A Comparison of the Interpretation of All Risk Insurance Policies: The United States v. England & Wales
April, 2005
by Mindy M. Medley and Darren O. Thompson
The first step in the analysis of any coverage issue requires that the insurance policy must be consulted. The second step in the analysis of any coverage issue requires that the common law must be reviewed and considered in light of the terms of the insurance policy. The following is a broad and general overview of some principles that courts in the United States and in England and Wales follow when resolving coverage questions presented by all risk insurance policies. An associate in our Chicago office, Mindy M. Medley, has addressed the law that has been developed by courts in the United States, and a solicitor in our London office, Darren O. Thompson, has addressed the law that has been developed by courts in England and Wales.
United States:
In the United States, all risk insurance policies create “coverage of a type not ordinarily present under other types of insurance, and recovery is allowed for fortuitous losses unless the loss is excluded by a specific policy provision; the effect of such a policy is to broaden coverage and a fortuitous event is one which, to the knowledge of the parties, is dependent upon chance.” Couch on Insurance, 3d, § 148:50.
In the United States, all risk insurance policies are analyzed in accordance with the general rules of construction applicable to all types of contracts: the language in an insurance policy must be applied as written, unless it is ambiguous. Policy language is deemed to be ambiguous if it is susceptible to more than one meaning. When an insurance policy is ambiguous, a court will generally interpret the policy in a manner most favorable to the insured party. See, e.g., Stamm Theatres, Inc., et al. v. Hartford Casualty Insurance Co., 93 Cal.App.4th 531, 538, 113 Cal.Rptr.2d 300, 305 (2001).
Insurance law in the realm of all risk insurance policies, however, is not nearly as uniform as these general rules may imply. Some courts in the United States have developed rules of causation that implicitly allow a court to overlook the plain and unambiguous language contained in all risk insurance policies. The efficient proximate cause doctrine is one such rule. The efficient proximate cause doctrine allows an insured to recover under its all risk insurance policy if a “covered and non-covered peril join to cause the loss provided that the covered peril is the efficient and dominant cause.” Couch on Insurance, 3d, § 148:61 (emphasis added).
At least thirty-five states in the United States have adopted the efficient proximate cause doctrine, or a similar rule, to determine whether coverage is provided under an all risk insurance policy when multiple causes join to create a loss. Some of these states, however, also allow insurers to contract out of the effect of the doctrine via anti-concurrent causation language, but some do not. For example, anti-concurrent causation language is deemed to be invalid in California. See, e.g., Howell v. State Farm Fire & Casualty Co., 218 Cal.App.3d 1446, 267 Cal.Rptr. 708 (1990). Therefore, even if an insurance policy contains anti-concurrent causation language in its policy exclusions, a court in California will actually ignore the effect of such language.
Some courts in the United States adhere to the concurrent causation doctrine. The concurrent causation doctrine allows for recovery when the loss is essentially caused by an insured peril with the contribution of an excluded peril merely as part of the chain of events leading to the loss. See, e.g., Davidson Hotel Co. v. St. Paul Fire & Marine Insurance Co., 136 F.Supp.2d 901 (W.D.Tenn. 2001). Courts in Arizona, North Carolina, and Tennessee apply the concurrent causation doctrine.
At least four states in the United States have not developed any causation principles to apply to the analysis of all risk insurance policies. Other states apply both the efficient proximate cause doctrine and the concurrent causation doctrine. In Florida, for example, courts apply both doctrines, depending on whether the causes of the claimed damage are concurrent or sequential. See, e.g., Paulucci v. Liberty Mutual Fire Insurance Co., 190 F.Supp.2d 1312 (2002).
Finally, courts in Texas have developed the doctrine of concurrent causes. The doctrine of concurrent causes provides that when covered and non-covered perils combine to create a loss, the insured is entitled to recover only that portion of the damage caused solely by the covered perils. It is the insured's duty to segregate its covered and non-covered damage. See, e.g., Wallis v. United Services Automobile Association, 2 S.W.3d 300 (Tex.Ct.App. 1999).
Obviously, in the United States, the outcome of insurance coverage litigation is often dependent on the jurisdiction in which the cause of action is filed. Insurance coverage litigation filed in California, for example, would potentially have a different outcome from insurance coverage litigation filed in Texas. Not only are the causation principles applied by the courts in these states different, but Texas also holds anti-concurrent causation language to be valid. See, e.g., Lexington Insurance Co. v. Unity/Waterford-Fair Oaks, Ltd., 2002 U.S.Dist.LEXIS 3594 (N.D.Tex. March 5, 2002). Therefore, although an all risk insurance policy issued in California may be nearly identical to an all risk insurance policy issued in Texas, the coverage outcome may not be.
