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Hurricane Ian and its aftermath are wreaking havoc in the Caribbean and Florida. While the situation is developing rapidly, Ian has moved through Florida after initially making U.S. landfall as one of southwest Florida’s most intense hurricanes in history. It produced catastrophic storm surge exceeding 10 feet in certain locations, destructive winds packing maximum sustained winds of more than 140 mph and relentless rainfall.
The economic impact of the storm will be felt by businesses and individuals across Florida and the southeastern United States for some time. Many businesses have and will continue to suffer direct damage to property and lose income due to the resulting interruption of their operations, but many other businesses are also likely to lose substantial income due to evacuation orders, disruption of utility service and disruption of the operations of key suppliers or customers. Florida is home to many businesses in the real estate, retail, hospitality, senior living, distribution and entertainment sectors that may face significant exposures to their operations.
Businesses should examine their insurance policies closely and not indiscriminately accept coverage denials premised on flood exclusions, or other excluded perils.
Insurance is a key asset
As the situation begins to stabilize as best as possible after the storm and the focus turns to economic recovery, businesses will begin to examine their operations, assess their losses and look to their insurance for compensation. Many businesses and municipalities may have a valuable asset available in the form of insurance that can play an important role in helping them recover from this devastating storm. Insurance may provide coverage not only for physical damage to and loss of property, but also for financial losses arising from an inability to conduct business, either at all or at the same levels as before; the extra expenses incurred in dealing with the effects of the storm, including expenses incurred in advance to minimize or mitigate any damages and losses; and the costs incurred in quantifying the extent of the losses.
The cause of loss will be an important issue in obtaining insurance coverage. After Hurricane Harvey in Texas, Superstorm Sandy in New York and other recent hurricanes, insurers relied heavily on flood exclusions in an effort to limit their liabilities, even where wind and storm surge were significant causes of damage. Florida case law makes clear that even if damage was caused by both high winds and flooding, the damage will be covered despite the presence of a flood exclusion.
“All risk” commercial property insurance policies cover all causes of loss, unless expressly, clearly and unambiguously excluded. In cases involving multiple perils — one peril that is not excluded by the policy and one that is excluded, or in some instances subject to a sublimit — resulting in loss, courts must determine whether recovery is permissible using a causal test.
The two most common tests are known as the “efficient proximate cause rule” and the “concurrent cause rule.” The Florida Supreme Court analyzed these two tests in December 2016 in Sebo v. American House Assurance Company Inc.:
1. Efficient proximate cause rule: Provides that an insurer may only avoid coverage where it proves that an excluded peril is the “efficient proximate cause” of the loss. For example, an explosion leads to a fire that burns portions of the policyholder’s facility. If the policy excludes loss caused by explosion and does not exclude loss caused by fire, and the insurer fails to prove that the efficient proximate cause of the resulting loss was an excluded peril – here, explosion – the entire loss will be covered.
2. Concurrent cause rule: Provides that a policyholder may recover where two or more perils contribute to the loss and at least one of the causes is not excluded by the terms of the insurance policy. For example, wind and rising flood water from a hurricane both cause loss to a policyholder’s facility. If wind is not an excluded peril in the policy and loss caused by flooding is excluded, pursuant to the concurrent cause test, the loss will be covered.
The Florida Supreme Court determined that the concurrent cause doctrine applied, rejecting the Second District’s concern that “a covered peril can usually be found somewhere in the chain of causation, and to apply the concurrent causation analysis would effectively nullify all exclusions in an all-risk policy.”
Why the Florida Supreme Court got it right
While the Sebo decision is binding in Florida, other courts that have not already done so may consider adopting the Court’s reasoning:
1. Contract interpretation: Typically, ambiguities in insurance policies are interpreted against the insurer. Thus, when a loss is caused even partially by a non-excluded peril, any exclusion that the insurer advances should be interpreted against the insurer to allow for coverage. The notion of contra proferentem, or interpretation against the drafter, is more aligned with the concurrent cause doctrine. And insurers can still offer policies with clear anti-concurrent causation language to contract around this assumption.
2. Judicial economy: In many situations involving sizable damages claims, determining what is the efficient proximate cause of a loss will be litigated. Where an insurer asserts that an excluded peril caused a loss that involves both excluded and nonexcluded contributing causes, the insurer bears the burden of proving that the policyholder’s loss was caused by an excluded cause. This is an issue of fact and may result in a battle of the experts during litigation to instruct and convince a finder of fact. Using the concurrent cause rule removes this burdensome, and costly, step.
3. Public policy: Because it is consistent with the rules of contract interpretation, conserves judicial resources by reducing the likelihood and scope of coverage litigation and makes default a standard that both reduces insurers’ ability to deny coverage and eases the burden on policyholders to establish it, the concurrent cause rule is good public policy.
Despite controlling Florida case law and these well-reasoned rationales, insurers are still likely to rely on exclusionary and coverage limiting language in an effort to reduce their monetary exposure to Hurricane Ian losses. Accordingly, policyholders will be well served to keep in mind that (1) it is the insurer’s burden to prove the cause of loss and that it is excluded; and (2) state law varies on the appropriate legal test governing the applicable causation analysis. Many policyholders in Florida may benefit from the decision in Sebo to recover insurance proceeds if any one of several contributing causes of loss is not an excluded peril.
Shareen Sarwar and Amber Morris of Blank Rome contributed to this article.
Jared Zola is a New York-based partner in Blank Rome’s policyholder-only insurance recovery practice. He can be reached at firstname.lastname@example.org.
Kyle Brinkman is a Washington-based partner in the practice. He can be reached at email@example.com.
Shareen Sarwar is a Washington-based associate at Blank Rome. She can be reached at firstname.lastname@example.org.
Amber Morris is a Philadelphia-based associate at the firm. She can be reached at email@example.com.