By Rory Eric Jurman and Steven S. Cula
As appeared in Law360 Expert Analysis on January 31, 2017
The Supreme Court of Florida's recent decision in Sebo v. Am. Home Assurance Co.(Fla. 2016) (Sebo II) will likely have an enormous and long-lasting impact on insurance coverage in Florida. The decision effectively adopts the concurrent cause doctrine and departs from the efficient cause doctrine previously applied by some Florida courts. Sebo II will require insurers and their counsel to develop litigation strategy in accordance with the decision, for cases involving losses resulting from multiple causes.Furthermore, this newly settled Florida law should force the insurance companies to draft policies reconciling this decision.
Efficient Cause Doctrine vs. Concurrent Cause Doctrine
The efficient proximate cause doctrine focuses on the predominant cause which sets into motion the chain of events producing the loss. If the efficient proximate cause is covered by the insurance policy, then the insurer is liable for the coverage, even if that cause was not the last act in the chain of events that led to the loss. Likewise, if the cause setting into motion the chain of events producing the loss was excluded under the policy, then the policy does not cover the loss. The efficient cause doctrine favors insurers because it allows insurers to argue against coverage if the covered cause of the loss was not the predominant cause or if the policy excludes the predominant cause of the loss. For example, under a policy which provides coverage for negligent design of a house but excludes losses caused by fire, the policy would not cover the loss primarily caused by a fire even though the negligent design of the house was also a cause of the damage.
By contrast, the concurrent cause doctrine provides that if the loss was caused by one or more non excluded events in combination with one or more excluded events, then the loss is covered under the relevant policy. In other words, the policy provides coverage if a covered event occurs somewhere along the line of causation. The concurrent cause doctrine is undeniably more insured-friendly, as it provides for coverage of a loss as long as a covered cause has any part in the resulting loss. In the example above, the concurrent cause doctrine would dictate coverage for the loss caused by the fire and the negligent design of the house because the negligent design contributed to the loss,even though it was not the predominant cause of the loss and was not the cause that set in motion the loss.
Sebo I and Sebo II
In Sebo II, the Florida Supreme Court overturned the 2nd District Court of Appeal's decision (Sebo I), which had denied the application of the concurrent cause doctrine and instead applied the efficient cause doctrine. The Sebo II court reversed and opted for making the concurrent cause doctrine Florida's law. The basis of the suit was the insurer's coverage denial of the plaintiff's home, which suffered severe property damage and was subsequently demolished. The property damage was the result of multiple causes, including defective construction of the house and harsh weather from a hurricane. In keeping with the theme of this publication and as you might have predicted, one cause was covered by the insurance policy and one was not.Specifically, the "all-risk" insurance policy excluded losses caused by defective construction of the house but covered losses caused by the weather.
In Sebo I, the 2nd DCA adopted the efficient cause doctrine, explaining 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.”141 So.3d at 201. The Florida Supreme Court reversed Sebo I and instead adopted the concurrent cause doctrine. It reasoned that "there is no reasonable way to distinguish the proximate cause of Sebo's property loss — the rain and construction defects acted in concert to create the destruction of Sebo's home. As such, it would not be feasible to apply the EPC doctrine because no efficient cause can be determined." Sebo II, 2016WL 7013859 at 5. In doing so, the Florida Supreme Court effectively settled any disputes amongst the Florida District Courts of Appeal as to which test to apply in similar cases dealing with coverage for losses resulting from multiple causes.
Florida's Treatment Before Sebo II
Before Sebo II, Florida courts were split in their application of the concurrent cause doctrine or efficient cause doctrine. Florida initially applied the efficient cause doctrine after the decision in Fire Ass'n of Phila. v. Evansville Brewing Ass'n, 75 So. 196 (Fla.1917). In Evansville Brewing, the loss at issue was caused by an explosion which resulted from a fire. Since the insurance policy excluded losses caused by explosions,the insurer argued that the loss was not covered by the insurance policy. However, the Florida Supreme Court held that, under the efficient cause doctrine, the fire was the predominant cause which set in motion the events that led to the explosion and the subsequent loss. Id. That court explained that the insurance policy would not cover the loss had the explosion not been caused by the fire, but since the explosion was an incident of the fire, the fire is the proximate cause and the insurer was responsible for coverage. Id at 198. The Sebo II court explained that Evansville Brewing "drew the distinction between a covered peril setting into motion an uncovered peril and an uncovered peril setting into motion a covered peril. Coverage exists for the former but not the latter." Sebo II.
The efficient cause doctrine was followed by many Florida courts until the recent decision in Sebo II. In fact, the efficient cause doctrine was applied in Citizens Prop.Insurance Corp. v. Salkey, 190 So. 3d 1092 (Fla. 2nd DCA 2016) in February 2016, just a few months before Sebo II was decided by the Florida Supreme Court. In Salkey, the court specifically relied on Sebo I in applying the efficient cause doctrine to a dispute regarding whether property damage to plaintiffs' home was caused primarily by sinkhole activity, which was covered by the insurance policy. Id.
