Dig Deeper into Insurance Denials Based on Intervening Causes
An insurance policy may say it covers losses caused “solely” by a certain thing—what insurance companies call a covered or non-excluded risk or peril. Yet when it happens, and a policyholder incurs losses as a result, insurers frequently deny coverage anyway.
The insurers argue that even though the covered thing happened, something else happened that contributed to or increased the policyholder’s losses, in which case the policy doesn’t apply.
Policyholders shouldn’t accept insurers’ coverage denials in such instances. The word “solely” when used in this context doesn’t bar or reduce coverage in the wake of intermediate or intervening causes—despite what insurers argue post-loss.
Insurers often argue that “sole” means “to the exclusion of all others,” which makes intermediate or intervening causes of loss fatal to coverage or reduces the amount of coverage due to a policyholder.
But recent case law rejects the position that “sole” causation permits only a single causative event and instead holds that intermediate or intervening causes of loss don’t disrupt covered losses caused “solely” by the precipitating event.
Southwest Airlines
The US Court of Appeals for the Fifth Circuit addressed “sole” cause in Southwest Airlines Co. v. Liberty Insurance Underwriters. The appeal involved a cyber risk insurance policy’s system failure coverage for $77 million in losses because of what the policyholder characterized as a system failure and resulting flight disruptions.
The cyber insurance policy stated the insurer must pay all losses that an insured incurs solely as a result of a system failure. After the primary and first excess insurer paid their respective shares of the loss, the next layer excess insurer, Liberty, denied coverage in part, arguing that the loss wasn’t “solely” a result of the system failure.
The district court agreed with the insurer, granting its motion for summary judgment, and holding that the policyholder’s costs weren’t caused by the system failure but rather were the result of “various and purely discretionary customer-related rewards programs, practices and market promotions.”
On appeal, the Fifth Circuit disagreed and remanded the case. The insurance policy fails to define “solely,” and precedential Texas case law defines the word as “to the exclusion of else” and “without another.” That definition alone doesn’t tell us whether “there can be no intermediate causes” or “whether it only means there can be no other originating or precipitating causes.”
Liberty easily could have answered that question if it had said so one way or the other in the policy, but it didn’t. The insurer argued the system failure can’t be the sole cause of the policyholder’s claimed costs because the “independent” and “more direct” cause of those losses was the policyholder’s decision to incur them.
The Fifth Circuit disagreed, citing Texas cases holding that a “sole” cause is one independent of any other cause. A New Jersey court had reached the same conclusion in Urban Edge Properties v. Allied World Assurance Company, rejecting an insurer’s narrow view of “sole” causation in a case involving a Covid-19 insurance claim arising in the context of a pollution liability insurance policy.
In Southwest Airlines Co., the court described one of its prior cases involving a life insurance policy that paid out only when a bodily injury was the “sole cause” of death.
Applying the independent cause analysis in the prior case, the court reasoned an injury is still the sole cause of death even if death resulted more directly from complications such as septic shock or multisystem organ failure. Those complications weren’t independent causes—they resulted from the original covered injury.
The court rejected Liberty’s causation argument, holding that Southwest’s decisions can only be independent, sole causes of its costs (losses) if they were the precipitating causes of the costs.
Just like the medical complications in the court’s prior case, Southwest’s decisions weren’t precipitating causes that competed with the system failure, but links in a causal chain that led back to the system failure. In other words, the intermediate or intervening causes—Southwest’s decisions and acts—didn’t bar coverage for costs incurred solely by the precipitating case, the system failure.
Addressing exclusionary language that the insurer also invoked, the Fifth Circuit sought to harmonize the insurance policy in its entirety. The court considered the exclusion for any loss arising out of or attributable to consequential damages.
Liberty interpreted the undefined words “consequential damages” as any costs that “do not flow directly and immediately from the act.” The court rejected Liberty’s imposed meaning of consequential damages because, if Liberty’s interpretation applied, the policy would exclude coverage for any costs that aren’t direct and immediate.
As Liberty would have it, the definition would be so narrow that “in practice it may not cover much beyond, for example, the cost of technical repairs to Southwest’s computer systems.” Liberty’s interpretation “would seem to preclude costs incurred as a result of a decision to mitigate damages from the system failure, even though, as we explained above, the system failure coverage provision permits such costs in principle.”
Harmonizing the policy language in its entirety highlighted the insurer’s untenable position that improperly left entire sections of the insurance policy without meaning.
Takeaways
If an insurer’s interpretation leaves any part of its policy meaningless when read in its entirety, then it is wrong. Even if a word or words read in isolation have a common meaning, apposite case law may have interpreted those words a certain way to determine causation relevant to insurance coverage.
Don’t take an insurer’s word for it if your claim is denied—look closer and dig deeper.
"Dig Deeper into Insurance Denials Based on Intervening Causes," by Jared Zola and Kyle Brinkman published in Bloomberg Law on March 22, 2024.
Reproduced with permission. Published March 22, 2024. Copyright 2024 by Bloomberg Industry Group, Inc. (800-372-1033) http://www.bloombergindustry.com