Most commercial and residential insurance policies contain
exclusions for earth movement, flood or surface water. At first glance it may
appear clear that these policies would not cover damage from a mudslide.
However, as the recent mudslides in Santa Barbara County, California demonstrate, the answer may not be so clear.
Those mudslides, which killed more than 20 people and damaged or destroyed
hundreds of homes, followed the Thomas Fire that scorched almost three hundred thousand acres.
On January 29, 2018, the California Department of
Insurance issued a formal notice to all property and casualty insurers to remind them that they had
duty to cover the damage from the recent mudslides if it was determined that
the efficient proximate cause of the mudslides was the recent Thomas Fire. The
Notice was premised on the California Insurance Code §560’s adoption of the
efficient proximate cause doctrine for determination of coverage under first
party insurance policies. The notice also noted that California courts have
stated that the efficient proximate cause test is the “preferred method of
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.” Julian v. Hartford Underwriters
Ins. Co., 35 Cal.4th 747, 753 (2005). In Julien¸
the court recognized that when a loss was caused by a combination of covered
and excluded risks, there was only coverage when the covered risk was the
predominate or efficient proximate cause of the loss. Id. at 750. If the excluded risk was the predominate cause then
there is no coverage. Id.
The notice also cited to Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446
(1990). In Howell, the insured
claimed damage from a landslide after a severe rain. Id. at 1449. The insured’s property was situated on a steep slope,
and the vegetation had been destroyed by a fire that summer. Id. State Farm denied the claim based on
exclusions for earth movement and water damage, but in the suit, the insured
alleged that the fire was the proximate cause of the loss. Id. at 1451.
The trial court granted summary judgment in favor of State
Farm, but on appeal, the Court of Appeals held that a property insurer could
not contractually exclude coverage when a covered peril is the efficient
proximate cause even when an excluded peril contributed to or was necessary for
the loss. Id. at 1452. In doing so, the court distinguished those
situations where the covered and non-covered peril were concurrent causes with
neither being the efficient proximate cause. Id. at 1457-58. In Howell,
the insured’s consultant determined that because of the loss of vegetation on
the slopes, the soil could not withstand the severe rainfall and the landslide
occurred. Id. at 1449. The court held
that the determination of whether the fire was the efficient proximate cause of
the loss was a question of fact for the jury. Id. at 1459.
The formal notice issued by the Department of Insurance
went so far as to conclude that, based on its preliminary evaluation of the
information surrounding the mudslides, the Thomas Fire was the efficient
proximate cause of the flooding, debris flow, mudslide and other similar events
in Santa Barbara County following the fire. However, it did recognize that that
only if it was determined that the fire or another covered peril was the
efficient proximate cause would there be coverage. The notice concluded by
warning that insurers should not deny claims without undertaking a diligent
investigation into the cause of the loss.
Not surprisingly, as a result, insurers face added pressure to make coverage determinations that provide coverage for the
damage caused by the mudslides. The link between the Thomas Fire and the
mudslides has already resulted in at least one lawsuit against Southern California Edison Company. In the suit, residents
of Santa Barbara County are suing Southern California Edison alleging it was
responsible for the Thomas Fire and that the fire stripped hillsides of
vegetation that could have prevented the mudslides.
While the formal notice places insurers on notice that
there will be extra scrutiny on claims arising from the mudslides after the
Thomas Fire or any similar event in California, it doesn’t change the law in
California and it doesn’t mean insurers aren’t allowed to investigate each loss
and make a case-by-case evaluation of the efficient proximate cause of the loss.
There may be instances where the mudslide or other damage cannot be traced to
the effects of the Thomas Fire or any other covered peril. In those instances,
insurers would be free to rely on any applicable exclusions in the policy. In
the end, it is always important to make a thorough investigation of the claim
and hire experts if necessary to determine the efficient proximate cause of the
loss.
Posted by Jonathan R. McBride