SC Lawyer, January 2008, #1. Anti-Concurrent Causation Clauses and Hurricane Relief: Was it Wind or Water?.

• Author: By Howard A. VanDine III and Erik T. Norton

South Carolina Lawyer

2008.

SC Lawyer, January 2008, #1.

Anti-Concurrent Causation Clauses and Hurricane Relief: Was it Wind or Water?

South Carolina Lawyer January 2008

Anti-Concurrent Causation Clauses and Hurricane Relief: Was it Wind or Water?By Howard A. VanDine III and Erik T. NortonHurricane Katrina, declared the costliest hurricane in American history, destroyed approximately 275,000 homes, caused total economic losses in excess of $100 billion and has spawned more than 1.6 million insurance claims. James A. Knox Jr., Causation, The Flood Exclusion, and Katrina, 41 Tort Trial & Ins. Prac. L.J. 901, 905 (Spring 2006). While most of the property damage resulted from flooding rather than wind, only a small percentage of Hurricane Katrina property owners maintained flood coverage under the National Flood Insurance Program. Id. at 903, 905. Many property owners therefore have turned to their homeowner property insurance policies for relief. As a result, a debate between property owners and their insurers has surfaced over the impact of specific policy provisions.

Typically, homeowners and commercial property insurance policies insure against damage cause by wind or hail, including damage from rain entering through breaches in a dwelling caused by wind or hail. These policies generally contain both a water damage exclusion and an anti-concurrent causation clause (ACC clause). The water damage exclusion clause typically precludes recovery for water damage to a dwelling caused by "flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind." The ACC clause routinely states: "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 sequence to the loss." The ACC clause therefore denies coverage for damage caused concurrently by covered and non-covered perils. In the context of hurricanes, this means that damage caused concurrently by wind and flooding would not be covered.

This article first will discuss the effect of these provisions by summarizing the law in South Carolina as to wind and hail policies and the courts' treatment of instances where both a covered peril and an excluded peril contribute to a loss. Thereafter, this article will review recent case law from the Gulf Coast states addressing the enforceability of ACC clauses. Finally, the implications of this recent case law for South Carolina lawyers will be analyzed.

I. South Carolina law regarding ACC clauses

South Carolina courts follow the majority approach in determining whether coverage is triggered by a loss where both an excluded peril and a covered peril exist. This approach provides that "it is generally sufficient to prove the event insured against was the efficient cause of the loss, even though not the sole cause." King v. N. River Ins. Co., 278 S.C. 411, 413, 297 S.E.2d 637, 638 (1982). Applying this rule, South Carolina courts have held that, where there are two contributing perils, one covered and one excluded, if the covered peril was the efficient, proximate or predominant cause of the loss, then the loss is covered by the policy. Id. at 414, 297 S.E.2d at 638. See also Phenix Ins. Co. v. Charleston Bridge Co., 65 F. 628 (4th Cir. 1895); Beattie Bonded Warehouse Co. v. General Accident Fire & Life Assurance Corp., 315 F. Supp. 996, 1001 (D.C.S.C. 1970).

Whether an insured bears the burden of establishing the portion of the damage caused by the covered peril under the proximate cause doctrine is less clear, however. That is, once an insured demonstrates the covered peril is the predominate cause of the loss, may an insured recover for the entire loss or must the insured segregate the loss caused by the covered peril in order to recover for that portion of the damage? In South Carolina that question remains open. Compare Hanover Fire Ins. Co. v. Ivey, 250 F.2d 110, 111 (4th Cir. 1957) (suggesting plaintiff must segregate losses), with King, 278 S.C. at 413, 297 S.E.2d at 638 (suggesting plaintiff does not have to segregate losses).

South Carolina courts also have not squarely addressed the question of whether an ACC clause effectively circumvents the efficient proximate cause doctrine. For example, in Brooklyn Bridge, Inc. v. S.C. Ins. Co., 309 S.C. 141, 145, 420 S.E.2d 511, 513 (1992), the Court considered whether a deli could recover under its business property damage policy for spoiled meats caused as a result of a power outage that occurred during Hurricane Hugo. The policy contained an ACC clause, but the clause itself included an express limitation stating that coverage would be provided "if loss or damage by a Covered Cause of Loss results." Id. Finding that the express limitation created an ambiguity in the policy, the Court construed it in favor of coverage, never reaching the ultimate issue of whether the ACC clause itself was enforceable. Id. No other case construing South Carolina law has come closer to addressing the issue at this time.

