When you have a claim for property damage and you submit it to your insurance company, the response is often unsatisfactory. If there are multiple possible causes of damage, the concurrent causation doctrine is triggered. While unfamiliar to most policyholders, concurrent causation can have a huge impact on the viability of your insurance claim because it requires the “segregation” of covered and non-covered causes of loss.
Federal and Texas courts have recently recognized “substantial gaps” in the law concerning concurrent causation. The following article is intended to explain the “gaps” identified by the courts and to discuss some potential methods for dealing with these claims in the future.
Certified Questions Remain Unanswered
In first-party insurance cases, one of the most fundamental propositions is that the insured has the burden of proving the existence of a covered claim and the insurer has the burden of proving the applicability of coverage exclusions. Sounds simple enough, right? My policy covers fire, and my house burns down- I have a covered claim. My policy covers wind and hail, there is a hailstorm, and my roof is damaged- I have a covered claim. I have an All-Risks policy and some fortuitous event damages my house- I have a covered claim. If the insurer believes my fire claim is not covered because the fire was intentionally set, they have to prove it. If the insurer believes my hail claim isn’t covered because my roof was actually damaged by wear and tear instead of hail, they have to prove it.
Unfortunately, things get confusing when there is more than one possible cause of loss and the Doctrine of Concurrent Causation is implicated. When there are multiple possible causes of loss, someone has to figure out what part of the damage was caused by a covered peril and what part was caused by non-covered or excluded perils. Determining who has the burden to prove each part falls under the Concurrent Causation Doctrine – an area of first-party insurance practice that has been needlessly confusing and unclear for decades. What does “concurrent” actually mean? Is “non-covered” the same as “excluded”? If something is not “fortuitous” (like wear and tear) can it still be considered a “peril”?
In 2021, the Fifth Circuit Court of Appeals recognized substantial gaps in Texas law concerning when and how a claim becomes subject to the concurrent causation doctrine in Frymire Home Services, Inc. v. Ohio Security Ins. Co., 12 F.4th 467 (5th Cir. 2021). (“This case raises the difficult specter of whether any ‘wear and tear’ on a roof triggers the ‘concurrent cause’ scenario in building insurance cases.”) The Frymire court certified three questions to the Texas Supreme Court, but the case was settled before the questions could be answered. The Fifth Circuit tried again in 2022 when they certified the same three questions in Overstreet v. Allstate Vehicle and Property Ins. Co., 34 F.4th 496 (5th Cir. 2022). Again, the case was settled before the Texas Supreme Court could answer the questions.
Why It Matters
At first glance, the issues here may look like legal theorizing without practical consequences. In reality, these concepts will determine whether many insurance claims survive the summary judgment stage of a lawsuit. Some cases will never get off the ground because the policyholder will be faced with the expense of hiring experts who are capable of segregating damages. Even when experts are on board, segregation may be impossible, or a court may simply find the insurer’s evidence and experts to be more convincing.
As stated throughout this article, no reasonable practitioner believes that insurers should pay for damages that are not covered by an insurance policy. This article is intended to address what happens when there is evidence of covered property damage along with evidence of non-covered or excluded causes of loss.
Texas Insurance Code §554.002
Per Section 554.002, an insurer has the burden of proof concerning coverage exclusions and exceptions to coverage:
§554.002. BURDEN OF PROOF AND PLEADING In a suit to recover under an insurance or health maintenance organization contract, the insurer or health maintenance organization has the burden of proof as to any avoidance or affirmative defense that the Texas Rules of Civil Procedure require to be affirmatively pleaded. Language of exclusion in the contract or an exception to coverage claimed by the insurer or health maintenance organization constitutes an avoidance or an affirmative defense.
A thorough analysis of the history of Section 554.002 (formerly Article 21.58) can be found in the amicus brief filed on behalf of the Texas Hospital Association and others in the Overstreet v. Allstate case before the Supreme Court of Texas. The amicus brief is authored by Brenden K. McBride, Marc L. Gravely, and Jonathan C. Lisenby and it is worth reading in its entirety. The authors cogently present their argument: “Texas Courts applying faulty logic have effectively ignored [Section 554.002] and improperly shifted the burden of proof regarding exclusions back onto the insured in violation of the statute.”
As a practitioner, I have always found it counterintuitive to require a policyholder to prove that wear and tear didn’t cause a loss. It’s easy to accept that an insured must prove that a covered event happened and that damage resulted from it. But insurers have long insisted that as soon as they raise the possibility of wear and tear, the burden shifts to the insured to segregate damages. Shouldn’t the insurer have to prove that wear and tear caused some or all of the loss? Isn’t that what Section 554.002 says explicitly? What does it mean to have the burden of proof as to “language of exclusion” in the policy?
Take the example of a fire loss where the insurer denies coverage because the fire was allegedly intentionally set. The burden shifting is clear: the insured proves that a fire occurred during the policy term, thus fulfilling his burden. The burden shifts to the insurer to prove that a) the fire was intentional, and b) the insured was involved in setting it. Perhaps because there is no duty to segregate damages, the scenario seems clear and simple. The insurer either will or will not meet its burden to prove a coverage exclusion.
The concurrent causation doctrine is not so simple because the duty to segregate gets inserted into the equation even before the insurer has proven anything. Or at least that’s how insurers have argued the doctrine should be applied. If an insurer believes wear and tear caused part of the loss, shouldn’t it have the burden of proving what part of the loss was due to an excluded cause? To put it another way, shouldn’t it be the insurer’s duty to segregate damages when an excluded cause of loss is present? There is a statutory burden of proof on insurers in Section 554.002 and there is a common law duty to allocate and/or segregate damages on insureds under the concurrent causation doctrine. These duties and burdens are bound to come into conflict. Unfortunately, insurers and courts sometimes try to resolve the conflict by simply ignoring Section 554.002.
