Last Friday, Texas’ highest court unanimously endorsed lower court and federal court decisions giving effect to anti-concurrent causation (ACC) clauses and held that such provisions bar coverage where a combination of an excluded peril and an included peril operate together to cause the loss. In JAW The Pointe, LLC v. Lexington Ins. Co., 2015 WL 1870054, 2015 Tex. LEXIS 343 (Tex., Apr. 24, 2015), that meant that the insured could not recover where flood and wind damage triggered the enforcement of city ordinances even though the covered wind damage component was arguably sufficient in and of itself to cause the loss.
The policyholder owned The Pointe Apartments – a complex in Galveston, Texas that was heavily damaged when Hurricane Ike came ashore on September 13, 2008. Lexington afforded the primary layer of property insurance protection under a $25 million all-risk contract of insurance that covered dozens of local apartment complexes. Wind was not an excluded peril, and Lexington paid its building consultant’s estimate ($1,278,000) for the wind damage in full.
Galveston City ordinances required that any complexes that were “substantially damaged” – meaning that they sustained damage equal to or exceeding 50% of market value – be raised to a base flood elevation, however, and raising The Pointe 3’ was not feasible. After the policyholder submitted a repair permit application with a repair estimate of $6,256,887, which was well in excess of the city-determined market value of $2,247,924, Galveston notified the insured that it had determined that the ordinances had been triggered, and the policyholder elected to demolish and rebuild the apartments.
The contract of insurance contained both ordinance or law and demolition and increased cost of construction coverage, but it excluded loss by flood, and the exclusion was prefaced by ACC language. That recited that Lexington would not pay for “loss or damage caused directly or indirectly by” flood and that “[s]uch loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” Neither the insured’s repair estimate nor the city’s notice segregated wind damage and flood damage, and Lexington’s own flood damage estimate was $3.5 million.
Lexington denied the demolition and reconstruction claim, and the insured brought suit. The trial court found in favor of the policyholder, but the court of appeals set that aside and rendered a take-nothing judgment for the carrier. An appeal to the Texas Supreme Court followed.
On April 24th, the high court affirmed in an opinion by Justice Jeffrey Boyd. The court noted that it had yet to address ACC clauses, and it then adopted the Fifth Circuit’s holding that in a policy that excludes flood, such provisions bar coverage for any damage caused by a combination of wind and water. It also rejected the insured’s attempts to invoke the common law concurrent causation doctrine which establishes that under a contract of insurance without an ACC clause, when a covered event (wind) and excluded event (flood) each are independently sufficient to cause the loss, the insurer must provide coverage despite the exclusion. According to the court, the presence of an ACC clause trumped that argument and rendered it inapplicable.
Justice Boyd also discounted the insured’s argument that the wind damage alone was sufficient to cause the enforcement of the city ordinances because he held that the record demonstrated otherwise. As his opinion explained, “the relevant inquiry is what in fact triggered enforcement of the ordinances, not what in theory was sufficient to do so.” Neither the insured (in its repair estimate) nor the city (in its notice) had differentiated between wind and water damage. As a result, the court held that the record showed “that the city relied on the combined total of wind damage and flood damage in its decision to enforce the ordinances.” It therefore concluded that Lexington had sustained its burden of proving that the policy’s ACC clause excluded coverage for the losses that the policyholder incurred in complying with Galveston’s ordinances.