II. Alabama, Louisiana and Mississippi law regarding ACC clauses

A. Before Hurricane Katrina

Prior to Hurricane Katrina, the efficient proximate cause doctrine was either explicitly adopted or openly endorsed by courts in Louisiana, Mississippi and Alabama. Roach-Strayhan-Holland Post No. 20, Am. Legion Club v. Continental Ins. Co. of N.Y., 237 La. 973, 980, 112 So. 2d 680, 683 (1959) (adopting efficient proximate cause test); State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 313 (Ala. 1999) (same); and Grace v. Lititz Mut. Ins. Co., 257 So. 2d 217, 224 (Miss. 1972) (applying efficient proximate cause test as a practical matter). Moreover, Louisiana courts extended the reach of the doctrine to allow recovery for the portion of losses proven to be connected to a covered peril even if an excluded peril was the predominant cause. Milton v. Main Mut. Ins. Co. of Ill., 261 So. 2d 723, 726 (La. Ct. App. 1972); Humphrey v. Fidelity-Phenix Fire Ins. Co., 135 So. 2d 81 (La. App. 1961).

As a result of these rulings, insurers sought to clarify the coverages by engrafting ACC provisions into insurance policies. When faced with interpreting these provisions prior to Katrina, courts applying Alabama, Louisiana and Mississippi law found them unambiguous and enforceable. As such, insureds' losses were avoided when two or more perils combined to cause the losses and one of the perils was excluded. Slade, 747 So. 2d at 313-14; Prytania Park Hotel v. General Star Indemnity Co., 896 F. Supp. 618, 623-24 (E.D. La. 1995); Boteler v. State Farm Ins. Co., 876 So. 2d 1067, 1069-70 (Miss. Ct. App. 2004).

B. After Hurricane Katrina

After Katrina hit the Gulf Coast, these prior court rulings came under attack. As might be expected, courts in Mississippi and Louisiana have been particularly active in addressing insureds' complaints. While most courts have continued to acknowledge the existence of the efficient proximate cause doctrine, the application of the typical ACC clause and burden shifting rules have resulted in conflicting opinions. To date, no court has construed Alabama law with regard to ACC clauses post-Katrina. However, federal district courts and the Fifth Circuit Court of Appeals have addressed Louisiana and Mississippi law in this regard.

In order to understand the battered landscape, a short discussion of the lower court opinions first addressing this issue in the post-Katrina era is in order. In Tuepker v. State Farm Fire & Casualty Co., the Southern District of Mississippi held, among other things, that the ACC clause was ambiguous and, in the context of a hurricane, did not preclude coverage for wind damage, even if the loss was caused concurrently by water. No. 05-0559, 2006 WL 1442489, at *3-5 (S.D. Miss. May 24, 2006), interlocutory appeal granted by 2006 WL 2794773 (Sept. 27, 2006). Similarly, in Ruiz v. State Farm Fire & Casualty Co., 2007 WL 1514015 (S.D. Miss. May 21, 2007), the district court applied Mississippi law to find that the ACC clause did not clearly and unambiguously negate the broad coverages provided under the homeowner's policy.

In reaching these decisions, prior opinions of the Mississippi courts were ignored. For example, neither Tuepker nor Ruiz addressed cases such as Rhodes v. State Farm Fire & Casualty Co., 32 F. Supp. 2d 907 (S.D. Miss. 1998) (ACC clause valid) or Boteler v. State Farm Casualty Ins. Co., 876 So. 2d 1067 (Miss. Ct. App. 2004) (same). As such, these opinions appear to be in conflict with established Mississippi law.

