Jennifer Hoffman | Zelle LLP | May 4, 2018
Mother Nature recently reminded California, as she often does, of how cruel she can be. In December 2017, the state experienced its largest wildfire in history.[1] The wildfire, known as the Thomas Fire, burned more than 281,000 acres in Southern California and destroyed more than 1,000 structures.[2] A month later, California experienced its heaviest rainfall in nearly a year.[3] Experts posit that the heavy rains, coupled with the absence of vegetation from the fires, triggered catastrophic mudflows that killed 21 people and caused significant property damage to homes and infrastructure.[4]
Insured property owners who experienced damage from the wildfire are likely covered. However, insured property owners who experienced damage as a result of the mudflows will have to wait to see how insurers respond to their claims. This is because most first party insurance policies insure against loss or damage from fire, but typically exclude earth movements such as mudflows or landslides. But if experts are correct, and the charred land did allow the mudslides to form, then the question becomes which event — fire, rain or mudflow — is to blame for the damage? To answer the question, a California court will likely apply an efficient proximate cause analysis.
California courts have long adhered to an “efficient proximate cause” analysis when determining the availability of insurance coverage in situations where more than one event has contributed to damage. Under this rule, when a loss is caused by a combination of a covered risk and a specifically excluded risk, the loss is covered only if the covered risk was the “efficient proximate cause” of the loss.[5] But what does this phrase mean? Well, at least in California, efficient proximate cause means the “most important” or “predominant” cause.[6] In other words, it does not matter if an excluded peril, such as mudflow, also contributed to the loss as long as the covered peril, such as fire, was the predominant cause of the loss.
In the aftermath of the mudflows, California’s response was twofold. First, California Insurance Commissioner Dave Jones issued a notice to insurance carriers advising them that mudflow exclusions are unenforceable if the “efficient proximate cause” of the mudslide was the wildfire. Second, the California Senate introduced a bill, SB 917, seeking to add a section to the Insurance Code regarding the efficient proximate cause doctrine and coverage for landslides.
The Jan. 29, 2018, notice from the California insurance commissioner stated, in part, that:
The California Department of Insurance (Department) is aware that homeowners’ and certain commercial property insurance policies frequently exclude losses caused by mudflow, debris flow, mudslide, landslide, or other similar events. However, 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.[7]
Not surprisingly, the commissioner’s notice does little to clarify whether insurance policies respond to the mudflow damage, since it does not make any determinative finding of fact that the wildfire was the “predominate” cause of the mudflows. This remains a determination for the factfinder. However, the notice does draw a parallel to the facts of Howell v. State Farm Fire & Casualty Co.[8]
In Howell, the insured submitted an insurance claim after heavy rains triggered a landslide that damaged its property. The insurer denied the claim based on the policy’s earth movement and water damage exclusions. At trial, the insured presented expert testimony that the landslide occurred as a result of a fire that destroyed vegetation on the slope where the landslide started. The California Court of Appeals held that where a covered peril, fire, was the efficient proximate cause of the mudslide, the policy’s earth movement exclusion was unenforceable, regardless of other contributing causes.
Similarly, the insurance commissioner indicated in his January 2018 notice there is a “substantial basis” to indicate that the Thomas Fire was the efficient proximate cause of the mudslide events that occurred in Southern California. Accordingly, he recommended that insurers undertake a diligent investigation and carefully consider the facts underlying the cause of the mudslide before denying claims.
The commissioner’s notice also pointed out that the efficient proximate cause rule is already incorporated into the California code. Specifically, Article 2 entitled “Causes of Loss,” Sections 530 and 532, state as follows:
530. An 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.
532. If 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.
These sections codify existing case law that holds the efficient proximate cause analysis to be “the preferred method for resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.”[9]
The second action taken in California in response to the mudslides was the introduction of SB 917 in the California Senate. That bill, which was passed on April 25, 2018, makes the following change to the Insurance Code, Article 2, Section 530:
530.5 If a loss or damage results from a combination of perils, one of which is a landslide, coverage shall be provided if an insured peril is the efficient proximate cause of the loss or damage.
The addition of Section 530.5 to the Insurance Code by this act does not constitute a change in, but is declaratory of, existing law.[9]
Under the newly amended wording, if an insured sustains damage from an excluded peril such as landslide or mudflow, as well as a covered peril such as wildfire. and the wildfire is the efficient proximate cause of the loss, then there is coverage for the damage. Thus, even though excluded mudflow was the immediate cause of the damage, the fire could still trigger coverage under the policy.
There is much debate among insurers and attorneys as to how the change to the California Insurance Code will affect and influence claims and insurance coverage litigation. But the amendment purports to merely reiterate what is already codified and expressed in caselaw and does not seek to change the current law. Other than trying to placate to their constituents, it is unclear what impact the change will have. And, since the amendment is specific to landslides, does this mean that the state legislature will attempt to revise the Insurance Code each time a natural disaster causes damage?
SB 917 was just passed on April 25, 2018. It is, therefore, too early to tell what the impact, if any, the amendment will have on claims. Nevertheless, insurers need to be prepared to address efficient proximate cause. In this regard, insurers’ best defense is likely to focus on the temporal and geographical factors since the California mudslides occurred weeks after the Thomas Fire and at varying distances from the insured properties at issue. With respect to those matters that end up in litigation, insurers should be prepared for inconsistent verdicts rendered by courts and juries applying the efficient proximate cause test.
[1] https://www.cbsnews.com/news/thomas-fire-now-largest-in-california-history-fire-officials-say/.
[2] http://www.fire.ca.gov/current_incidents/incidentdetails/Index/1922.
[3] https://www.dailynews.com/2018/01/10/rain-is-done-how-much-did-we-get/.
[4] https://www.washingtonpost.com/news/capital-weather-gang/wp/2018/01/10/how-the-harrowing-thomas-fire-planted-the-seed-for-californias-deadly-mudslides/.
[5] See Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 770 P.2d 704 (1989).
[6] Id.
[7] http://www.insurance.ca.gov/0400-news/0100-press-releases/2018/release012-18.cfm.
[8] 218 Cal. App. 3d 1446 (1990).
[9] Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747, 753 (2005).
[10] http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB917