Insured Must Prove Loss & Insurer Must Prove Exclusion
It is the obligation of an insured of a first party policy to prove that a loss occurred that is covered by the policy. Once that proof is received it is the duty of the insurer to prove beyond a preponderance of the evidence that an exclusion applies. The test in California and most states is that coverage is based upon what is the efficient proximate cause of loss.
In Vardanyan v. AMCO Insurance Company, 243 Cal.App.4th 779, 197 Cal.Rptr.3d 195, 16 Cal. Daily Op. Serv. 240, 2016 Daily Journal D.A.R. 136 ( December 11, 2015) the insured rental property owner brought an action against a property insurer, alleging breach of its all-risk insurance contract and breach of the implied covenant of good faith and fair dealing after insurer refused to cover damage to rental property.
The trial court expressed its intention to instruct the jury that plaintiff’s property damage loss was covered by his policy only if it was caused by perils specifically listed in the collapse coverage provision and no others. Because it was undisputed that other perils contributed to some extent to the loss, plaintiff conceded he could not prevail if the jury was so instructed.
Plaintiff owned a rental house covered by an insurance policy issued by defendant. On December 6, 2010, he submitted a claim that stated plaintiff believed there was water damage to the flooring that might have come from the walls, and there was mold as well.
The subfloor area lacked adequate ventilation, preventing the moisture below the house from drying. An engineer, Jundt, opined the original construction of the subfloor area without proper ventilation was not up to code at the time of construction. The various sources of moisture—roof leaks, gutters and downspouts that did not channel the water away from the house, a faucet spraying water on the exterior of the house, leaking toilet and bathtub, and humidity—contributed to the damage to the house, along with poor construction, termite damage and decay.
Defendant denied coverage of plaintiff’s loss, citing multiple policy exclusions, including exclusions for damage caused by seepage or leakage of water from a plumbing system, deterioration, mold, wet or dry rot, settling of foundations, walls or floors, earth movement, water damage, neglect, weather conditions, acts or decisions of any person, and faulty or defective design, workmanship, repair, construction, or maintenance.
Plaintiff alleged the house collapsed and the policy provided coverage for collapse.
The policy, excluded coverage for collapse, “other than as provided in OTHER COVERAGES 9.” Other Coverage 9 provided coverage for losses involving collapse of a building or part of a building “caused only by one or more” of a list of perils, including hidden decay, hidden insect damage, and weight of contents, equipment, or people.
Plaintiff’s expert, Robert Bresee, opined the water in the subfloor area came from within the walls, where it was not readily visible to occupants of the house.
The evidence presented by both sides indicated there were multiple causes of the damage to plaintiff’s house. Plaintiff’s theory was that the coverage for collapse due to hidden decay or hidden insect damage applied, if either of those perils was the predominant cause of the collapse of the structure. Plaintiff requested that the trial court give a standard jury instruction explaining that, when a loss is caused by a combination of covered and excluded risks, the loss is covered if the most important or predominant cause is a covered risk. Defendant instead proposed a special jury instruction (No. 12) placing on plaintiff the burden of proving the collapse of the house was “caused only by one or more” of the perils listed in Other Coverage 9. Defendant’s special instruction No. 12 specified that there was no coverage if the cause of the collapse involved any peril other than those listed. Plaintiff opposed giving the special instruction proposed by defendant.
Efficient proximate cause doctrine
In California, the efficient proximate cause doctrine is “the preferred method for 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. (2005) 35 Cal.4th 747, 753, 27 Cal.Rptr.3d 648, 110 P.3d 903 (Julian ).)
Plaintiff contends the language “caused only by one or more of the following” in Other Coverage 9 means that this is a complete list of the perils causing collapse that are covered under the policy. If any one or any combination of the listed perils causes the collapse, the loss is covered. If some unlisted peril contributes to the collapse, the efficient proximate cause doctrine requires that the jury determine which cause is the predominant or most important. If the predominant cause is a peril listed in Other Coverage 9, then the loss by collapse would be covered. If the predominant cause is not a listed peril, then the loss would not be covered.
Defendant contends the use of the word “only” means that a collapse is a covered loss only if no peril other than those listed contributes to the collapse. The trial court agreed with defendant and indicated it would instruct the jury with defendant’s proposed special instruction No. 12, and would not give CACI No. 2306. Defendant’s proposed special instruction, as the trial court intended to give it, states: “Mr. Vardanyan contends that the damage to his property is covered under the insurance policy’s provision for ‘collapse’ to a building or any part of a building caused by ‘hidden decay’ or ‘hidden insect or vermin damage.’
The mutual intention of the parties as it existed at the time of contracting governs interpretation. Such intent is to be inferred, if possible, solely from the written provisions of the contract. The policy’s coverage for plaintiff’s house is all-risk or open peril coverage; the policy provides that plaintiff is insured “for risk of direct physical loss to the property,” with specified exceptions or exclusions. One of the exceptions to coverage is “collapse other than as provided in Other Coverage 9.”
Here, the policy provision provides that collapse is covered if caused by specific listed perils. Plaintiff’s interpretation of the Other Coverage 9 provision is the correct interpretation, consistent with the efficient proximate cause doctrine.
A policy cannot extend coverage for a specified peril, then exclude coverage for a loss caused by a combination of the covered peril and an excluded peril, without regard to whether the covered peril was the predominant or efficient proximate cause of the loss. To the extent the term “caused only by one or more” of the listed perils can be construed to mean the contribution of any unlisted peril, in any way and to any degree, would result in the loss being excluded from coverage, the provision is an unenforceable attempt to contract around the efficient proximate cause doctrine. Accordingly, CACI No. 2306, rather than defendant’s proposed special instruction No. 12, was the correct instruction to give to the jury.
Burden of Proof
When an issue of coverage exists, the burden is on the insured to prove facts establishing that the claimed loss falls within the coverage provided by the policy’s insuring clause. Once the insured has made that showing, the burden is on the insurer to prove the claim is specifically excluded. The insurer, though, since it is denying liability upon the policy, must prove the policy’s noncoverage of the insured’s loss—that is, that the insured’s loss was proximately caused by a peril specifically excluded from the coverage of the policy.
Plaintiff’s policy provided that defendant covered the house for “risk of all direct physical loss to the property,” with specified exceptions and exclusions. One exception was for “collapse other than as provided in Other Coverage 9.” Thus, the burden was on defendant to prove not just collapse, but collapse other than as provided in Other Coverage 9.
Because the instruction improperly shifted the burden of proof, the trial court erred in its decision to instruct the jury with defendant’s proposed special instruction and in granting defendant’s motion for directed verdict based on the decision to give that instruction.
The judgment on plaintiff’s claims for breach of contract and breach of the covenant of good faith and fair dealing is reversed and remanded for retrial. On retrial, the trial court is instructed to enter judgment in favor of defendant on plaintiff’s claim for punitive damages, in accordance with the directed verdict already entered.
There are multiple reasons why there was no coverage for the loss claimed. The insured grasped at straws and claimed collapse even though the apparent cause of the damage was poor maintenance, improper design, leaking pipes, a faucet poring water into the house that eventually resulted in partial collapse of the house. The trial court attempted to find a way around the efficient proximate cause doctrine and was properly reversed.
Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.
He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.
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