As the Sandy-related insurance disputes develop along the New Jersey coast, we’re seeing what we anticipated: general liability and homeowners’ carriers are disclaiming coverage on the ground that the damage was caused by flood, and is therefore excluded. Policyholders, on the other hand, are trying to establish that a good portion of the damage wasn’t flood-related, but rather resulted from severe, sustained winds and wind-driven rain in advance of the storm surge. And here’s a twist: One policyholder that I know of sustained severe damage when a pipe under its building burst during the storm. So, what happens when there are multiple potential causes of loss that combine to cause damage?
The starting point, as always, is the policy language. Many first-party property policies contain “anti-concurrent causation” clauses. A typical anti-concurrent causation clause reads: “We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss: [flood, earth movement, etc.]” If you’re on the policyholder side and you’re faced with such a clause, you may need some engineering help to determine whether identifiable areas of damage are separately attributable to covered causes of loss (such as wind).
Putting to one side the anti-concurrent causation clause language, New Jersey follows “Appleman’s rule.” Under Appleman’s Rule, the loss is covered if a covered cause starts or ends the sequence of events leading to the loss. Let’s take a look at how this works. In Stone v. Royal Ins. Co., 211 N.J. Super. 246, 252 (App. Div. 1986), for example, the policyholders’ basement flooded as a result of a rupture in a hose that connected their sump pump to a drain. The policy covered loss due to “[a]ccidental discharge or overflow of water or steam from within a plumbing, heating or air conditioning system or from within a household appliance.” The carrier disclaimed liability under a clause that excluded “loss resulting directly or indirectly from … [w]ater damage, meaning … water below the surface of the ground …” According to the carrier, the sump pump was pumping out water that originated beneath the surface of the ground; hence, no coverage.
The Court disagreed, writing: “Here, the underground water, an excluded peril, started the loss-producing chain of causation, but the last event, the ruptured hose on the appliance, was a covered risk.” The Court therefore remanded the case to the trial court (which had granted summary judgment in favor of the carrier) for a determination of the extent of damage caused as a direct result of the ruptured hose, as distinguished from any damage caused by water seepage alone.
For a situation in which a concurrent loss-type claim was not covered, consider Brindley v. Firemen’s Ins. Co., 35 N.J.Super. 1, (App.Div. 1955). In Brindley, the policyholder owned a beachfront home in Lavallette. In November 1953, a severe windstorm took place, resulting in serious damage to the house, including shingles blown from the roof and side, a television antenna torn down, linoleum on the floors damaged by water, a storm door blown off, and sand blown high against the rear of the building, requiring its removal and causing such scaling of the exterior paint that repainting was needed. Windstorm was a covered peril under the policy; flood was not. In addition, damage to the interior of the home was not covered if caused “by water, rain, snow, sand or dust, whether driven by wind or not, unless the building covered or containing the property covered shall first sustain an actual damage to roof or walls by the direct force of wind or hail and then [the carrier] shall be liable for loss to the interior of the building or the property covered therein as may be caused by water, rain, snow, sand or dust entering the building through openings in the roof or walls made by direct action of wind or hail.” (Who writes this stuff?)
At the coverage trial, witnesses testified that the interior damage was caused by “the storm,” but did not specifically testify as to how the damage was caused. Was it caused by holes ripped into the building by the wind, and then rain entering through the holes (hence, covered)? Was it caused by flood (hence, excluded)? The trial court (this was a bench trial) apparently concluded that the damage was caused by a covered peril, but the policyholder had produced no specific evidence to allow that conclusion. Interestingly, the insurance company offered no evidence on its own case, instead simply arguing that the policyholder’s proofs were insufficient. (This was the early fifties, when trial lawyers weren’t afraid to take a position and stick to it. I can’t imagine such a thing happening in a New Jersey courtroom today.)
The appeals court reversed, writing: “[T]here is no direct evidence here to support a finding that the wind, rather than tidal or ocean water, or rain seeping through the roof or walls, caused any of the damage complained of. All of the evidence is circumstantial. Most of it is tenuous. We know from the testimony that there was unusually high water at least in the immediate vicinity of this building on the day of the storm. There is nothing shown either to support or negate the hypothesis that ocean water swept through this building. There is a distinct possibility that it did. The finder of the facts could not say, on the basis of the testimony of persons who saw the property the day after the storm or later, that the sand piled against the house, the missing storm door, or the water on the floor were not the work of high water or rain rather than wind alone… ‘it was incumbent upon [the policyholder] to establish by a fair preponderance of the evidence that the proximate cause was windstorm.’” (Citation omitted.)
From the policyholder side (and since the Brindley judges are all long gone and can’t hurt me!), I’ll say that the decision in Brindley is wrongheaded in a number of respects. The statement that “the evidence is circumstantial” is vacuous; many trials, even criminal trials using a “beyond a reasonable doubt” burden of proof, are decided based upon “circumstantial” evidence. Did the court expect the policyholder to stand in front of the house in the middle of a cyclone and take pictures? Equally vacuous is the statement that “[t]here is nothing shown either to support or negate the hypothesis that ocean water swept through this building.” The burden is on the carrier to prove the applicability of exclusions, and not on the policyholder to prove their inapplicability.
But Brindley does contain an important lesson for policyholders. Sandy claims, and any claims involving multiple causes of loss, need to be approached carefully. You have to show the finder of fact that some or all of the damage was caused by a covered peril. That may require experts, such as engineering experts – and, unfortunately, experts are expensive. And carriers know that.