Federal district courts construing Louisiana law also concluded that ACC clauses were invalid. For example, in In re Cameron Parrish Rita Litigation, the district court held that an ACC clause was invalid because "coverage cannot be provided by the right hand and then be excluded by the left hand." 2007 WL 2066813 (W.D. La. July 13, 2007). Finding the intent of the parties was not reflected in such a provision, the district court construed the provision against the insurer to find coverage existed even though water and wind combined to cause the loss. Id. This decision appears to be in direct conflict with Prytania Park Hotel, 896 F. Supp. at 623-24, which was not addressed in the opinion.

While in conflict with existing Mississippi and Louisiana precedent, the approach taken by the Southern District of Mississippi and Western District of Louisiana courts is not new. See Cox v. State Farm Fire & Cas. Co., 459 S.E.2d 446, 447-48 (Ga. Ct. App. 1995) (finding ACC clause ambiguous and finding coverage existed where policy excluded "earth movements" but specifically covered explosions and damages caused by explosion-induced earth movement); Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1 (W. Va. 1998) (finding ACC clause ambiguous and affirming summary judgment where fact question existed as to whether damages caused by excluded earth movement or covered negligent construction). Other state courts have also rejected the application of an ACC clause, albeit for other reasons. See Howell v. State Farm Fire & Cas. Co., 267 Cal. Rptr. 708, 712-13 (Ct. App. 1990) (contrary to statutory law); W. Nat. Mut. Ins. Co. v. Univ. of N.D., 643 N.W.2d 4, 12 (N.D. 2002) (same); Safeco Ins. Co. v. Hirschmann, 773 P.2d 413, 415 (Wa. 1989) (inapplicable where covered peril efficient proximate cause of the loss); Shelter Mut. Ins. Co. v. Maples, 309 F.3d 1068, 1071 (8th Cir. 2002) (finding ACC clause's application ambiguous and thereafter construing policy narrowly in favor of insured). As such, the reasoning of the above courts was not without support.

Not unexpectedly, the effort to allow the insureds to recover did not go unchallenged. Specifically, the Fifth Circuit Court of Appeals in Leonard v. Nationwide Mutual Insurance Co., 2007 WL 2446794 (5th Cir. Aug. 30, 2007) was asked to reverse the district court's finding that the ACC language was ambiguous under Mississippi law. The Court of Appeals held that the district court erred in finding the ACC clause ambiguous based on the plain language of the policy. Id. at *6-7. As such, the court found that the only damage recoverable under the homeowner's policy at issue was damage "caused exclusively by wind," but that if wind and water "synergistically caused the same damage," it was excluded by the policy. Id. (emphasis in original).

Based on this decision, it appears Fifth Circuit courts will enforce an anti-concurrent cause provision and deny recovery to insureds in the appropriate situation. While the decision construing Mississippi law does not directly overrule In re Cameron Parrish, which construed Louisiana law, it serves as a likely predictor of any future appeal on the same grounds in the Fifth Circuit. Consequently, despite efforts to eliminate ACC clauses by numerous plaintiffs ravaged by Hurricane Katrina, their efforts appear to have failed in the Fifth Circuit.

Though the Leonard opinion resolves the question of enforceability of ACC clauses in the context of hurricane-related claims, it leaves other questions unanswered. For example, who bears the burden of proving whether the loss was caused by a covered or non-covered peril? To date, the Gulf Coast courts addressing this issue have held the insured has the initial obligation to bring itself within policy coverage. See, e.g., Broussard v. State Farm, 2007 WL 2264535 (E.D. La. Aug. 2, 2007). If that occurs, the obligation to prove the existence of an exclusion then falls to the insurer. Id. However, Mississippi and Louisiana law appear to differ on the ultimate responsibility for apportioning damages. Compare Broussard, 2007 WL 2264535 (applying Louisiana law and finding burden is on insured to prove damages covered by covered peril) with Broussard v. State Farm, 2007 WL 1438792 (S.D. Miss. May 11, 2007) (holding that to avoid coverage, insurer is obligated to prove the damage allocated to an excluded peril.)

