Anti-Concurrent-Causation Exclusions

Hail claims lawyers need to read the Texas Supreme Court opinion styled, JAW The Point, L.L.C. v. Lexington Insurance Company. This is a 2015, opinion that is relevant to most hail damage claims, as well as lots of other claims. The case is written about in the State Bar of Texas Insurance Journal It is hard to believe that this case is the Texas Supreme Court’s first occasion to address the proper application of the so-called “anti-concurrent-causation” (the “ACC”) exclusion, which in this case bars coverage for:
loss or damage caused directly or indirectlyby any [excluded cause or event], regardless
of any other cause or event that contributes concurrently or in any sequence to the loss.
No damage claims implicate the ACC exclusion more frequently than those caused by the one-two punch of wind (usually covered) and flood (usually excluded), and in Texas,
this conundrum usually results from Gulf Coast hurricanes.
The insured, JAW the Pointe, owned an apartment complex in Galveston that was heavily damaged by Hurricane Ike in 2008. Lexington covered a number of insured properties, including JAW’s complex, under a blanket “all-risk” property policy, up to a value of $8 million. Under normal circumstances, JAW could probably have repaired the
apartments well within that limit and in addition, collected a few hundred thousand for lost profits. However, the city imposed an ordinance that repairs equaling or exceeding 50%
of market value must raise the ground level of a structure to a minimum base flood elevation, in this case, approximately three feet. Because the estimated cost to repair exceeded 50% of the market value, JAW determined that it could not simply repair the existing structures but instead had to demolish them, raise the ground elevation, and rebuild the structures at substantial additional cost. After extended discussion and negotiation, Lexington denied the claim for raising the elevation and rebuilding.
However, two facts must be noted. First, in accepting JAW’s permit application, the city agreed that the ordinance required JAW to meet the base flood elevation but did not indicate whether this requirement was due to wind or flood damage. Second, before JAW brought a coverage action, Lexington had actually paid to JAW $817,940.94, the damage amount stated in JAW’s proof of loss exclusively caused by wind.
JAW sued Lexington, eventually getting to trial only on statutory “bad-faith” claims under the Texas Insurance Code and the DTPA, for which the jury awarded over $3 million. The Houston Fourteenth Court of Appeals reversed and rendered a take-nothing judgment, concluding that the ACC exclusion barred coverage for all costs necessary to comply with the ordinance, and with that, any extra-contractual recoveries as well. The Texas Supreme Court agreed.
The parties had agreed, noted the court, that the only coverage issue was whether a covered loss caused the enforcement of the ordinance. Lexington argued that the
ACC exclusion barred coverage because the property damage triggering the ordinance was the result of both wind and flood–end of story. JAW countered that the ACC exclusion does not apply when the covered damage was sufficient to be a “separate and independent” cause of the damage. Because it had demonstrated that both wind and flood contributed to the damage, JAW argued that the burden of proof shifted to Lexington to prove that flood damage alone pushed the loss above 50% ordinance threshold.
The high court first observed that a number of courts, including the Fifth Circuit, had enforced the ACC exclusion and agreed that there is coverage when, “[t]he only species covered under [a policy with an ACC clause] is damage caused exclusively by wind. But [when] wind and water synergistically cause . . . the same damage, such damage is excluded.” Yet, the court also considered JAW’s argument that the interpretation in
Leonard contradicted Texas’s common-law concurrent-cause doctrine that when a
covered event and an excluded event “each independently” cause the loss, separate and independent causation exists, and the insurer must cover the loss.
Faced with this dilemma, the court fashioned an elegant and logical solution. First, eschewing abstract theory, the court simply asked, “what in fact triggered enforcement of
the ordinances.” The evidence clearly established that the damage triggering enforcement was the result of both wind and flood. But two important facts conclusively established that at least part of the ordinance-triggering damage was flood and flood alone, a conclusion that doomed coverage. First, JAW’s application to the city and the city’s approval contained no allocation between wind and flood damage. Second, Lexington had paid 100% of JAW’s wind-damage claim, which was an amount well below ordinance threshold. Necessarily, therefore, some of the damage triggering the ordinance was exclusively caused by flood. The court affirmed the take-nothing judgment against the insured.
This decision clarifies the relatively high burden facing an insured in these cases. When we consider, post-Katrina, post-Rita, post-Ike, the daunting task of distinguishing what
wind damage is synergistically bound with flood and what is “separate and independent,” the burden of proof becomes all important. We suggest that this decision probably gives
all ties to the insurer, even though the burden of applying an exclusion should rest with the insurer. If the insurer can show no more than the impossibility of separating wind
from flood damage, it probably then shifts to the insured to segregate wind-only damage.