Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Probably the strongest evidence of this storm’s damage is in the San Pedro area, where the roadway collapsed in a landslide into the ocean. Although this was an area of concern before the rainstorm, it was certainly driveable before Sunday. Thankfully, no homes were lost, but now the nearby houses along the cliffside may be geologically compromised.

With winter and additional rainstorms, there comes the possibility of landslides. Despite these worries, the threat of another major earthquake is California’s most dangerous and costly potential natural disaster. If you believe the statistics, a large quake occurs once every twenty years, so we are overdue for another large quake. Our last big earthquake in Southern California was the 1994 Northridge Quake, which caused about $20 billion in damage.

In California, earthquake insurance is not a covered risk under a general “All Risk” policy. In fact, earthquakes are specifically excluded under most property insurance policies. See California Insurance Code § 10088. To have insurance coverage for earthquake related damage, a separate policy must be purchased. These earthquake insurance policies can be costly. Thankfully for homeowners, earthquake coverage must be offered at the time of purchase of residential property insurance or at least within sixty (60) days of the purchase. Earthquake insurance must also be offered every other year upon renewal of a homeowners policy. With residential properties, an insurer must offer earthquake coverage to a homeowner or forego insuring the property altogether. See Williams v. State Farm Fire & Casualty Company (1990) 216 Cal.App.3d 1540, 1545.

Although many insureds wish to forego the extra expense of earthquake coverage, it should be noted that the insurance company insuring your home must offer the coverage and the failure to offer earthquake insurance coverage may give insureds who suffer earthquake losses a possibility to recover from an insurer who failed to comply with the insurance code and applicable Act. See Jacobellis v. State Farm Fire & Casualty Company (9th Cir. 1997) 120 F. 3d 171, 173,-174. Jacobellis implies that a private right of action exists because otherwise the Insurance Code Statues could not be enforced.

With the statistics indicating a large earthquake will hit Southern California, it’s time for insureds to examine their policies to see if their earthquake insurance is adequate or determine whether they should be purchasing earthquake insurance if they don’t already have it.

The loss in progress doctrine essentially stands for the premise that losses which have already commenced, but are not necessarily known, prior to the effective date of the insurance policy will not be covered under all-risk policies. While this too, is a fairly simple concept, it does raise questions about how to define a loss which has already commenced.

Take, for example, Leafland Group II v. Insurance Co. of North America, 881 P. 2d 26 (N.M. 1994). Leafland purchased an apartment complex in 1983 that had been built in the early to mid 1970’s. Of course, Leafland insured the complex with a comprehensive all-risk policy. Several years later, Leafland received a hazardous substance survey showing the existence of asbestos in the buildings. Leafland later had an appraisal report which showed that the value of the complex had diminished significantly due to the now known presence of asbestos. Subsequently, Leafland filed an insurance claim, but it was denied.

During litigation, Leafland maintained that it was entitled to coverage under the policy because such a cause of loss was not specifically excluded in the insurance policy. The court disagreed:

Leafland argues that the loss of value due to the presence of asbestos should be covered under the property coverage section of the policy because the policy was a comprehensive ‘all-risk’ policy that did not specifically exclude coverage for diminution in value caused by the installation of asbestos…Leafland can point to no event that happened during the time the policy was in effect that caused direct loss or damage to its property. Rather, Leafland is claiming coverage under the…policy due to the discovery of an undisclosed problem with the property that was present at the time of purchase and was subsequently found to have diminished the property’s value.

The court further supported its reasoning by explaning that,

All-risks” insurance coverage, such as the coverage at issue in the instant case, does not protect against losses that are certain to happen….A related principle is that “all-risks” insurance does not cover loss for events that occur prior to issuance of the policy. In this case, the underlying problem causing the diminution in property value – the use of asbestos in constructing the buildings – was present long before Leafland acquired the property. The presence of asbestos had, in effect, already diminished the value of the property before Leafland purchased the property and bought insurance…even though the presence of asbestos remained undetected for some time after Leafland bough the property. In other words, the diminution in property value was discovered, but not cause, during the time the policy was in effect. Because the claimed loss occurred prior to the time the insurance was purchased, the concept of risk that is inherent in all policies of insurance is lacking.

The Supreme Court of New Mexico clearly sided with the insurance company, reasoning that the loss caused by the presence of asbestos was a “loss in progress” at the time Leafland purchased insurance. Keep in mind that the laws in different states will vary.

For example, in David Danzeisen Realty Corp. v. Continental Ins. Co., 170 A.D. 2d 432, 565 N.Y.S. 2d 223 (1991), the roof of a building owned by the insured began to slide, and the insured to submitted a claim to its insurance company. The insurance company denied coverage, “contending that the loss was not fortuitous because it was caused by the plaintiff’s failure to adequately repair the roof following the fire [two years earlier].”

