DARLENE ALT, a partner in the insurance and reinsurance department of the Providence, R.I., office of Edwards Angell Palmer & Dodge who represents defendants in mass tort, insurance and product liability litigation; JAMES KILLELEA, an associate in the insurance and reinsurance department of the New York; and NATHAN HULL, an associate in the insurance and reinsurance department of the London office
In the aftermath of the Japan earthquake and tsunami, U.S. and U.K. insurers will likely face a host of claims from companies seeking to recover lost business income caused by the severe disruption to Japanese supply links. This comes as no surprise given Japan's worldwide prominence in supplying electronic, automotive and other component parts. Contingent business interruption (CBI) coverage will be the focus of these claims as it indemnifies an insured for economic losses incurred when its third-party suppliers' ability to supply component parts is disrupted.
CBI coverage in the wake of the Japanese disaster raises a number of causation issues. In particular, coverage for physical damage caused by an earthquake or flood is often excluded from CBI coverage, while other causes, such as fire and explosions, are not. These causes are often intertwined or concurrent in the wake of a natural disaster.
As U.S. law has evolved in addressing these causation issues, anti-concurrent causation (ACC) clauses now appear in many contingent business interruption policies. These clauses may significantly limit coverage of CBI claims arising out of Japanese supply chain interruptions because they generally bar coverage whenever the physical damage is caused--even in part--by an excluded peril. Because jurisdictions differ on the causation theory they employ in analyzing these issues and the enforcement of ACC provisions in particular, it is important to understand how these provisions are interpreted and their potential impact on CBI claims.
THE CAUSATION DOCTRINES
Under U.S. laws, the prevailing approach for analyzing causation issues has been the efficient proximate cause (EPC) doctrine. Under this doctrine, recovery is generally permitted when a covered risk and an excluded risk combine to cause a loss if the covered risk was the "efficient proximate." Depending upon the jurisdiction, the efficient proximate cause may be defined as the "predominant" or most important cause in the chain of events, or the "prime" or "moving" cause of the loss. While the doctrine applies where multiple causes occur in a causal chain, it generally does not apply where completely independent causes simultaneously produce an indivisible loss.
To address this situation, a number of U.S. courts have adopted the concurrent causation doctrine. This doctrine expanded coverage so that a loss would be wholly covered as long as at least one cause, whether independent or dependent, meaningfully contributed to the loss and was a covered peril.
English courts also apply proximate cause principles when determining recovery for damage or loss. Under English law, proximate cause has been described as the "real", "dominate" or "efficient" cause, and is determined by applying "common-sense standards." Where there are two or more concurrent proximate causes, coverage for the resulting damage or loss depends on whether one of the causes is excluded as opposed to merely uninsured. If one of the causes is excluded, the exclusion prevails, thereby barring coverage for the resulting damage or loss. If one of the causes is uninsured, coverage is still available for any damage or loss resulting from the insured cause.
The foregoing analysis, however, has arguably been altered in the context of independent causes (rather than dependent causes) following the decision in Orient-Express Hotels v Assucurazioni Generali SA from 2010. In that case, business interruption losses were caused independently by damage to the hotel (covered cause) and damage to the New Orleans area (uninsured cause). Applying the wording of the policy, which required a "but for" test, the court concluded that because the insured would have suffered the same losses from the damage to New Orleans as it would have suffered from the damage to the hotel, the insured could make no recovery. While this case has not been applied in the contingent business interruption context, it may further limit coverage for such claims.
Accordingly, where one of two or more concurrent causes is excluded under a policy, under English law the resulting damage or loss is excluded, whereas under the law of many U.S. jurisdictions, the damage or loss may still be covered.
ANTI-CONCURRENT CAUSATION CLAUSES
Largely in response to these causation doctrines, anti-concurrent causation clauses began appearing in property insurance policies. ACC is somewhat of a misnomer because the clause is largely meant to contract around the U.S. concurrent causation and EPC doctrines depending on how they are defined in a particular jurisdiction. Court decisions involving catastrophic losses from natural disasters--and resulting large-scale losses to insurers--were the driving force behind the development of these clauses.
Anti-concurrent causation clauses often appear in the preamble of a policy's exclusion section. The typical ISO form ACC clause states:
"We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss."
The purpose of the clause is to bar coverage in situations where an excluded peril is one of two or more causes of a loss--a position consistent with English law.
Courts in approximately 20 U.S. states, including many along the Gulf Coast, have enforced ACC clauses to bar coverage when a loss results from both a covered and excluded peril. While many of the Gulf states have applied ACC clauses in handling CBI claims arising from natural disasters, other states, such as Michigan and New Jersey, have enforced anti-concurrent causation clauses but not in the context of a catastrophic loss.
To date, courts in only four states--California, West Virginia, North Dakota and Washington--have refused to give effect to ACC clauses. The rationale is that the provision either violates public policy, conflicts with the reasonable expectation of the parties, or otherwise violates state valued policy statutes and is therefore unenforceable.
Notably, courts in nearly half of the states, including New York and Illinois, have not addressed the enforceability of anti-concurrent causation clauses. Both New York and Illinois, like the majority of jurisdictions, apply the efficient proximate cause doctrine.
It therefore remains to be seen how courts in these and other jurisdictions will apply the ACC clauses when faced with a dispute over whether coverage exists for business losses arising out of damage to an insured's supplier's property.
Ultimately, the law governing a contingent business interruption policy and the interaction of the various causation elements, along with the specific wording of the policy, will determine coverage for CBI claims arising out of Japanese supply link disruptions. Under English law and in states that enforce ACC provisions, where flood, fire, earthquake and wind are determined to be concurrent causes of damage to a supplier's property and even one of these perils is excluded, coverage may not be available. Likewise, where an earthquake caused flooding that caused an explosion that damaged a supplier's property, coverage may be unavailable if one of these perils is excluded by the policy.
Even if a policy does not include an anti-concurrent causation clause (or the applicable jurisdiction does not enforce it), there still is no guarantee of coverage for damages resulting from concurrent causes. In states that have adopted the EPC doctrine, only damages proximately caused by a covered peril would likely be covered.
Complex causation issues therefore permeate CBI claims following a natural disaster, and many insureds may be surprised to learn the difficulties they face in proving that a covered peril caused their losses.
August 1, 2011
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