England and Wales:
An all risks insurance policy governed by the law of England and Wales (“English law”) is generally governed by the same rules of construction that are used to construe the meaning of insurance contracts, as well as other commercial contracts. All risks insurance policies, however, do not provide cover against literally all risks. There are a number of exceptions implied by common law, as well as many express exemptions of the all risks policy itself. For coverage to exist under an all risks policy, loss must, therefore, be fortuitous, not inevitable (within the period of insurance) or caused by the wilful conduct of the insured.
The task of the English Court construing an all risks policy governed by English law is to ascertain and give effect to the mutual intention of the parties to the contract. The English Court looks at the objective intention of the parties and asks what a reasonable person in the position of the parties understood at the time when the contract was entered into. Therefore, the subjective intention of the parties is not relevant. The English Court presumes that the words of the contract are to be given their ordinary, literal meaning whether the insurer and insured had this meaning in mind or not. However, in ICS v West Bromwich Building Society [1998] 1 WLR 896, Lord Hoffman noted that
interpretation is the ascertainment of the meaning which the documents would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract… [the background knowledge] includes absolutely anything which would have affected the way in which the language of the document would have been understood by the reasonable man.
In the event of a genuine ambiguity, which the Court will only find if necessary, the English Court will construe the all risks policy strictly in favour of the party that did not draft the contract. This is referred to as the “contra proferentem” rule. The English Court assumes that the party who actually drafted the contract would write into the contract what it wanted to best suit its own interests.
The “parol evidence rule” is also applied by the English Courts. The parol evidence rule states that any terms, agreements, discussions, or the like will not be considered in the interpretation of a contract. Generally only the final document is held to evidence the agreement between the parties.
The Court also has regard to legal precedent in the interpretation of all risks insurance policies. So if a court has already ascribed a certain meaning to a certain phrase, the English Court will in the future construe the same phrase in the same way.
For an all risks policy to respond, an insured peril must cause the loss. The English Courts look for the “proximate cause” of the loss. The rule in England and Wales is no longer that the proximate cause is the last cause in time. (Leyland Shipping Co Limited v Norwich Union Fire Ins Sys Ltd [1918] AC 350.) The current rule in England and Wales is that the proximate cause of a loss is the direct or dominant cause. Therefore, a cause is proximate if it “operated with reasonable certainty to occasion the loss” (Ore v Aetna Life Ins Co., 435 F 2d 957, 959 (6 Cir, 1970 – life)).
The proximate cause of the insurance loss is generally determined by the English Court by reference to the contract of insurance. So for example, in the case Wayne Tank and Pump Co Ltd v The Emloyers’ Liablity Assurance Corporation Ltd [1973] 2 Lloyd's Rep 237, the Court looked at whether a loss was the result either of two possible causes. Wayne Tank arose from the outbreak of a fire in a plasticine factory belonging to H Ltd. The plaintiff (the insured) purchased a public liability policy with the defendant insurers. The policy gave cover for damage to property resulting from certain types of accident. Liability consequent on damage caused by the nature or specification of goods provided by the plaintiff was excluded.
In Wayne Tank, the plaintiff had installed equipment in the factory belonging to H Ltd, which was found to be wholly unsuitable for H Ltd's factory. Before the equipment installed by H Ltd had been tested, an employee of H Ltd turned on the equipment and left it unattended overnight. As a result, a fire broke out causing damage. H Ltd was awarded damages against the plaintiff. The plaintiff claimed indemnity from the defendant insurer. The fire was an accident under the policy.
In Wayne Tank, if the proximal cause of the loss was the equipment installed by the plaintiff insured, the exemption would operate such that the policy would not respond. However, if the proximal cause of the damage was determined to be the actions of the employee, then the policy would respond.
The Court in Wayne Tank found that there were two causes of the fire: (1) Wayne Tank supplying and installing the unsuitable equipment; and (2) H Ltd’s employee switching on the equipment and leaving it unattended before the equipment had been tested. Lord Denning considered what the dominant cause of the fire was. He held that the conduct of the employee was just “the trigger – the precipitating event”. The proximal cause was actually the dangerous installation. This cause came within the exemption of the policy, and the policy, therefore, did not respond. Moreover, the Court in Wayne Tank held that even in the absence of one dominant cause, where concurrent causes of loss were present, and one of those concurrent causes is within the policy exemption, insurers could rely on the exemption clause and would not be liable for any of the damage.
In practice, the various rules of interpretation could give rise to very different results when applied to the same set of facts. It is therefore submitted that the English Court is pragmatic and likely to look at the merits of each case and wherever possible use the array of tools of construction available to reach the conclusion that seems just.
Learning Point:
Obviously, the rules of contract construction applied by courts in the United States and courts in England and Wales are quite similar. Indeed, courts in the United States first relied on the principles developed by the English common law. Additionally, courts in each of these countries often apply proximate cause theories to answer questions of insurance coverage. Courts in the United States, however, have created causation principles in addition to the proximate cause rule, and as a result, have developed legal precedent that often varies from state to state. •
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