Courts around the country have struggled to apply ensuing loss provisions in insurance contracts. See generally James S. Harrington, Lessons of the San Francisco Earthquake of 1906, 37-SUM Brief 28 (2008) (discussing courts’ notorious history of misinterpreting and misunderstanding the effect of ensuing loss provisions).  This should come as no surprise.  The murky waters of semantics and causation are difficult to parse, and both are intimately intertwined with the interpretation of any ensuing loss provision.  While there are many factors to consider in applying an ensuing loss provision, this article will analyze several of the most common issues with their interpretation.

a. The Proximate Cause Rule and Ensuing Loss Provisions

One issue affecting the application of ensuing loss provisions is a jurisdiction’s position on the efficient proximate cause rule.  The efficient proximate cause rule holds that the legal cause of an event is the event’s predominant cause, which in many cases is the initial cause in a chain of events. See Graham v. Public Employees Mut. Ins. Co., 656 P.2d 1077, 1091 (Wash. 1983) (explaining that the efficient proximate cause is the predominant cause of an event).  Whether the efficient proximate cause rule has been adopted in a jurisdiction may affect how an ensuing loss provision operates.

Most jurisdictions apply the efficient proximate cause rule in the insurance context. See e.g. Julian v. Hartford Underwriters Ins. Co., 110 P.3d 903, 904 (“We have construed [California Insurance Code section 530 as incorporating into California law the efficient proximate cause doctrine, an interpretive rule for first party insurance.”); Pioneer Chlor Alkali Co., Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pennsylvania, 863 F. Supp. 1226 (D. Nev. 1994) (citing Villella v. Public Employees Mut. Ins. Co., 106 Wash.2d 806, 725 P.2d 957, 962 (1986)).  Where the efficient proximate cause rule has been adopted, a loss may be covered if the efficient proximate cause was a covered event, even if subsequent excluded events followed the covered event. See Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704. 707 (Cal. 1989).

However, in jurisdictions where the efficient proximate cause rule has been rejected, the inquiry is not a matter of locating the predominant cause. See Millar v. State Farm Fire & Cas. Co., 167 Ariz. 93, 97, 804 P.2d 822, 826 (Ct. App. 1990) (“We have never adopted the ‘efficient proximate cause’ rule. In Arizona, an insurer is permitted to limit its liability unless to do so would be inconsistent with public policy.”) (citation omitted).  In these jurisdictions, a loss is not covered merely because the predominant cause is covered; rather, if the immediate cause of a loss was an excluded event, then the loss may not be covered, regardless of predominant cause.

b. Separate and Independent Event

Another issue affecting the application of ensuing loss provisions is the separateness of the two events being considered under the ensuing loss provisions.  Because the ensuing loss provision contemplates two events—an excluded event followed by a covered event—the distinction between those events is important to define.  Ignoring the separateness of these two events permits a savvy lawyer to split an otherwise single event into two or conflate two separate events into one.

Many courts find that ensuing loss provisions only apply where there are two events that are “separate and independent” perils from each other. See Cooper v. American Family Mut. Ins. Co., 184 F.Supp.2d 960, 965 (D. Ariz. 2002); Erie Ins. Property and Casualty Co. v. Chaber, 801 S.E.2d 207, 215 (Sup. Ct. App. W.V. 2017) (“An ensuing loss provision does not serve to revive coverage for an excluded event. It simply carves out a narrow exception to the exclusion, ‘limit[ing] the scope of what is otherwise excluded under the policy.’”).  The purpose of this rule is to ensure that the ensuing loss provision operates only to reaffirm coverage for a covered loss, not to create new and additional coverage where there otherwise would be no coverage. Cooper at 964.  If there were no requirement that the two events be “separate and independent” perils, then one legally indivisible peril could be construed as two perils.  Such splicing of a single event into two events would thereby turn an otherwise excluded event into a covered event and create brand new coverage as opposed to reaffirming coverage.  This principle is demonstrated in the case Cooper v. American Family Mutual Insurance Company.

In Cooper v. American Family Mutual Insurance Company, insureds filed a claim with their homeowners insurer after experiencing a plumbing leak in their home, a covered peril, which caused mold buildup, an excluded peril. Id.  The insureds sued their insurer after the insurer refused to pay for the mold damage, citing the mold exclusion. Id. at 961.  An intervenor argued that the mold released mycotoxins, and these mycotoxins should be considered an ensuing loss under the ensuing loss provision of the policy. Id. at 964.  The court rejected this argument, reasoning that the mycotoxins could not exist without the mold and therefore, the mycotoxins were not a “separate and independent loss,” as impliedly required by the resulting loss provision’s language. Id. at 965.

Daniel Bernardone is an associate with Christian, Dichter & Sluga in Phoenix, Arizona. Mr. Bernardone practices primarily in the areas of insurance coverage and bad faith litigation, but also has experience with white collar crime.