While the allocation of responsibility may seem of little importance, if the anti-concurrent cause provision is applied, the task of allocating a loss to wind only can be difficult and expensive. Thus, the party assuming the duty may have a harder time carrying its burden of excluding damage or allowing recovery. Therefore, as the present situation in the Fifth Circuit is in flux, parties in Gulf Coast litigation are faced with uncertainty as to the ultimate duty to prove damages, and resolution of this issue will require further court action.

III. Implications for South Carolina law

What do the above decisions mean for South Carolina? Certainly, legal decisions addressing the enforceability and effects of water damage exclusions and ACC clauses in wind and hail policies are just beginning to emerge from the Gulf Coast states. All of the cases from this region discussed in this article likely will be (or have been) scrutinized on appeal. As there are many other theories of recovery (and reasons for denial of recovery) that have not yet presented themselves for substantive resolution, any prediction as to how the cases discussed here might impact decisions in South Carolina must be continually reassessed.

Nonetheless, the groundswell of post-Katrina legal opinion appears to favor enforcement of ACC clauses. See Leonard, 2007 WL 2446794, at *10; see also Michael C. Philips & Lisa L. Coplen, Concurrent Causation Versus Efficient Proximate Cause in First-Party Property Insurance Coverage Analysis, The Brief, Winter 2007, at 35-39 tbl. 1. Thus, if South Carolina were to adopt this approach, ACC clauses should be enforced absent any ambiguity in the ACC clause itself. See Brooklyn Bridge, 309 S.C. at 145, 420 S.E.2d at 513.

If ACC clauses are found enforceable in South Carolina, the question of who bears the burden to prove whether damage is caused exclusively by a covered peril or concurrently with an excluded peril becomes crucial. There is support in South Carolina both for the approach adopted by the Southern District of Mississippi (which found that Mississippi law places the onus on the insurer and adjuster to investigate and allocate damage) and that of the Eastern District of Louisiana (which found that, under Louisiana law, the insured must allocate losses to a covered event). Specifically, the Fourth Circuit in Ivey suggested that, under South Carolina law, the plaintiff bears the burden of showing what part of the loss was caused by wind instead of by water. 250 F.2d at 111. However, in King, the S.C. Court of Appeals approved of the burden shifting framework advocated by the Mississippi District Court and placed more duties on the insurer. 278 S.C. at 413, 297 S.E.2d at 638.

Thus, at the present time, it is unclear which entity would have the obligation to apportion damages if an ACC clause were enforced. Due to this uncertainty, until the South Carolina courts speak on the issue, both the insured and the insurer should fully analyze and attempt to prove the cause of the damage.

IV. Conclusion

Katrina-related litigation has answered some questions and created others with regard to ACC clauses. The Leonard opinion establishes that ACC clauses are enforceable under Mississippi law, at least in the federal courts of the Fifth Circuit. Questions remain, however, about whether the insurer or the insured bears the burden of proving whether damage was caused by a covered or excluded peril.

While it is unclear how South Carolina courts will address these same issues in the event of a hurricane, it is likely the courts' consideration of Katrina litigation will play a significant role in how the courts will rule. In the interim, South Carolina law has its own assortment of established law and unanswered questions. For example, it is established in South Carolina that coverage exists where a covered peril is the efficient proximate cause of the loss. Once an insured can show that a covered peril proximately caused a loss, an insured may recover the total losses.

On the other hand, South Carolina courts have not addressed the issue of whether an unambiguously drafted ACC clause may be enforced to circumvent the efficient proximate cause doctrine. Certainly, enforcement of an unambiguous ACC clause follows the approach of an overwhelming majority of jurisdictions. However, as shown by the post-Katrina cases discussed above, exclusionary or limiting policy terms may be subject to attack as being ambiguous. While it is more likely ACC will be enforced in South Carolina, a careful review of policies and provisions is needed with particular attention paid to the decisions rendered by the Gulf Coast states in the aftermath of Katrina. Though case law from these jurisdictions is not binding on South Carolina courts and remains volatile, it is currently the best predictor available of how South Carolina courts may rule on these same issues.

Howard A. VanDine III is a partner at Nelson Mullins Riley & Scarborough. Erik T. Norton is an associate at the firm. Both are based in Columbia.