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Texas High Court Clarifies Multiple Perils Coverage Scope

Texas Law360
May 8, 2015

By David B. Winter
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Often damage to a building or structure can be the result of multiple perils. One of the most common examples is when a windstorm causes a building to sustain both flood and wind damage. Based on the policy language at issue, there are three situations that can exist: (1) both perils are covered; (2) neither peril is covered; or (3) one is covered and the other is not. In the situations where both perils are either covered or not covered, the analysis is simple. However, when a loss involves both covered and noncovered perils, the analysis is more complex.

The first question that must be asked is whether the damage at issue can be easily attributable to a peril that caused the damage. For instance, in the instance of windstorm that causes both wind damage and flood damage, if the roof of a building is damaged and the flood water was only 3 feet deep, it is fairly safe to attribute the roof damage to being caused by wind. Similarly, most of the damage below 3 feet will likely be attributable to the flood.

The common situation that often results in disputes between insureds and their insurance carriers is when two perils (one covered and one not) jointly contribute to the damage.

Common Law Allocation

In the absence of policy language to the contrary, many states have adopted the efficient proximate cause doctrine to determine whether the loss is covered.[1] When that doctrine applies, if the efficient proximate cause of the loss is covered, the loss is covered; if the efficient proximate cause is not covered, the loss is not covered.[2] Basically, an all-or-nothing result.

Texas courts have not adopted the efficient proximate cause doctrine. Rather, when multiple perils contribute to a loss, Texas courts apply the doctrine of concurrent causes.[3] Under that doctrine, when covered and noncovered perils contribute to a loss, “the insured is entitled to recover only that portion of the damage caused solely by the covered peril(s).”[4] In other words, under Texas law, the insured is entitled to recover the portion of the loss that is attributable to the covered peril.

The burden is on the insured to allocate between a covered and noncovered loss.[5] Failure to do so can result in a complete bar to recovery. For example, in Wallis v. United Services Automobile Ass’n, a jury found that 35 percent of the insured’s foundation damage was caused by plumbing leaks, a covered peril.[6] However, because the insured presented no evidence to allocate the damage among the various perils, the trial court determined that there was no evidence upon which the jury could have based its finding. As a result, the trial court entered a take-nothing judgment for the insurance carrier, which was affirmed on appeal.

Similarly, in Hamilton Properties v. American Insurance Co., the court granted summary judgment for the insurance carrier because the insured failed to make a showing they could allocate damages between a hailstorm occurring during the policy period and pre-existing, noncovered damage.[7]

Anti-Concurrent Causation Clause

The doctrines discussed above apply when an insurance policy is silent on how damage caused by multiple perils should be allocated. However, often insurance policies contain what is known as an anti-concurrent causation clause. Such clauses typically provide that if an excluded peril contributes in any way to damage, that damage is excluded.

On April 24, 2015, the Supreme Court of Texas addressed, for the first time, the viability of an anti-concurrent causation clause in JAW the Pointe LLC v. Lexington Insurance Co.[8] In that case, JAW owned an apartment complex that sustained both wind damage (a covered peril) and flood damage (an excluded peril) as a result of Hurricane Ike. After Lexington’s consultant allocated the extent of damage due to wind versus flood, Lexington paid JAW for the wind damage.

Due to the extent of damage at issue, JAW was required to bring the building up to the current code requirements, which included raising the building 3 feet. To do so, JAW was going to have to completely demolish and rebuild the buildings — a cost of over $6 million. During the permit application process, JAW simply submitted an estimate for the repair cost without a breakdown for damage caused by wind versus damage caused by flood. Similarly, the city’s notification that JAW had to bring the building into compliance with existing codes did not segregate the damage caused by wind versus flood.

When JAW submitted a claim to Lexington for the cost to bring the building up to code, Lexington advised JAW that it would not pay for flood damage or the cost to comply with the city ordinances because the enforcement of those codes was the result of the flood damage.