Similarly, in Peek v. Am. Integrity Insurance Co. of Florida, 181 So. 3d 508 (Fla. 2ndDCA 2015), the court applied the efficient cause doctrine when it held that an insurer was not liable for damage caused by the excluded cause of defective Chinese drywall,even though plaintiff presented evidence that Florida's humidity was a concurrent cause of the loss. This case demonstrates the confusion in the previous split amongst the courts regarding which of the two doctrines to apply. The parties in Peek conducted discovery and presented the case based on the concurrent cause doctrine adopted by the 3rd DCA in Wallach v. Rosenberg, 527 So.2d 1386 (Fla. 3rd DCA1988), with the belief that if humidity is proven to be a concurrent cause, then the insurer should cover the loss. However, the 2nd DCA instead applied the efficient proximate cause doctrine under the then recently decided Sebo I.
In Wallach, mentioned above, Florida's 3rd DCA employed the concurrent cause doctrine. 527 So.2d 1386. In that case, the insured suffered property damage when a sea wall surrounding their property collapsed due in part by a storm and in part by the negligence of their neighbor. The storm was not a covered cause under the policy. The court applied the concurrent cause doctrine, stating that the jury may find coverage where an insured risk constitutes a concurrent cause of the loss even where “the insured risk [is] not ... the prime or efficient cause of the accident.” Wallach v.Rosenberg, 527 So. 2d 1386, 1387 (Fla. 3rd DCA 1988) citing 11 G. Couch, Couch on Insurance 2d § 44:268 (rev. ed. 1982). As such, the court held that a jury could find coverage where the insured risk (neighbor's negligence) constitutes a concurrent cause of the loss. Id. The Florida Supreme Court agreed with the rationale in Wallach in its adoption of the concurrent cause doctrine in Sebo II.
Importance of Policy Language
The importance of policy language, which Florida law demands be construed strictly,cannot be understated in cases involving more than one cause of loss. This notion is exemplified in Empire Indem. Insurance Co. v. Winsett, 325 F. App'x 849 (11th Cir.2009). In that case, the United States Court of Appeals for the 11th Circuit, applying Florida insurance law, overturned the lower court's decision and reliance on the efficient cause doctrine. It did so, however, due to the policy language and not in order to apply the concurrent cause doctrine.
In Winsett, 56 tenants settled a lawsuit they brought against Preserve, Empire's insured,for negligence in Preserve's failure to build a vapor barrier in the building, causing mold in the tenants' homes. Empire then denied coverage to Preserve based on an exclusion for fungi or bacteria, which was another cause of the loss along with Preserve's negligence. The lower court applied the efficient cause doctrine and held that the exclusion did not apply because the negligence in failing to install the barrier was the efficient proximate cause of the loss. 325 F. App'x 849. That lower court reasoned that since the efficient proximate cause of the loss was covered, the exclusion for bacteria or fungi was inapplicable and the insurer must provide coverage.
On appeal, the 11th Circuit Court reversed under a strict interpretation of the language of the subject exclusion, which excluded injury or damage caused by bacteria or fungi"regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage." Id at 851. Therefore, the11th Circuit Court found the application of the efficient cause doctrine erroneous.Specifically, the court found that “the efficient cause doctrine cannot be incorporated into an insurance policy if doing so would render part of the policy meaningless.”Winsett, 325 F. App'x 849, 851 citing Arawak Aviation Inc. v. Indem. Insurance Co. of N.Am., 285 F.3d 954, 958 (11th Cir.2002). As a result, the court reversed the decision that insurer was liable for coverage, finding that the district court had overlooked the unambiguous policy language when it applied the efficient cause doctrine. Winsett, 325F. App'x 849.
The insurance industry refers to the type of clause in the Winsett policy exclusion as"anti-concurrent causation" clause. This clause effectively avoids the effective cause/concurrent cause issue because it provides contractual language limiting coverage if other causes are concurrent with the excluded cause. Thus, loss resulting from a combination of a covered cause and an excluded cause is excluded under the policy, as long as the exclusion includes such anti-concurrent causation language.Therefore, though Sebo II stands for Florida's adoption of the concurrent cause doctrine, a more accurate reading of the case, especially if read in conjunction with Winsett, is that it stands for the adoption of the concurrent cause doctrine if there is no anti-concurrent causation language in the subject provisions.
A comparison of Winsett and Sebo II may provide an insight into future litigation of coverage cases arising from multiple causes. At the outset, it is worthwhile to point out that both the Winsett and Sebo II courts reversed their respective lower court's application of the efficient cause doctrine, but each did so for a different reason.Namely, the Winsett court reversed the application of the efficient cause doctrine because the policy language called for it, since the subject exclusion contained anti-concurrent causation language excluding one of the causes of the loss regardless of whether any other cause contributed to the loss. 325 F. App'x 849, 851. By contrast, the Sebo II court denied the application of the efficient cause doctrine because it found the concurrent cause doctrine more appropriate. Notably, the Sebo II court was only able to do this because the exclusion which formed the basis for the insurer's denial did not have anti-concurrent causation language, which would have excluded coverage regardless of concurrent causes.
