Hurricane Ian and its aftermath wreak havoc in the Caribbean and Florida. While the situation is evolving rapidly, Ian has moved through Florida after first making landfall in the United States as one of Southwest Florida’s most intense hurricanes on record. It produced catastrophic storm surges exceeding 10 feet in some 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 property damage and lost revenue due to business interruptions, but many other businesses are also likely to lose significant revenue due to evacuation orders, utility outages and business interruptions. key suppliers or customers. Florida is home to many companies in the real estate, retail, hospitality, senior living, distribution and entertainment sectors that may face significant exposures to their operations.
Companies should review their policies carefully and not indiscriminately accept denials of coverage based on flood exclusions or other excluded perils.
Insurance is an important asset
As the situation begins to stabilize as much as possible after the storm and the focus turns to economic recovery, companies will begin to examine their operations, assess their losses and ensure that their insurance policies are covered. 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 can provide coverage not only for physical damage to and loss of property, but also for financial losses arising from the inability to conduct business, either at all or at the same levels as before; the additional expenses incurred to deal with the effects of the storm, including expenses incurred in advance to minimize or mitigate any damages and losses; and the costs of quantifying the extent of the losses.
The cause of the damage will be an important issue in obtaining insurance coverage. After Hurricane Harvey in Texas, Superstorm Sandy in New York and other recent hurricanes, insurance companies relied heavily on flood exclusions in an attempt to limit their liability, even where wind and storm surge were significant causes of damage. Florida case law makes it clear that even if the damage was caused by both high winds and flooding, the damage will be covered despite the existence of a flood exclusion.
“All risk”; commercial property insurance covers all causes of damage, unless expressly, clearly and unequivocally excluded. In cases involving multiple perils—one peril not excluded by the policy and one that is excluded, or in some cases covered by a sublimit—resulting in loss, courts must determine whether recovery is permissible using a causation test.
The two most common tests are known as the “effective proximate cause rule” and the “concurrent cause rule.” The Florida Supreme Court analyzed these two tests in December 2016 Cebu v. American House Assurance Company Inc.:
1. Effective Proximate Cause Rule: Ensures that an insurer may avoid coverage only if it proves that an excluded peril is the “effective proximate cause” of the loss. For example, an explosion leads to a fire that burns up parts of the policyholder’s facility. If the policy excludes loss caused by explosion and does not exclude damage caused by fire, and the insurer cannot prove that the effective proximate cause of the resulting damage was an excluded peril – here explosion – the entire damage is covered.
2. Concurrent Cause Rule: Provides that a policyholder can recover if two or more perils contribute to the injury and at least one of the causes is not excluded by the terms of the policy. For example, both wind and rising floodwaters from a hurricane cause a loss to a policyholder’s facility. If wind is not an excluded peril in the policy and loss caused by flood is excluded, under the concurrent cause test, the loss will be compensated.
The Florida Supreme Court held that the doctrine of concurrent causation applied, rejecting the Second District’s concern that “a covered peril can usually be found somewhere in the chain of causation, and applying the concurrent causation analysis would effectively nullify all exclusions in an all-perils policy.”
Why the Florida Supreme Court got it right
While Cebu decision is binding in Florida, other courts that have not already done so may consider adopting the court’s reasoning:
1. Contract interpretation: Usually, ambiguities in insurance policies are interpreted against the insurer. Thus, when a loss is caused even in part by a non-excluded peril, any exclusion advanced by the insurer should be construed against the insurer to enable coverage. The perception of versus proferentem, or interpretation against the author, is more in line with the doctrine of concurrent cause. And insurers can still offer policies with clear anti-concurrent causation language to cower around this assumption.
2. Legal economics: In many situations involving significant tort claims, determining what is the effective proximate cause of a loss will be brought. If an insurer alleges that an excluded peril caused an injury involving both excluded and non-excluded contributing causes, the insurer bears the burden of proving that the policyholder’s injury was caused by an excluded cause. This is a question of fact and can result in a battle between the experts during litigation to instruct and convince a fact finder. Using the concurrent cause rule removes this burdensome and costly step.
3. Public order: Because it is consistent with the rules of contract interpretation, it 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 the concurrent cause rule is good public policy.
Despite controlling Florida case law and these well-reasoned reasons, insurers will likely still rely on exclusionary and coverage-limiting language in an effort to reduce their monetary exposure to Hurricane Ian losses. Accordingly, policyholders will be prepared to remember that (1) it is the insurer’s burden to prove the cause of the loss and its exclusion; and (2) state laws vary on the appropriate legal test governing the applicable causation analysis. Many policyholders in Florida can benefit from the decision in Cebu to recover insurance proceeds if one of several contributory causes of injury 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 contributor 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.