Hamilton Properties: Bad Facts Make Terrible Law for Insureds
Anyone involved in property damage coverage suits will eventually encounter Hamilton Properties, et al v. The American Ins. Co, et al, 2014 WL 3055801(N.D. Tex 2014) [1].Hamilton owned the Dallas Plaza Hotel, which was essentially abandoned at the time of the alleged covered loss in July 2009 (the “July Hailstorm”). The loss was not reported to the insurer until at least 19 months after the July Hailstorm, and possibly not until 27 months later, depending on whose facts you believe. In addition to the July Hailstorm, there were no less than six hail events between 2007 and 2011 that could have damaged the Property. That’s six hailstorms besides the one claimed by Hamilton to have caused roof damage to the hotel. These six hailstorms occurred either before or after the period covered by American Insurance Co. (“AIC”) Policy.
So, the court was faced with a roof damage claim where there were seven different hailstorms that could have caused or contributed to roof damage, with only one of those storms occurring during the applicable coverage period AND the insurer was not able to inspect the roof until after additional non-covered hailstorms had occurred. These terrible facts predictably resulted in the granting of AIC’s motion for summary judgment based on Hamilton’s inability to segregate covered hail damage from non-covered damage.
Unfortunately, the Hamilton opinion contains extra verbiage that has been used as a cudgel against policyholders for the last ten years. First, the opinion notes that there are excluded causes of loss identified in the policy (such as wear and tear, gradual deterioration, inherent vice, latent defect, etc.) and there are non-covered hail damages (i.e. hail damage that occurred outside the policy period). But the court treats excluded and non-covered causes interchangeably for the purpose of the concurrent causation doctrine, and it never mentions Section 554.002. The only duties discussed are the insured’s duty to allocate/segregate, with no discussion given to the prospect of holding the insurer to its burden to prove that wear and tear caused all or part of the roof damage.
Interestingly, Hamilton never uses the term “concurrent causation doctrine”, but it discusses burden shifting consistent with the doctrine: “As neither a prior storm nor lack of maintenance is covered by the Policy, the burden has shifted to Plaintiffs to provide evidence to allow the trier of fact to segregate covered losses from non-covered losses.” Again, the court uses this language without explicitly recognizing that the insurer had any burden to begin with. Yet, the burden has somehow “shifted” to the insured anyway.
It seems reasonable to require the insured to segregate covered hail damage from non-covered hail damage (i.e., hail damage that occurred before or after the Policy was in effect). But, requiring an insured to segregate covered hail damage from excluded wear and tear, latent defect, or inherent vice renders Section 554.002 meaningless. It says in black and white that the insurer has to prove that exclusions apply. Plus, we know that some wear and tear exists on almost all roofs or other structures that are exposed to the elements. Under the burden shifting scheme in Hamilton, every hail claim would require the insured to segregate between hail damage and wear and tear without requiring the insurer to prove anything. Understandably, insurers like this scheme, which is why (in my opinion) they don’t want the Texas Supreme Court to answer the certified questions that have been twice put before it.
Bible Baptist Church and the Sea of Obscurity
In the wake of Frymire and Overstreet, several courts have grappled with the “sea of obscurity that is the concurrent causation doctrine at the present time.” Bible Baptist Church v. Church Mutual Ins. Co., 2023 WL 1931912 at footnote 5 (N.D. Tex. 2023). In Bible Baptist [2], the court acknowledged that the Fifth Circuit’s unanswered certified questions “concerned the applicability of [the concurrent causation doctrine] to wear and tear, as well as the allocation duty of the insured.” The court analyzed the term “peril” and concluded that non-fortuitous conditions like wear and tear are not “perils.” Accordingly, the existence of wear and tear does not trigger the concurrent causation doctrine because that doctrine only applies when covered and non-covered “perils” combine to cause a loss. (“Wear and tear is present in virtually every roof. If wear and tear is a certainty, it cannot be insured against and thus is not a peril.”) Bible Baptist Church, 2023 WL 1931912 *5 (internal citations omitted).
The Court breaks the concurrent causation doctrine down into parts: the applicability clause and the allocation clause. Id. at *4. The Court also sought additional briefing from the parties on the meaning of the term “peril” and was “unpersuaded by [the] broad and all-encompassing definition” argued by the insurer. Instead, the Court favorably cited cases from other jurisdictions defining perils as “fortuitous, active, physical forces such as lightning, wind, and explosion, which bring about the loss.” Id.
Finally, the Bible Baptist opinion rejects the notion that Hamilton Properties stands for the proposition that the concurrent causation doctrine can or should be invoked because of the presence of wear and tear. Id. At *5. As the Court says, the quintessential example of concurrent causation is when there are multiple storms at play. The practical result is that an insured must segregate damages caused by different hailstorms (“perils”) but does not have to segregate wear and tear or any other excluded condition.
Conclusion
Both the Fifth Circuit and the Supreme Court of Texas seem to agree that there are gaps in concurrent causation law that require answers. When and how those answers will come remains to be seen. In the meantime, I believe attorneys for policyholders would be well-advised to emphasize Tex. Ins. Code Section 554.002 in those cases where excluded causes of loss are alleged to have caused some or all of the damages.
[1] The above cite is to the 2014 Memorandum Opinion and Order from the Northern District of Texas. The Fifth Circuit affirmed the Opinion in Hamilton Properties, et al v. American Insurance Co., et al, 643 Fed. Appx. 437 (5th Cir. 2016).
[2] The above Westlaw cite is to U.S. Magistrate Judge Lee Ann Reno’s Findings, Conclusions, and Recommendation. The District Judge issued an Order Adopting Findings, Conclusions, and Recommendations on February 10, 2023. 2023 WL 1931350.
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