On appeal to the Supreme Court of Texas, the issue was whether the policy’s Ordinance or Law Coverage provision or Demolition and Increased Cost of Construction provision provided coverage for the cost JAW had to incur to comply with the city’s code requirements. The parties agreed that those provisions only apply when “a covered loss causes the enforcement of the law or ordinance.”[9]

To determine whether a covered loss caused the enforcement of the city’s code requirements, the court noted that the evidence conclusively established that the building sustained both wind and flood damage and that the city based its decision to enforce the ordinance on the combined total of the two.[10]

Lexington argued that in light of the policy’s anti-concurrent causation clause, since the flood damage contributed to the city’s determination to enforce the code, those costs are excluded. The clause at issue stated that Lexington “will not pay for loss or damage caused directly or indirectly by [flood]. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”

JAW argued that application of the anti-concurrent causation clause would conflict with the common law concurrent causation doctrine. However, the court found JAW’s claim is governed by the terms of the policy and that the concurrent causation doctrine is limited to cases where the policies did not include a similar clause.[11] Accordingly, the court concluded:

To determine coverage under the policy, we look first to “the language of the policy because we presume parties intend what the words of their contract say.” The clause included in Lexington’s policy provides that Lexington will not pay for any loss resulting “directly or indirectly” from an excluded peril, regardless of whether a covered peril contributes “concurrently or in any sequence” to the loss. Under this language, if the covered wind damage and the excluded flood damage contributed to cause the enforcement of the city ordinances, then the policy excludes coverage.[12]

Since the evidence presented established that the city’s determination to enforce the code was the result of combined flood and wind damage, the court found that there was no coverage for the cost to comply with the city’s code requirements.

The Supreme Court of Texas described the ultimate holding from this case by quoting from case law from the Fifth Circuit on the topic:

The Fifth Circuit in particular has had the opportunity to develop case law on anti-concurrent causation clauses in situations involving combinations of covered wind damage and excluded flood damage, and has concluded that “[t]he only species covered under [a policy with an anti-concurrent causation clause] is damage caused exclusively by wind. But [when] wind and water synergistically cause[ ] the same damage, such damage is excluded.” We agree with the Fifth Circuit that, under Texas law, the anti-concurrent-causation clause and the exclusion for losses caused by flood, “read together, exclude from coverage any damage caused by a combination of wind and water.”[13]

Although the JAW case dealt with the common example of wind and flood, the holding in this case can be applied to any case where an anti-concurrent causation provision is present.

—By David B. Winter, Zelle Hofmann Voelbel & Mason LLP

David Winter is a senior associate in Zelle Hofmann Voelbel & Mason's Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See, e.g., Fidelity Co-op. Bank v. Nova Cas. Co., 726 F.3d 31 (1st Cir. 2013) (applying Massachusetts law); Kula v. State Farm Fire & Cas. Co., 212 A.D.2d 16, 628 N.Y.S.2d 988, 991 (N.Y. App. Div. 1995) (“The efficient proximate cause of a loss is the cause that originally sets other events in motion.”); State Farm Fire & Cas. Co. v. Von Der Lieth, 54 Cal.3d 1123, 2 Cal.Rptr.2d 183, 820 P.2d 285 (1991).

[2] Von Der Lieth, 54 Cal.3d at 1131-32, 2 Cal.Rptr.2d at 189, 820 P.2d at 291.

[3] Wallis v. United Servs. Auto. Ass’n, 2 S.W.3d 300 (Tex.App.‑San Antonio 1999, writ denied); Travelers Indem. Co. v. McKillip, 469 S.W.2d 160, 163 (Tex. 1971); Paulson v. Fire Ins. Exch., 393 S.W.2d 316, 319 (Tex.1965); Warrilow v. Norrell, 791 S.W.2d 515, 527 (Tex.App.—Corpus Christi 1989, writ denied).

[4] Wallis, 2 S.W.3d at 304.

[5] Lyons v. Millers Cas. Ins. Co. of Tex., 866 S.W.2d 597, 606 (Tex. 1993) (“When covered and excluded perils combine to cause an injury, the insured must present some evidence affording the jury a reasonable basis on which to allocate the damage.”) (citing Paulson v. Fire Ins. Exch., 393 S.W.2d 316, 319 (Tex.1965)).

[6] Wallis, 2 S.W.3d at 304.

[7] C.A. No. 3:12-CV-5046-B, *4-*7 (N.D. Tex. July 7, 2014).

[8] — S.W.3d — (Tex. Apr. 24, 2015).

[9] Id. at *7

[10] Id. at *8.

[11] Id.

[12] Id. (quoting Gilbert Tex. Constr. LP v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010). Other internal citations omitted.

[13] Id. (quoting Leonard v. Nationwide Mut. Ins. Co., 499 F.3d 419, 429–31 (5th Cir.2007) (interpreting Mississippi law)).

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