In determining whether this loss was fortuitous, the court first defined a fortuitous loss: “A fortuitous event is any occurrence or failure to occur which is…to a substantial extent beyond the control of either party.”

The insured did suffer roof damage due to a fire two years prior to this claim and hired a roofing company to repair the damage. As the court recognized,

“The [insured] did not have any expertise in this area, and therefore relied upon [the roofing company] to do whatever was necessary to properly complete the job….Thus, the loss was to a substantial extent beyond [the insured’s] control.”

Interestingly, the court held that even though the roof repairs were done under the insured’s watch, the fact that the insured hired a licensed professional to make the necessary repairs was enough to make the subsequent damage substantially beyond the insured’s control.

The insurance company also argued that the insured was negligent for failing to ensure that the proper repairs were made, but the court held, “[m]ere negligence of an insured is not a defense to coverage under an ‘all risk’ policy.” This goes to show that a loss can be fortuitous in some circumstances even when the insured was negligent.

Keep in mind that this case applied New York law and the law in other states may vary.

As illustrated in Sentinel Management Co. v. New Hampshire Ins. Co., 563 N.W. 2d 296 (Minn. App. 1997), courts typically focus on the fortuity of the loss or damage actually suffered, rather than the fortuity of the cause of or the acts leading to the loss. In this case, an apartment complex suffered damage due to asbestos contamination of the buildings. The court, in making its determination as to whether or not the loss was fortuitous, first discussed what function an all-risk policy serves. Specifically, it stated that,

Generally, an ‘all-risk’ insurance policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an ‘all-risk’ policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

Although the insurance company argued that asbestos contamination was not fortuitous because the release of asbestos fibers through ordinary wear and tear was certain to occur, the court disagreed:

An occurrence is fortuitous if the outcome of the event is not known in advance by the insured. This element of risk is central to insurance contracts because one cannot insure against a certainty….A loss caused by a pre-existing defect is fortuitous so long as neither party knew of the defect or expected the loss.

The court further determined that,

The eventual contamination of Sentinel’s buildings was inevitable, due to the presence of asbestos-containing materials. However, it is undisputed on the record before us that neither party was aware that asbestos fibers were being released in the buildings or that the buildings were suffering damage as a result. Thus, so far as all parties were concerned, asbestos contamination was a risk inherent in owning twenty-year-old buildings, but it was not a certainty. Under these circumstances, Sentinel’s asbestos contamination constitutes a fortuitous loss because Sentinel was unaware of the asbestos damage when the insurer’s policy went into effect.

The court reached this conclusion even though the events leading to the release of the asbestos were normal residential and building maintenance activities – clearly not fortuitous acts. This is a good illustration of how courts look at whether the loss was fortuitous, not whether the acts leading to the loss were fortuitous.

Keep in mind that this court applied Minnesota law, and laws vary in different states.

Next week, I will take another look at the fortuity doctrine. Stay tuned.

Experts and courts agree that the very nature of insurance implicitly creates the requirement that a loss is accidental or by chance in order to be a covered loss under an insurance policy. Courts have explained that it is against public policy to allow an insured to collect insurance proceeds for a known or expected loss. Consequently, the fortuity doctrine could create a basis for insurance companies to deny coverage in first-party insurance claims. To be clear though, it is the loss that must be fortuitous and not the event leading to the loss. As stated by Michal A. Hamilton in Introduction to Property Insurance (Insurance Law: Understanding the ABCs, 673 PLI/Lit 155):

To qualify as fortuitous, the loss or damage – rather than the acts causing the loss or damage – must be unexpected at the time the policy is issued. In addition, the loss must be caused by a chance event beyond the insured’s control. Consequently, the fortuity doctrine should prelude coverage for a claim where the evidence establishes that: (1) at the time the policy was issued, the insured reasonably foresaw the loss or damage it sustained; and (2) the insured failed to take action, knowing that such inaction might predictably result in loss or damage.

Put another way, a loss is fortuitous if it:

[R]esulted from a ‘risk,’ as contrasted with being an ordinary and almost certain consequence of the inherent qualities and intended use of the property.

30 A.L.R. 5th 170 §3.

Now that I have explained the fortuity doctrine, next week I will explain how courts apply the fortuity doctrine to specific sets of circumstances.

One of the most basic requirements – other than proving an insurance policy was in place – is to show that the damage suffered is covered by the policy. Most courts agree that the burden is on the policyholder to prove a loss is within the scope of the insuring agreement. However, once that burden is met, the burden shifts to the insurer to show that an exclusion applies or that the policyholder failed to comply with a policy requirement.

Another basic requirement is that the damage or loss be physical in nature -- there must be some physical change to the insured property. While this may seem straightforward at first glance, interesting issues may arise.

