To the dismay of most New York business owners who suffered property damage from Superstorm Sandy, insurers are taking the position that only flood losses occurred and businesses that did not pay an additional premium for flood coverage are not covered.
Because of this hard-line position, policyholders without flood coverage need to consider whether losses can be claimed under other policy provisions, such as service interruption, wind, civil authority or other situations. Ultimately, the language of the policy, the particular facts and circumstances surrounding the loss and the law of the relevant jurisdiction will control.
Concurrent Causes of Loss
Superstorm Sandy caused a variety of losses. Some were by wind, some by flood and some by service interruptions and other nonphysical losses (e.g., the inability to access property due to civil authority and ingress/egress limitations). As a result, many losses may involve two causes -- one covered and the other excluded -- with both contributing to a single loss or causing the policyholder to suffer separate losses. For example, suppose a policy covers losses caused by wind, but excludes losses caused by flood. If wind blows down a business’s door, allowing water to enter its basement and forcing the business to shut down, is the resulting business interruption considered covered loss from wind or an excluded loss from flood?
Many courts apply what is known as the “efficient proximate cause test” in evaluating whether coverage exists in this type of situation. Under this test, the loss will be covered if the “dominant and efficient” cause of the loss is a covered cause of loss.1 The dominant and efficient cause of the loss is defined as the one that sets the others in motion. Applying this test to the above hypothetical situation, the dominant and efficient cause of the loss would be wind since that is the initial cause that set the other cause—flood water entering the basement—in motion. Had the wind not blown down the door, the water never would have entered the building.
The upshot of the efficient proximate cause test is that some businesses that do not have flood insurance may still be entitled to coverage, even if the loss or damage was caused in part by flood -- as long as the flood was not the dominant cause.
But Watch Out for Anti-Concurrent Causation Language …
Most insurers seek to avoid the efficient proximate cause test by including anticoncurrent causation (“ACC”) clauses in their policies. These clauses typically appear in a preamble to the exclusions section of the policy and are intended to bar coverage when an excluded cause of loss contributes in any way, even in an insignificant way, to the resulting loss. ACC clauses typically state:
We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another peril or event contributed concurrently or in any sequence to cause the loss.
New York courts have held that ACC clauses are enforceable and will preclude coverage, where their language is clear and unambiguous.2 The courts have reasoned that if the parties’ intent to override the efficient proximate cause test is evident from the terms of the policy, the courts should not intervene and undermine the parties’ clear intent.
Returning to the earlier hypothetical situation, if a policy contained an ACC clause, the insurer would likely take the position that the business is not entitled to coverage. The insurer would argue that recovering under the policy is precluded even though the principal cause of the loss (wind) was a covered cause of loss, since an excluded cause (flood) partially contributed to the loss. If the ACC clause at issue was clear and unambiguous, a court might be receptive to this argument. Therefore, ACC clauses have the potential to seriously hinder policyholders’ efforts to recover for damages caused by Superstorm Sandy.
… Even if Your Policy Has ACC Language, All Hope Is Not Necessarily Lost
To be sure, broadly drafted ACC clauses are bad news for policyholders. But even if a policy includes such a clause, all hope is not necessarily lost. Most courts will only enforce ACC clauses if they are drafted in clear and unambiguous terms that a reasonable policyholder could easily understand. Where they are not, most jurisdictions interpret ambiguities against the insurer and in favor of coverage.
For example, in Molycorp, Inc. v. Aetna Casualty & Surety Co., a New York appellate court found an ACC clause ambiguous, and accordingly refused to enforce it, because it did not make unmistakably clear the parties’ intent to deny coverage in every situation in which an excluded peril contributed to the loss.3 The clause in that case was buried deep within the policy’s exclusions section and provided that the loss would be excluded if it “was caused by, resulted from, contributed to, or aggravated by [an excluded cause].”4
Similarly, in Leonard v. Nationwide Mutual Insurance Co.,5 a federal court found an ACC clause unenforceable which provided that “[w]e do not cover loss to any property resulting directly or indirectly from [flood]. Such a loss is excluded even if another [insured] peril or event contributed concurrently or in any sequence to cause the loss.”6 The court reasoned that permitting the insurer to deny coverage based on this ACC language would have defeated the reasonable expectations of the policyholder and led to an unconscionable result: “an insured whose dwelling lost its roof in high winds and at the same time suffered an incursion of even an inch of water could recover nothing under [its] policy.”7
As demonstrated by Molycorp and Leonard, if an insurer drafts an ACC clause in vague and imprecise terms or buries it deep within a confusing section the policy, it could be unenforceable. In addition, if an ACC clause would undermine the policyholder’s reasonable expectations in purchasing all-risk coverage, a court may construe it narrowly and in favor of coverage. In short, although ACC clauses are enforceable in most states, they are not always favored by the courts. Therefore, even if your business did not have flood insurance and your policy contains a broadly drafted ACC clause, you still may be entitled to coverage for your Sandy-related claims. It all comes down to the particular policy language and the factual circumstances surrounding the cause of your loss.
Reversing an insurer’s improper denial of a property and business interruption claim requires specialized knowledge and experience. Lowenstein Sandler’s insurance coverage lawyers have that knowledge and experience. We have spent our careers litigating coverage claims against insurance companies and helping clients negotiate insurance claims cost effectively. We have handled some of the largest property and business interruption insurance claims stemming from wide-impact disasters in the United States. And right now we are handling numerous Sandy-related claims in New York and New Jersey.