion the forces tending toward settlement. As stated in 6 Couch, Insurance (1930) [sections] 1466, "[I]n 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 in producing the disaster." The virtual absence of subsidence damage in the prior four years of the existence of the house here in question clearly indicates that the broken pipe was the predominating or moving cause of the loss.(5) Thus, the Sabella court, without citation to any specific judicial thinking from any other jurisdiction, acknowledged that it was approving or adopting a rule so well-established that the treatise on which it was relying could state it as an unchallenged principle.

Subsequent confusion in the intermediate appellate courts of California led to abandoning this rule in favor of a different analysis, arising from a decision in the liability insurance context, State Farm Mutual Automobile Insurance Co. v. Partridge.(6) The Partridge extension would have allowed coverage under a first-party property insurance policy whenever a covered peril is a concurrent proximate cause of the loss, without regard to the application of specific policy exclusions clauses.

Rejecting that development, the California Supreme Court in Garvey reaffirmed that concurrent causation issues arising under property insurance are to be resolved under the Sabella test, with one qualification:

Sabella defined "efficient proximate cause" alternative as the "one that sets others in motion" ... and as "the predominating or moving efficient cause." ... We use the term "efficient proximate cause" (meaning predominating cause) when referring to the Sabella analysis because we believe the phrase "moving cause" can be misconstrued to deny coverage erroneously, particularly when it is understood literally to mean the "triggering" cause. Indeed, we believe misinterpretation of the Sabella definition of "efficient proximate cause" has added to the confusion in the courts and, in part, is responsible for the erroneous application of Partridge. to first-party property loss cases.(7) The Garvey court acknowledged that it was approving "fundamental principles of insurance law discussed" in a 1910 case, Pacific Heating & Ventilating Co. v. Williamsburgh City Fire Insurance Co.,(8) in which an insured building that was not damaged in the San Francisco earthquake of 1906 eventually burned down in the widespread fires that began as a result of the earthquake. The policy excluded loss "occasioned by or through" earthquake.

However, the California Supreme Court approved the opinion of the intermediate appellate court, which had held that the insured's fire loss was covered:

What was the cause of the plaintiff's loss or damage? It was fire, the peril which he had insured against. When the earthquake occurred, and the vibrations of the earth ceased, the plaintiff's property had not been damaged, nor had he lost it. His property remained intact, and it had not been set on fire by the earthquake. He had suffered no loss by the earthquake or through the earthquake. He afterwards lost his property by fire, which was the direct and proximate cause of his loss. It is true that appellant claims that the earthquake caused the fire in the building occupied by Mack & Co., and that this fire caused the fire in the adjoining building, and that this caused the fire in the next adjoining building, and so on until finally it reached and burned the property of the plaintiff. If we go back from cause to cause, we can trace the parent cause to the earthquake which was the remote cause of the fire. But the plain common-sense reading of the policy would convey no information to plaintiff that he could not recover if the cause of the cause of the cause of the fire was an earthquake. He could understand by reading the policy that if an earthquake should by its violence set his building on fire that he could not recover the loss; but it would be difficult for any one to understand that the plaintiff agreed that the defendant might be exempt from a fire the remote cause of which was an earthquake.(9) In Williamsburgh, California law applied a rule of efficient proximate cause to prevent the application of an exclusion. The excluded peril--earthquake--was merely in the "chain of causation." In Sabella, the immediate damage was cracking sustained in the settling of a house over loosely compacted soil, an excluded peril. However, application of the efficient proximate cause rule permitted the insured to attempt to demonstrate that the "efficient" or "active" cause of the settling was the non-excluded negligence of the developer of the property.

Thus, both these seminal California cases stand for the principle that it is ultimately a factual judgment as to whether the insurer's or the insured's examination of a causal chain to find an efficient proximate cause is reasonable.

NO POLICY LANGUAGE

Policy language may significantly limit from the outset the attempt of either party to the insurance contract to attempt to persuade the trier of fact that its interpretation of the causal chain is reasonable. In the absence of limiting language, however, it is fair to conclude that with very few exceptions, case law in the United States recognizes that the determination of the efficient proximate cause is a question of fact.

1. Federal

   In the era of federal common law, the U.S. Supreme Court considered questions of concurrent causation by covered and excluded perils. In an 1868 case, Insurance Co. v. Tweed,(10) a policy on cotton in a warehouse excluded loss caused by "explosion," while it covered fire. An explosion in one building set a second on fire, and the fire...