Take, for example, Fujii v. State Farm Fire & Cas. Co., 71 Wash. App. 248 (1993). In this case, heavy rainfall caused a landslide near the Fujii’s home. The landslide caused continued instability of the slope on which the Fujii’s home was built, so they filed a claim under their homeowners insurance policy. State Farm denied coverage because no direct physical loss had occurred to the dwelling. Experts from both sides agreed that physical damage was imminent, but that no damage to the house, itself, had occurred.

The court stated,

It is undisputed that there was no discernable physical damage to the dwelling during the effective period of the policy….Under the plain terms of the policy, coverage was triggered by direct physical loss to the dwelling….Therefore, because the covered dwelling did not sustain a direct physical loss during the effective period of the policy, the trial court correctly granted summary judgment to State Farm.

Unfortunately, this put the Fujiis in a bad situation. They had just changed insurance carriers and due to the fortuity doctrine, which states that insurance companies should not be held liable for known losses, expected or intended losses, or losses that are certain to occur, they may not be able to recover from their current insurance provider as well.

The fortuity doctrine is the basis of many legal issues, and I will delve into it more next week. Stay tuned.

Generally, “inherent vice” implies that no external or extraneous peril caused the loss; rather, the loss or damage results from the internal composition of the property, or some aspect of the property that brings about its own destruction. See Harmon v. Safeco Insurance Co. of North America, 24 Kan. App. 2d 810, 954 P. 2d 7, 10 (1998). “Latent defect,” on the other hand, generally refers to a defect not readily observable or discoverable upon reasonable inspection. See Board of Education of Maine Township High School Dist. 207 v. International Insurance Co., 292 Ill. App. 3d 14, 684 N.E. 2d 978, 990, app. Denied, 175 Ill. 2d 523, 689 N.E. 2d 1137 (1997).

Of course, even those definitions are subject to interpretation. A good illustration of a latent defect can be found in Acme Galvanizing Co., Inc. v. Fireman’s Fund Insurance Co., 221 Cal. App. 3d 170, 270 Cal. Rptr. 405 (1990). There, a steel kettle at one of Acme’s plants ruptured, allowing several tons of molten zinc to spill onto surrounding equipment. Acme’s insurance claim was denied by Fireman’s on the ground that the loss was caused by a latent defect or inherent vice and was excluded.

During the investigation of the claim, Acme had an expert examine the kettle. The expert ultimately opined:

I believe that the kettle failure was principally due to poor welding techniques. The weld is just not adequate for the service intended.

Fireman’s concluded that the policy exclusion for “inherent vice and latent defect” applied and their report further explained:

In conclusion, the inadequate weld seam was an internal characteristic of the kettle which was not readily detectable upon reasonable inspection. In support of this conclusion, we observe that the defect could only be found by [your expert] after destructive testing was performed.

The court, after looking at conflicting case law and California’s Code of Civil Procedure, held that

[a] latent deficiency [i]s one which is not apparent by reasonable inspection….Here, Acme’s expert established…that the kettle rupture was caused by inadequate welding due to a defective design of the welding. The expert was able to reach this conclusion only after examining an assembly drawing of the kettle, and stated that further analysis could be made by radiographic and ultrasonic testing. We conclude such evidence establishes the welding defect was not apparent upon reasonable inspection, but was a latent defect, as a matter of law….To hold the reverse would be to render the phrase ‘latent defect’ meaningless and to transmute the insurance policy into a type of warranty.

While this case is a good illustration of one court’s interpretation of the term latent defect, California courts changed the test in a later case. No longer is a latent defect simply one that is not apparent upon reasonable inspection. Instead,

A latent defect is one which is both not readily observable and not discoverable to any but the most searching examination.

Keep in mind that these cases mentioned apply the law of their respective states, and that laws in other states may vary. Stay tuned for another edition of Deconstructing the All-Risk Policy.

In Henri’s Food Products v. Home Insurance Co., 474 F. Supp. 889 (E.D. Wis. 1979), a warehouse owner ran into a contamination problem. The warehouse stored many items, from food products to chemicals. The Food & Drug Administration (FDA) conducted several tests on the products kept in the warehouse and determined that some of the food products had a chemical residue on them. Further tests showed that some of the chemicals kept within the warehouse had vaporized and permeated the warehouse.

The insurance policy stated,

Perils Insured Against…Smoke, meaning thereby only sudden and accidental discharge of smoke from other than industrial operations or agricultural smudging.

There was no argument that the chemical vapors were due to industrial operations or agricultural smudging, and as the Court pointed out,

The issue [was] whether vapor is within the common meaning of the word smoke.

Much like the case in last week’s blog, this court was unable to find any law on which to base its definition of “smoke,” so it turned to the dictionary.

