Most commercial and residential insurance policies contain exclusions for earth movement, flood or surface water. At first glance it may appear clear that these policies would not cover damage from a mudslide. However, as the recent mudslides in Santa Barbara County, California demonstrate, the answer may not be so clear. Those mudslides, which killed more than 20 people and damaged or destroyed hundreds of homes, followed the Thomas Fire that scorched almost three hundred thousand acres.
On January 29, 2018, the California Department of Insurance issued a formal notice to all property and casualty insurers to remind them that they had duty to cover the damage from the recent mudslides if it was determined that the efficient proximate cause of the mudslides was the recent Thomas Fire. The Notice was premised on the California Insurance Code §560’s adoption of the efficient proximate cause doctrine for determination of coverage under first party insurance policies. The notice also noted that California courts have stated that the efficient proximate cause test is the “preferred method of resolving first party insurance disputes involving losses caused by multiple risks or perils, at least one of which is covered by insurance and one of which is not.” Julian v. Hartford Underwriters Ins. Co., 35 Cal.4th 747, 753 (2005). In Julien¸ the court recognized that when a loss was caused by a combination of covered and excluded risks, there was only coverage when the covered risk was the predominate or efficient proximate cause of the loss. Id. at 750. If the excluded risk was the predominate cause then there is no coverage. Id.
The notice also cited to Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446 (1990). In Howell, the insured claimed damage from a landslide after a severe rain. Id. at 1449. The insured’s property was situated on a steep slope, and the vegetation had been destroyed by a fire that summer. Id. State Farm denied the claim based on exclusions for earth movement and water damage, but in the suit, the insured alleged that the fire was the proximate cause of the loss. Id. at 1451.
The trial court granted summary judgment in favor of State Farm, but on appeal, the Court of Appeals held that a property insurer could not contractually exclude coverage when a covered peril is the efficient proximate cause even when an excluded peril contributed to or was necessary for the loss. Id. at 1452. In doing so, the court distinguished those situations where the covered and non-covered peril were concurrent causes with neither being the efficient proximate cause. Id. at 1457-58. In Howell, the insured’s consultant determined that because of the loss of vegetation on the slopes, the soil could not withstand the severe rainfall and the landslide occurred. Id. at 1449. The court held that the determination of whether the fire was the efficient proximate cause of the loss was a question of fact for the jury. Id. at 1459.
The formal notice issued by the Department of Insurance went so far as to conclude that, based on its preliminary evaluation of the information surrounding the mudslides, the Thomas Fire was the efficient proximate cause of the flooding, debris flow, mudslide and other similar events in Santa Barbara County following the fire. However, it did recognize that that only if it was determined that the fire or another covered peril was the efficient proximate cause would there be coverage. The notice concluded by warning that insurers should not deny claims without undertaking a diligent investigation into the cause of the loss.
Not surprisingly, as a result, insurers face added pressure to make coverage determinations that provide coverage for the damage caused by the mudslides. The link between the Thomas Fire and the mudslides has already resulted in at least one lawsuit against Southern California Edison Company. In the suit, residents of Santa Barbara County are suing Southern California Edison alleging it was responsible for the Thomas Fire and that the fire stripped hillsides of vegetation that could have prevented the mudslides.
While the formal notice places insurers on notice that there will be extra scrutiny on claims arising from the mudslides after the Thomas Fire or any similar event in California, it doesn’t change the law in California and it doesn’t mean insurers aren’t allowed to investigate each loss and make a case-by-case evaluation of the efficient proximate cause of the loss. There may be instances where the mudslide or other damage cannot be traced to the effects of the Thomas Fire or any other covered peril. In those instances, insurers would be free to rely on any applicable exclusions in the policy. In the end, it is always important to make a thorough investigation of the claim and hire experts if necessary to determine the efficient proximate cause of the loss.
