Insurance Policies Cover the “Efficient Proximate Cause” of Property Damage

A week ago, law professor Kenneth Klein wrote a Los Angeles Times op-ed saying that Montecito residents should not expect their homeowners insurance to cover flood and mudslide damage. He argued that policy exclusions likely preclude recovery. I challenged that assertion in a letter to the editor, arguing that where there are multiple, different causes of property damage (both insured and uninsured), the “efficient proximate cause” triggers coverage.

In a series of articles published here, I will address important legal issues relevant to Montecito insureds. I will do my best to present the disputes objectively, weighing the best arguments from each side. This first article is about the issue of causation and homeowners insurance coverage for debris flow damage.

Montecito presents an interesting situation, because it is not entirely clear what caused the recent property damage and who bears liability for the loss. Within two months, Montecito experienced record fires, debris flows, flooding, mudslides, earth movement, and more. Homeowners and their insurers may not know how to determine what damage is covered. Fortunately, California courts have addressed similar situations before.

In Howell v. State Farm, the California Court of Appeal reached a decision that clarified decades of disagreement on causation and insurance coverage. Barbara Howell owned a 17-acre parcel of land in the slopes of Lafayette, California. Summer wildfires destroyed hillside vegetation, denuding the slopes and making it prone to mudslides. When heavy rainfall occurred in the winter, a major landslide destroyed Ms. Howell’s property. Although her insurance policy specifically excluded coverage for loss caused by “Earth Movement” and “Water Damage,” the court declined to apply the policy language. Instead, the court held that whether the loss is covered is a question of fact to be determined by a jury applying “efficient proximate cause” analysis.

The result in Howell emerged from tangled roots in Californian jurisprudence. In 1963, the California Supreme Court reached a landmark decision in Sabella v. Wisler. The insurance policy at issue excluded coverage for property damage caused by foundation settlement, but provided coverage for damage caused by negligence. When water escaped from a negligently installed sewer pipe, it caused the home’s foundation to settle. The insurer argued that it was not liable because California Insurance Code §532 precluded liability. According to State Farm, the loss would not have occurred “but for” an excluded peril (foundation settlement).

The Supreme Court rejected this argument, holding that Section 532 had to be read in conjunction with Section 530, which says an insurer is liable when a covered peril proximately causes property damage. When there’s a concurrence of different causes, the efficient cause – the one that “sets others in motion” – is the cause to which the loss is to be attributed.

Subsequent cases applying Sabella affirmed the “efficient proximate cause” rule. In Sauer v. General Insurance, the Court of Appeal held that “efficient proximate cause” applies even to an insurance policy that specifically excludes liability for certain perils. The Sauer decision made it unlawful for insurance companies to use exclusionary provisions to contract their way out of liability when an “efficient proximate cause” is insured.

In Gillis v. Sun Insurance, the appellate court applied Sabella-Sauer analysis in a coverage dispute over a damaged dock. The policy at issue covered property damage from wind but not water. During a storm, intense wind lifted a gangway into the air and smashed it into a dock, causing it to sink in the water, where it was torn apart by waves. The court reasoned that although water damaged the dock, the fact that wind “was the start of a chain of events” meant that Sabella-Sauer analysis governed the dispute, while the exclusionary policy language did not.

In Montecito, the community is being divided on this issue. Some homeowners are facing a legal battle with their insurers over whether the Thomas Fire was the efficient proximate cause of the debris flow. Other homeowners are fortunate to have an insurer that concedes the point. On Thursday, January 25, State Farm publicly announced that in Montecito the “predominant cause of the debris flow was a recent wildfire.” AIG will reportedly make a similar announcement soon. For those insured by other carriers, this could be a major issue.

State Senator Hannah-Beth Jackson added her voice to the fight by introducing a bill clarifying what the law is. In short, when a covered peril (such as a wildfire) sets in motion a noncovered peril (such as a mudslide), the resulting property damage is covered. By now, there should be a consensus on what the law says. However, the jury is still out on whether the Thomas Fire is, in fact, the efficient proximate cause of recent property loss. 

Announcements from State Farm and AIG give credence to the idea that homeowners should be covered, but many Montecito homeowners will have to wait and see if their insurers put up a fight.