Based upon this research and the Court’s own understanding of the word “smoke,” plaintiff’s suggestion that the vapor involved here was smoke, and thus within the policy coverage, must be accepted.

The warehouse owner prevailed, but this case, together with my blog from last week, illustrates how differently courts can rule. As always, keep in mind that this court applied Wisconsin law and the laws in other states may vary. Check back next week for another breakdown of the All-Risk Policy.

One common issue that arises when this exclusion becomes relevant is how to define smoke, vapors or smog. Does the term smoke include harmful vapors? Do vapors differ from smoke, especially if they cannot be seen? A clear illustration of this is found in K & Lee Corp. v. Scottsdale Insurance Co., 769 F. Supp 870 (E.D. Pa. 1991).

In this case, employees of a wholesale grocery warehouse noticed a chemical smell and a chemical substance dripping from the floor above which was not under their control. Much of the inventory was destroyed by this chemical contamination and the grocery warehouse filed an insurance claim. The policy specifically stated that smoke damage was covered. However, the issue for the court was:

Whether coverage for ‘smoke’ damage encompasses contamination by chemical vapors.

Because it was unable to find any case law to provide direction on how to interpret the term “smoke,” the court turned to the dictionary and stated,

While smoke may result from some chemical reactions, the common usage of the term refers to the products of combustion and, more importantly, to matter that is visible.

Unfortunately for the grocery warehouse, the chemical vapors were invisible, so the court denied coverage for the claim.

Invisible chemical vapor is not ordinarily and commonly understood to be ‘smoke.’

Not all courts have reached the same conclusion. Laws vary in different jurisdictions. Next week, I will discuss a case that found vaporized chemicals fit within the definition of smoke.

As one court put it,

The purpose of the standard wear and tear exclusions in an All-Risk policy is to remove from coverage the repair and replacement of property that deteriorates or has defects occurring over time.

Commonwealth Ins. Co. v. Stone Container Corp., 2002 WL 31833862 at *6 (N.D. Ill. 2002).

The case of Murray v. State Farm Fire & Casualty Co., 219 Cal. App. 3d 58, 268 Cal. Rptr. 33 (1990), illustrates how the wear and tear exclusion works. The Murray’s discovered a crack in the foundation of their home that resulted from a broken water pipe some 23 inches below the concrete slab floor. The Murrays filed a claim with State Farm, but we unable to recover the amount of damages they felt were necessary to fix the broken pipe and cracked foundation. They filed suit, and State Farm argued the loss was not covered because the pipe broke due to deterioration. Both the Murrays’ and State Farm’s experts agreed that the pipe did deteriorate over the course of approximately a year.

The Murrays’ homeowners policy excluded coverage for the following:

e. leakage or seepage of water or steam unless sudden and accidental from a:…plumbing system, including from or around any shower stall or other shower bath installation, bath tub or other plumbing fixture. If loss is caused by water or steam not otherwise excluded, we will cover the cost of tearing our and replacing any part of the building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped.

f. wear, tear, marring, deterioration, inherent vice, latent defect, and mechanical breakdown…

As the experts agreed, the court had a fairly easy decision to make. The court noted that,

[A]ny different decision would convert their homeowners’ insurance policy into a maintenance agreement, contrary to the fundamental rule of construing insurance policies which requires that contracts of insurance…be viewed in the light of their general objects and purposes.

Keep in mind that this court applied California law in reaching its decision, and the law may differ in other jurisdictions.

In Bowers v. Farmers Insurance Exchange, 991 P. 2d 734 (Wash. Ct. App. 2000), Ms. Bowers rented her property to new tenants. Prior to the new tenants, the house was well-maintained and in good shape. A few months into the lease, the Ms. Bowers became suspicious of the activities taking place in her rental home and called the police. A marijuana grow operation had been set up in the basement. The extreme heat in the basement allowed for the rapid growth of mold throughout the house. Ms. Bowers filed a claim with her insurer. The insurance company denied the claim, reling on policy language which stated,

We do not cover direct or indirect loss from…wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, mold, wet or dry rot…

The policy did, however, provide coverage for vandalism, which was not defined. Using a definition from Webster’s Dictionary, the court ruled that the marijuana grow operation was vandalism to the house which caused the mold damage.  The court held:

When the insured can identify an insured peril as the proximate cause, there is coverage even if subsequent events in the causal chain are specifically excluded from coverage….Here, there can be no reasonable difference of opinion regarding the cause of Ms. Bowers’ loss. It was the tenants’ acts, which in an unbroken sequence produced the result for which recovery is sought. We conclude that the tenants’ acts are the efficient proximate cause of the owner’s loss.

This case highlights the importance of determining the proximate cause of mold damage to determine whether or not you have a valid claim. If a covered peril causes the mold to grow, you may be able to collect payments to repair the mold damage.

