High court needs to resolve insurance proximate cause issues

An insurance claim sometimes involves a loss resulting from two causes, one of which is not covered, e.g., damage caused in part by negligent construction (a covered peril) and in part by soil subsidence (an excluded peril). This dichotomy often presents a challenge. See Reichert v. State Farm Gen. Ins. Co., 212 Cal. App. 4th 1543, 1554 (2012) (causation "has bedeviled insurance law in California courts for over a hundred years since the 1906 San Francisco earthquake").

Insurance Code Sections 530 and 532 provide two standards, which are arguably inconsistent. Section 532 seems to exclude coverage for a loss which would not have occurred "but for" an excluded peril, while Section 530 seems to say coverage would exist if the insured peril was the "proximate cause" of the loss.

To reconcile this tension, courts have turned to the "efficient proximate cause" doctrine, which focuses upon the "predominating cause of the loss," i.e., the most important cause. Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 403 (1989). There must be two separate or distinct perils, each of which could have occurred independently of the other to precipitate the loss (even if each did not in fact operate independently). DeBruyn v. Superior Court, 158 Cal. App. 4th 1213, 1223 (2008).

When the efficient proximate cause is an excluded peril, there is no coverage even if a covered peril also contributed to the loss; the contrary (a covered peril is the efficient proximate cause) yields coverage even if an excluded peril also contributed.

For application of this doctrine, the efficient proximate cause need not be the initial cause, nor the last to occur. Garvey, at 412-13. While the trier of fact usually weighs in, should the facts be undisputed the determination of efficient proximate cause becomes a question of law. Mission Nat'l Ins. Co. v. Coachella Valley Water Dist., 210 Cal. App. 3d 484, 492 (1989).

The California Supreme Court last ventured into this area of the law in Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747 (2005). In evaluating the "weather conditions" clause in question, the court commented the landslide was "not an independent causal agent in the Julians' loss." That is, "but for" the rain, there would have been no residential damage. The clause's application thus did not violate Section 530, nor the efficient proximate cause doctrine. Particularly in light of the absence of contrary evidence, an insured such as the Julians should "readily grasp the difference between a loss caused by weather conditions alone and a loss caused by weather conditions that induced a landslide."

Such a clause, though, continued the court, is not enforceable to the extent it conflicts with Section 530. Nor could the efficient proximate cause doctrine avoid "inconsistent policy language." An insurer's attempt to contract around that doctrine or Section 530 would render the "terms virtually illusory." Yet, for the Julians, these standards were not relevant as their loss was "proximately caused by the peril explicitly named."

The past 10 years have seen little activity in this area of the law until Vardanyan v. AMCO Ins. Co., 243 Cal. App. 4th 779 (2015). There, AMCO's all-risk policy insured a rental home. The policy excluded loss due to "collapse other than as provided in the Other Coverage 9." The latter allowed for collapse coverage but "caused only by one or more of the following ... hidden decay ... hidden insect or vermin damage." Additionally, the policy's General Exclusions embraced "water damage ... and inadequate or defective maintenance."

To investigate the reported loss, AMCO opened up the Vardanyan home finding many problems, including sinking floors, long-term water leaks, terminate infestation and poor repairs. AMCO denied coverage.

According to Vardanyan at trial, collapse coverage could exist if the jury found that either hidden decay or hidden insect damage was the predominant cause of the loss, even if other causes contributed. AMCO disagreed, asking the trial judge for a jury instruction to the effect such coverage could not exist if any peril contributed, other than those specifically listed in Other Coverage 9. Vardanyan rejoined such an instruction violated the efficient proximate cause doctrine. The trial judge agreed with AMCO and, because the evidence showed other causes contributed to the loss, directed a verdict for AMCO.

The Court of Appeal reversed because a "reasonable insured would not anticipate that a listed, covered peril, if combined with some completely unrelated, unspecified peril, would result in an exclusion of coverage. This is particularly true when the provision is a coverage provision, not an exclusion; a reasonable insured would understand that, if one of the specified perils was the predominant or most important cause of the collapse, the loss would be covered." AMCO was attempting to enforce "illusory insurance."

AMCO's position was incorrect by seeking "to contract around" the efficient proximate cause doctrine. A new trial was accordingly needed. At any retrial, AMCO, not Vardanyan, bore the burden "to prove not just collapse, but collapse other than as provided in Other Coverage 9." That was true as AMCO sought to enforce exclusionary language.

The Vardanyan court distinguished Julian inasmuch as the Supreme Court "analyzed only the specific combination of perils before it." Notably, quoting Julian, "exclusions are unenforceable to the extent they conflict with Section 530 and the efficient proximate cause doctrine."

The court criticized Freedman v. State Farm Ins. Co., 173 Cal. App. 4th 957 (2009), for erroneously applying Julian to limit the efficient proximate cause doctrine. Julian "did not conclude that every exclusion of interaction perils in a policy is acceptable." The Freedman court "simply seemed to assume an insurance policy could exclude any combination of interacting perils."

Unless the California Supreme Court steps in, two appellate decisions are evidently in conflict with respect to certain aspects of the efficient proximate cause doctrine. So, in encountering such "concurrent causation" issues in an insurance claim, keep in mind these decisions and related arguments.