An Anti-Concurrent Causation Contract Clause
Michael Sean Quinn, Ph.D., J.D.,
C.P.C.U, Etc.
This is a description of the central issue in the JAW The Pointe, L.L.C. v. Lexington
Insurance Company, a case decided by the
Supreme Court of Texas on April 23, 2015(Cause Number 13-0711).* Given the context of this case, it will be of
great importance to business property insurance along the Gulf coast for years
to come. It is important not only to
insureds, courts, and lawyers, but to
brokers as well, so long as there are “concurrent causation” issues potentially
involved. (*Find-able on the website of the Texas Supreme Court and on the Internet at various places.)
This
case has been heard by a trial court and
jury, before an intermediate court of appeals, and now before the Supreme Court
of Texas. By the time it got to the Supreme Court, it was technically an insurance
bad faith case based upon Texas statutes. However, since the existence of
insurer bad faith, almost always depends on the existence of coverage, the high
Court focused on coverage. I will too, and I will be even more brief. I will leave almost all of the issues
sketched, at most, and I will refer to the insured as simply JAW; others have
referred to the entity as “The Pointe,” perhaps that brings attention to the
apartment complex that sustained the damages.
The
JAW’s apartment at issue was damaged by both flood and wind arising out
of Hurricane Ike. The apartment complex had “all risks” [1]
property insurance, and as usual subject to exclusions. It recovered
significant amounts of money from its flood insurer, from an excess carrier and Lexington—amounts already in the many
millions.
The Lexington policy,
however, also contained a special Lexington “Ordinance and Law Coverage”
endorsement, and JAW wanted compensation under it, since the City of Galveston
was requiring that the buildings of the relevant complex be torn down and
rebuilt.
The
whole Lexington policy subjected its “all [fortuitous and physical] risks”
coverage to the following exclusion:
We will not pay for loss or damage caused directly or
indirectly by any of the following. Such
loss or damage is excluded regardless of
any other cause or event that contributes
concurrently or in any sequence to the loss.
The Court states that the passage
just quoted is “at the center of the parties” dispute.
The exclusion goes on to list at
least some specifically excluded causes of loss. One of them is “flood.” No damage resulting from a flood to any extent is covered, even if there was something else
involved in the causal process. Another one is the enforcement of certain types of
ordinances or law, e.g., those “regulating construction, use and repair of any
property” and those “requiring [the] tearing down of property[.]
There
are two relevant endorsements, however. One of them is entitled “Ordinance or Law Coverage [OLC].” It states in relevant part that if a covered cause of
loss “occurs to covered building property,” Lexington will pay
“[f]or loss or damage caused by enforcement of any ordinance or law” that meets
various requirements which are relevant here but not in dispute. The most pertinent is a Galveston code requirement
that if a commercial building, including an apartment complex, has sustained
damage of 50% or more of the market value of the building, the building(s) must
be brought into compliance with current code requirements if the ordinance
requires that a building be torn down and brought up to meet specified code
requirements.
Now
we need to go back to the anti-concurrent cause exclusion. As applied in
this circumstance, it entails that if both a covered cause of loss and an
excluded cause of loss induces the City to invoke the requirements of the code,
then there is no coverage; it does not matter if a covered cause of loss
participated in damaging the property, so long as the non-covered cause of loss
was involved. In this case, the cause of loss that was not covered
was the flood waters Ike caused.
JAW spent immense
effort in arguing that since the damage caused by the winds of Ike were covered,
since that cause of loss alone might cause the building to sustain a 50%-or-more
reduction in value, and since Lexington did not prove otherwise, it (JAW) was
entitled to recover from Lexington under the OLC endorsement.
The Court rejected this view. It
branded it simply theoretical when what matters are
why did the City official, as a matter of actual empirical fact invoke the
requirements of the statute. The Court
opined that the evidence conclusively showed that the flood Ike caused played
at least some role in the decision of the city.
Once that is recognized to be true, the
case is over.
JAW
seemed to think that since Lexington paid substantial sums based on wind damage,
it was obligated to ignore the
anti-concurrent causation exclusionary clause when it came to the OLC
endorsement. JAW made two related but separable mistakes.
First,
it didn’t seem to realize that if, arising out of the same storm, wind alone caused some damages while flooding caused other damages;
then the anti-concurrent causation exclusionary rule is not triggered. Consider the following hypothetical example.
The insured’s building is five stories
tall. Suppose that water rolls into the
ground and the second floor. Suppose further that wind tears off the roof; rain
comes in; additionally, the wind breaks
some windows on floors four and five though there is no flood damage. Clearly
there is coverage for damages on floors four and five, and there is no coverage
for damages on floors one and two.
Now finally suppose that some flood
waters lapped up and through the broken windows on the south side of the
building but nothing of the sort happens on the north side. What was covered and what was not would have
to be divided up, and where the matter was indeterminable and not to be settled, a jury would have to answer.
What’s important to notice here is that that wind caused some damage, and flood
waters caused another. All this was done
separately; there is no concurrent causation problem.
Second, however, the action of the
city in invoking the ordinance is entirely different. The decision of the city is the direct cause of JAW’s loss. Unless the
city ruled that the building had to be torn down and redone, the loss at issue—the money JAW’s was going to
have to spend, having been legally ordered to spend it—there would be no loss.
The decision of the city is the cause of the loss covered by the OLC
endorsement. The question now becomes, “What
caused the city to make the decision it did?” To the extent flood, as a matter
of fact, played any role in that decision of the City, then all amounts of
money the City’s decision requires to be spent are not covered. The Court
thought that the evidence “conclusively” showed that exactly this happened. QED
[as we used to say in high school].
Closing
Remarks
The
courts says that the evidence demonstrates something conclusively. This is true if and only if the sole focus of
the Court’s attention is on the nature of basis for the City’s decision. Notice
that if that is the only issue, it does not matter whether what the government
decided was reasonable or unreasonable.
It does not even matter if the government’s decision was based on
bribery and therefore criminal.
It
must be kept in mind that Texas now has two quite distinct concurrent-causation
rules. One is for tort actions, and the other one is for contract, such as
insurance policies.
Insurers
will be attracted to using no-coverage-for-concurrently-caused-losses, where
one of the causes is excluded. This is
most obvious in damages policies where flood is one of the sources of damages,
but it can be any two or more causes of losses.
Not all insurance policies are like this, and that is an important fact.
Michael Sean Quinn, Ph.D., J.D., C.P.C.U. . .
.
The Law Firm of Michael Sean Quinn et
Quinn and Quinn
1300 West Lynn Street, Suite 208
Austin,
Texas 78703
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