Keep in mind that the above case used Washington law, and laws vary in different states. Be sure to check in next week for another look at the all-risk policy. 

Mold exclusions often contain language like:

This policy does not apply to any loss or damage caused by or resulting from the actual or threatened existence, growth, release, transmission, migration, dispersal or exposure to mold, spores or fungus.

As phrased, this exclusion may lead one to believe that any and all damage stemming from mold would be excluded. While many times mold damage will be excluded, there may be other avenues for recovery under the policy. Before looking at those other avenues, I want to first begin with a case in which coverage was denied.

In Merrimack Mutual Fire Insurance Company v. McCaffree, 486 S.W. 2d 616 (Tex. App. 1972), the insureds faced a mold problem in their shower stall. The shower stall lacked a shower pan and consequently, the water from the shower leaked onto the wood underneath the shower stall. Of course, the water caused the wood to rot and the growth of fungus and mold. The insurance policy contained an exclusion that read:

This insurance does not cover…loss caused by inherent vice, wear and tear, deterioration, rust, rot, mold or other fungi, dampness of atmosphere, extremes of temperature, contamination, vermin, termites, moths or other insects…

The court ruled that denial of coverage was appropriate, reasoning that “since the damage or deterioration to the property was admittedly directly caused by fungi, and to some extent by termites, such would bring it clearly within the exclusion of the contract.”

The court based its decision largely on the fact that mold – along with termites – was the direct, or proximate, cause of damage. Keep in mind, though, that this case applied Texas law and that the laws are different in every state.

Mold exclusions are relatively straightforward, but many of you may be wondering what happens when mold damage is the result of some other damage. Great question. The answer is: It depends – if the “other damage” is a covered peril, then the policyholder may be in luck. Next week I will write about a case that found mold damage was covered even though the policy at issue contained a mold exclusion.

When purchasing an all-risk policy, understand that you almost certainly will not be covered for every possible loss. In fact, as I alluded last week, there are always exclusions contained within an all-risk policy which limit the instances in which you may recover damages from your insurance company. As one court put it,

The label ‘all risk’ is essentially a misnomer. All risk policies are not ‘all loss’ policies; all risk policies…contain express written exclusions and implied exceptions which have been developed by the courts over the years…. In a nutshell, a policy of insurance insuring against ‘all risks’ is to be considered as creating a special type of insurance extending to risks not usually contemplated, and recovery will usually be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding loss from coverage. Ariston Airline & Catering Supply Co., Inc. v. Forbes, 511 A. 2d 1278, 1282 (N.J. Super Ct. Law Div. 1986) (internal citations omitted).

The Third Circuit of the United States Court of Appeals stated,

The term ‘all-risk’ has been said to be somewhat misleading. ‘All-risk’ is not synonymous with ‘all loss.’ Indeed, the question of ‘loss’ and ‘risk’ are separate and distinct….Under an ‘all-risk’ policy, the only questions which need to be answered…are whether the plaintiff has suffered a loss and, if so, whether such loss is excluded from coverage under the policy. Intermetal Mexicana, S.A. v. Insurance Co. of North America, 866 F. 2d 71, 75 (3d Cir. 1989) (internal citations omitted).

Be sure to understand that even though a policy may be sold as an “all-risk” policy, there are exclusions that may preclude recovery. This highlights the importance of reading each line of your policy so that you completely understand what losses are not covered.

Next week I will begin my discussion of specific exclusions. Stay tuned!

According to Murphy, Downs, and Levin in Property Insurance Litigator’s Handbook:

An Extended Coverage Endorsement added coverage for windstorm, hail explosion, riot, civil commotion, aircraft, vehicles, and smoke. Yet another, the Additional Extended Coverage Endorsement, which carried a fifty-dollar deductible, could be purchased to add coverage for accidental discharge of water, vandalism, ice, snow, freezing, fall of trees, and collapse.

Around the same time, consumers were finally able to purchase coverage for contents of their homes and additional living expenses. Perhaps the most important changes, however, were yet to come. Murphy, Downs, and Levin wrote,

The 1950’s brought two very important developments: the multi-line dwelling policy and the “all risk” policy. New legislation permitted insurers to underwrite risks for both property and liability exposures. Consequently, insurers began experimenting with multiple line policies that provided “all risk” coverage for dwellings and “comprehensive personal liability coverage.” These early all risk policies typically excluded loss by war, earthquake, flood, faulty workmanship, and wear and tear type losses.

The next round of significant changes came in the late 1970’s with the advent of the ‘Easy to Read Policy.’ Consumer activists, regulators, and legislators sought a change from the standard fire policy. They argued that the standard policy’s print was too small, that the format was confusing, and that the language was stilted, archaic, and ambiguous….In response, underwriters developed Easy to Read policies. These policies packaged everything neatly into the basic layout and format still in use today.