The difference in the analyses of these two cases raises an interesting question: what would have happened if the subject policy in Sebo II had similar limiting language to that in Winsett? As you may recall, the policy is Sebo II excluded losses caused by defective construction of the house but covered losses caused by the weather. Let's assume,hypothetically, that the policy in Sebo II expressly excluded losses caused by defective construction regardless of whether any other cause contributed to the loss. The result would have been that the dreaded concurrent cause/efficient cause analysis would have had no place in that litigation. Instead, the appropriate determination by the court would have been that loss caused by defective construction is not covered regardless of the weather's contribution. Whether the defective construction was the efficient proximate cause of the loss would be immaterial to this result, just as the bacteria/fungi not being the efficient proximate cause in Winsett did not affect the decision to exclude coverage based on the bacteria/fungi exclusion. The insurer in Sebo II must be kicking itself knowing that it could have, effectively, contracted out of an efficient cause/concurrent cause application had it simply added anti-concurrent causation language mirroring the language in the Winsett exclusion.
On the other hand, had the Winsett policy not contained such anti-concurrent causation language, that litigation would have called for a thorough concurrent cause/efficient cause analysis and the court's decision of which of the two standards to apply would have dictated its outcome. Specifically, had the efficient cause doctrine been applicable,the 11th Circuit would have affirmed the district court's decision that the exclusion for bacteria and fungi does not apply because the bacteria/fungi was not the efficient proximate cause of the loss. However, if the 11th Circuit had relied on the concurrent cause doctrine, the insurer would most likely have been liable for coverage. This is because the builder's negligence, a covered cause, was a concurrent cause of the loss,even though another cause (e.g. bacteria and fungi) is excluded.
Therefore, Winsett and Sebo II demonstrate not only the impact that the concurrent cause doctrine or the efficient cause doctrine may have on the outcome of a case, but also the importance of skillfully drafted policy language. Specifically, proper policy language may avoid the issue altogether.
Consequences and Potential Effect on Practice
Had the Sebo II insurer avoided the efficient cause/concurrent cause issue with the appropriate policy language, perhaps the Florida Supreme Court would not have even had the chance to adopt the concurrent cause doctrine. However, the reality is that,much to insurers' chagrin, Sebo II gave the Florida Supreme Court the opportunity to evaluate the efficient cause/concurrent cause issue and the court opted for the application of the concurrent cause doctrine. As a side note, the dissenting judge argued that this issue should not have been decided by the court in this case because it was not raised by the parties before the trial court or on appeal before the Second District. Regardless, the inquiry must now become: what are the consequences of this decision and what can insurers do about it?
First, there is no substitution for a well-crafted insurance policy. As analyzed above, the right language in the policy may avoid this issue altogether and ensure that insurers are not liable for coverage of losses that the policy did not intend to cover. As great an impact as the Sebo II decision will have in Florida insurance litigation, the reality is that insurance companies can write around it with anti-concurrent causation language. To that end, it is imperative that insurers work with competent counsel to draft and negotiate insurance policies to reflect the significance of Sebo II.
In cases that enter litigation, the litigation strategy for these types of cases in Florida needs to evolve to accommodate the adoption of the concurrent cause doctrine.Insurers previously litigating coverage in an efficient cause jurisdiction could avoid coverage by pointing to an uncovered cause as the efficient proximate cause of the loss. However, under the now statewide concurrent cause doctrine, insurers must make the case that none of the covered losses contributed to the loss. Not only does this requirement provide a higher burden of proof for coverage counsel than before, it may also demand more expenses on experts and testing. It may also lead to an increase in settlements where insurers might not have settled in an efficient cause jurisdiction. This is so because the insured now has the upper hand if any of the causes that led to the loss was covered.
As such, coverage counsel should take more proactive steps in litigation to avoid a Sebo II scenario. One effect that the Sebo II decision may have is the increase of declaratory judgment actions by insurers. Declaratory judgments can be a valuable procedure for insurers to resolve the issue of coverage and determine the insurer's duties to cover or defend under the subject policy. Declaratory judgments are especially beneficial if the insurer can achieve a determination of non-coverage while the insured's underlying action has not yet been adjudicated. A successful insurer in such a declaratory action would be relieved of its obligation to defend the underlying action and to cover damages assessed against its insured, which as analyzed above, would be covered by the policy if it is found that any of the covered causes contributed to the loss at issue. Alternatively, if the insurer is unsuccessful in its declaratory judgment action, at least it is now certain of what its rights and obligations are under the policy and can make more educated decisions, such as whether to settle the underlying claim. Despite the increased costs of litigating a separate declaratory judgment action, it may prove quite useful to insurers, especially in the wake of Sebo II, which increases the chances of coverage under certain insurance policies.
Insurers in Florida need to take Sebo II into consideration moving forward, whether it be in the drafting and negotiation of policies or in coverage litigation. The full effects of the recent Sebo II decision remain to be seen, as more issues are certain to arise in Florida cases dealing with coverage for damage arising from multiple causes. However, one thing is certain, this decision cannot be ignored.