While these developments helped make policies easier to understand, as many of you know all to well, ambiguities still occur.

In the coming weeks, I will break down some of the most common exclusions to all risk policies. Tune in next week.

Leonard E. Murphy, Andrew B. Downs, and Jay M. Levin edited the Property Insurance Litigator’s Handbook, which gives a great synopsis of the evolution of property insurance. They explained:

Property insurance finds its roots in fire insurance. The business of underwriting the risk of loss by fire originated in England in the late 1600s. After the great fire of London in 1666, a doctor and builder began insuring newly constructed buildings against loss by fire.

These early policies, first replicated in the United States in the mid-1700s, only covered damage to the building caused by fire. Personal property inside the building and other perils, such as windstorms and accidental discharge of water, were not covered. While consumer demand would lead to coverage for additional perils, both insurance companies and insureds were more immediately concerned about creating uniformity among insurance policies and making them easier to understand. Murphy, Downs and Levin wrote:

Beginning in the late 1800s, the industry, along with others including the National Association of Insurance Commissioners, began developing a standard fire insurance policy. After decades of various efforts including variations of a standard form, most states settled on the New York Standard Fire Policy. This standardized policy contains a mere 165 lines of text. In many states, this form still establishes the minimum coverage required to be provided by property insurers.

Soon thereafter, consumers demanded coverage for additional perils. Next week, I will write about how additional perils were added to the standard fire policy and, in subsequent weeks, discuss some of the most common exclusions from “all risk” policies. Stay tuned.

Policyholders are sometimes faced with the option of purchasing an “All Risk” insurance policy that would, by its name, suggest that it covers all risks. In his book Delay Deny Defend, author, professor and expert Jay M. Feinman writes about how an “All Risk” insurance policy does not necessarily cover all risks:

In the insurance business, all risks does not mean all risks, the presence of a hurricane deductible does not mean that damage caused by a hurricane above the deductible amount is covered, and even if damage is caused by a risk covered by the policy, it may not be covered. Under an all-risk policy an insurance company does not cover damage from any source. In its underwriting, the company determines that risks of a certain kind are too great to be covered under the standard premium, or perhaps to be covered at all, so it excludes them from coverage with special provisions.

As an example, Mr. Feinman uses a standard homeowner’s insurance policy, commonly referred to as the HO-3. The HO-3 usually has nine different types of exclusion such as the following:

• Damage caused by earth movement;
• Power failure;
• War;
• Nuclear Hazard;
• Loss caused by freezing of a plumbing system;
• Loss caused by settling;
• Loss caused by smog; and/or
• Loss caused by birds, vermin, rodents or insects.

Naturally, an insurance policy that is called an “All Risk” policy but does not actually cover all risks because exclusions preclude coverage for many different types of risks might be at odds with a homeowner’s expectation of coverage. Such a name might be considered by some to be misleading. A policyholder might think this misrepresentation – an “all Risk” policy that does not cover all risks -- could be grounds for a bad faith claim against the insurer. However, as Mr. Feinman explains in his book, courts have allowed insurance companies to sell “All Risk” policies that do not cover all risks under one condition:

What the insurance company gives it can only take away if it does so specifically and unambiguously in the policy. This is an application of the ancient maxim of interpretation know in lawyer’s Latin as contra proferentem, interpreting a documents “against the one who proffers” it: Because the drafter of a document is in the best position to write it in a way that says what it means, he should suffer the consequences if it is not clear. Thus “all risks” includes all risks except to the extent that certain risks have been specifically excluded.

For homeowners shopping for the right policy for their property, it is important to keep in mind that although an “All Risk” policy grants broad coverage, the exclusions take away some of that coverage. It is imperative for homeowners review the proposed policy and all of its exclusions and endorsements so that the homeowner has a fair understanding of what is covered and what is not covered. This might help fend off unpleasant surprises if the homeowner suffers a loss that is not covered.

For more of Mr. Feinman’s evaluation of “All Risk” policies and other important topics that play an important role in today’s insurance industry, please refer to his book Delay Deny Defend.

I. The Burdens

Historically in Texas, the insured bore the burden to prove that the loss was excluded. See Lyons v. Millers Cas. Ins. Co. of Texas, 866 S.W. 2d 597 (Tex. 1993); Hardware Dealers Mut. Ins. Co. v. Berglund, 393 S.W. 2d 309 (Tex. 1965); Paulson v. Fire Ins. Exchange, 393 S.W. 2d 316 (Tex. 1965). However, this all changed in 1991 when the Texas Legislature enacted Article 21.58 of the Insurance Code, which now sets the required burden of proof and pleading under insurance contracts. Article 21.58 was codified into § 554.002 of the Insurance Code in 2003, and amended in 2005 to include health maintenance organizations.

Sec. 554.002. BURDEN OF PROOF AND PLEADING. In a suit to recover under an insurance or health maintenance organization contract, the insurer or health maintenance organization has the burden of proof as to any avoidance or affirmative defense that the Texas Rules of Civil Procedure require to be affirmatively pleaded. Language of exclusion in the contract or an exception to coverage claimed by the insurer or health maintenance organization constitutes an avoidance or an affirmative defense. (Emphasis added).

The plain reading of the statue puts the burden of proof and pleading for exclusions on the insurer, and Texas courts have consistently ruled accordingly. Central Mut. Ins. Co. v. KPE Firstplace Land, LLC, 271 S.W. 3d 454, 456 (Tex. App.- Tyler 2008);Lone Star Heat Treating Co., Ltd. v. Liberty Mut. Fire Ins. Co., 233 S.W. 3d 524, 526 (Tex. App.- Houston 2007); Crocker v. American Nat. General Ins. Co., 211 S.W. 3d 928, 931 (Tex. App.- Dallas 2007); Arrellano v. State Farm Fire and Cas. Co., 191 S.W. 3d 852, 856 (Tex. App.- Houston 2006). Should there be an exception to an exclusion, the burden will shift back on the insured to prove the exception to the exclusion. Telepak v. United Services Auto. Ass’n, 887 S.W. 2d 506 (Tex. App.- San Antonio 1994, writ denied).

Furthermore, Texas Rule of Civil Procedure 94 expressly requires that an insured shall never be required to allege the double negative that a loss is not within an exception.

In pleading to a preceding pleading, a party shall set forth affirmatively accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, waiver, and any other matter constituting an avoidance or affirmative defense. Where the suit is on an insurance contract which insures against certain general hazards, but contains other provisions limiting such general liability, the party suing on such contract shall never be required to allege that the loss was not due to a risk or cause coming within any of the exceptions specified in the contract, nor shall the insurer be allowed to raise such issue unless it shall specifically allege that the loss was due to a risk or cause coming within a particular exception to the general liability; provided that nothing herein shall be construed to change the burden of proof on such issue as it now exists. (Emphasis added).

See also Venture Encoding Service, Inc. v. Atlantic Mut. Ins. Co., 107 S.W. 3d 729 (Tex. App.- Fort Worth 2003).

II. Concurrent Causation

Despite the apparent clarity of the statute and contemporary case law, some courts have held on to the traditional approach of requiring the insured to prove coverage exclusions, often when dealing with the complexities of concurrent causation. See Wallis v. United Services Auto. Ass'n, 2 S.W. 3d 300 (Tex. App.- San Antonio 1999). Some of this confusion may be attributable to the fact that the Texas Supreme Court published the case of Lyons v. Millers Cas. Ins. Co. of Texas in 1993, after the Texas Legislature enacted Article 21.58 (later § 554.002) in 1991. Although Lyons was published in 1993, that case resolved issues of law that arose when the case was heard at the appellate level in 1990, before Article 21.58 was law. This leaves the Lyons case in the same pre § 554.002 classification as the other cases that set the concurrent causation doctrine.

What is the concurrent causation doctrine? When two or more events combine to cause a loss, courts take different approaches to determine if the loss is covered under an insurance policy. Texas courts use the concurrent causation doctrine, which holds that as long as one of the causes was a covered cause of loss, the loss will be covered under the policy. In an all-risk policy, the insured would only need to prove a fortuitous loss, and the insurer would need to prove that all causes of loss are excluded under the policy. Unfortunately, coverage only gets you in the door; it doesn’t determine how much you will recover.

Many courts have been holding on to the traditional concurrent causation rules set forth in case law that predates § 554.002. Cases like Wallis almost without fail cite back to Lyons and other pre § 554.002 cases without giving any regard to the legislative intent set forth in § 554.002. Respectfully, these courts, like the one in Wallis, err in the reasoning that the doctrine of concurrent causation is not an affirmative defense or avoidance issue. On the contrary, § 554.002 expressly states that, “Language of exclusion … constitutes an avoidance or an affirmative defense.” Causation will either be (a) a covered cause of loss, or (b) an excluded cause of loss. To the extent that an insurer claims a particular cause of loss is excluded, the insurer is required by § 554.002 to prove that exclusion. In Wallis, despite the erroneous finding mentioned above, the court still determined whether the insured had met its burden of proving the loss was covered and that the insurer had proved its exclusions. At no point did the court ever expect the insured to plead and prove a double-negative -- that the exclusion did not apply. Other courts that have continued the traditional rule of requiring the insured to prove the double-negative, that a loss is not excluded, have also relied on pre § 554.002 cases to support that basis. See Travelers Personal Sec. Ins. Co. v. McClelland, 189 S.W. 3d 846 (Tex. App.- Houston 2006).

By relying on case law that predates Article 21.58 and § 554.002 and not giving due consideration to the Legislature’s clear intent to require that each party bear their own burden of proof, Texas judges have given the insurance companies an uneven playing field. There is no rational policy reason for giving insurance companies this advantage of requiring the insured to prove both coverage and lack of exceptions in concurrent causation cases, and now is the time to stop.

In the event of a sinkhole, insurance companies typically rely on the "settlement of loose, sandy soils" and "concrete shrinkage and bulging" exclusions in denying coverage. In order to prevail, the insurance company must prove that the excluded event; i.e. the settlement of loose, sandy soils and/or the shrinking or bulging of materials caused ALL of the damage to a residence.

Even if sinkhole activity is not affirmatively found in the SPT borings that are done on the property, if sinkhole activity cannot be ruled out as a cause OR contributing cause of all OR part of the damage, there is coverage for the loss. Simply stated, if sinkhole cannot be ruled out as one of the possible causes contributing to some of the damage to the house, there is coverage.

All a homeowner has to prove at trial is that there was a loss to the property during the policy period and that there was resulting damage. The homeowner does not have to prove that there is coverage; i.e. prove that there is a sinkhole on the property. Rather, the carrier has to prove that sinkhole can be ruled out completely even as a possible contributing cause to some of the damage. If the carrier cannot meet it's burden, there is coverage under the policy for the loss.

Here are sample jury instructions (click on the image to view):

The story delves right into the insurance coverage problem:

Joey Roche never set out to be a leading voice in educating homeowners on protecting their investment.

But in the more than two years since 15,000 gallons of raw sewage spewed into his newly purchased house in Oregon City, he's ended up instructing more than a few people on how to steer clear of his own fate.

"Looking back, I, of all people, should have known better," Roche said. "I'm a licensed general contractor. So I figure if this could happen to me, it could happen to anyone."

He's far from alone in assuming that the insurance policy he bought to protect his vintage 1940 house in the city's historic Canemah neighborhood would cover any contingency.

In fact, it covered almost nothing. And even the $10,000 he collected from State Farm Insurance to pay to clean up the muck came through a previous purchase of a separate endorsement -- an addition to his policy -- that if not for his contractor's background he might never have thought to ask about.
...

But whether it's a freak sewage backup, flooding, landslide or earthquake, a majority of homeowners probably assume the insurance policy they've taken out to cover such contingencies will pay off in time of need, Roche and others say.

Often, that's simply not the case.

"I get calls every single day from people who are outraged to find out that they simply aren't covered for things they thought they were," said Ron Fredrickson, who manages the Oregon Insurance Division's consumer advocacy unit. "In the end, unfortunately, there's usually not much I can do for them."

I think that State Farm agents must get some of the best "how to be likeable" training in the insurance business. I say this because as I pointed out in Is the State Farm Policy Really Worth Anything? the policy they sell does not really offer broad coverage and after all those commercials suggesting that State Farm will be there for you after the disaster, it simply is not true. Joey Roche had State Farm coverage. He got paid a fraction of his loss, but he loves his agent who sold him the coverage.

"Roche praised his State Farm agent for making good on everything the policy provided.

"Unfortunately and to our ultimate chagrin," he added, "it just didn't cover very much."

To be Fair And Balanced, standard homeowners forms, like most property forms in current use, exclude all loss "caused directly or indirectly by any of the following . . . water which backs up through sewers or drains or which overflows from a sump." Newer homeowners forms expand the exclusion to include "water-borne material which backs up through sewers and drains." It also adds "which overflows or is discharged." And, "a sump pump or related equipment" now accompanies a sump. The bottom line: most insurance companies only cover this occurrence under endorsements that offer little extra coverage.

In Rodin v. State Farm Fire & Casualty Co., 844 S.W.2d 537 (Mo. App. 1993) the insureds argued that damage done to their dwelling was caused by sewage, not by water. Tree roots in the outside sewer system caused sewage to back up into the homes of the Rodins and their neighbors. Rodin described the eight inches of effluent that entered his basement as an odorous, viscous, black liquid with solid matter floating in it. He added that the liquid definitely was not water. However, the court stated that the plaintiffs’ argument that the policy excluded only water damage overlooked the totality of the exclusion. The Court noted that the loss that would not have occurred in the absence of the water backing up through sewers or drains, regardless of other causes acting "concurrently . . . with the excluded event to produce the loss." Therefore, whether the loss was caused by water or pollutants contained in the sewage acting concurrently with water, it was excluded under State Farm's policy.

What a stinking mess and unexpected uninsured event from the policyholder's standpoint.