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Insurance Law

High Fire Season Followed by El Niño Sets California Policyholders On Collision Course With Property Insurers

Regular readers of the SFGate website saw two familiar headlines on September 10, 2015. The first – “Northern California wildfire explodes in size” – would not have been unusual on any summer day in California, particularly in the last four years as an historic drought has ravaged the Western United States. Wildfires, always a feature of the dry season in the West, have increased in size and intensity as the yearly average precipitation levels continue to fall.

The second – “El Niño Odds Rise Again, Tracking to Be a Blockbuster” – was more unusual, and almost certainly more welcome to local readers. The El Niño weather phenomenon, which refers to a band of abnormally warm water in the central equatorial Pacific, is generally associated with large storms in the United States, and the West Coast in particular. News of the impending 2015-2016 El Niño has raised hopes that heavy rains will replenish water supplies that have been devastated by four-plus years of meager rainfall. But this year’s El Niño may have more damaging effects, especially in areas impacted by fire.

When heavy rains follow wildfire, the results can be deadly. According to the U.S. Geological Survey, after a wildfire “even modest rainstorms can produce dangerous flash floods and debris flows.” Multiple fire-related factors can contribute to mudslides. The most obvious is the tendency of wildfires to damage vegetation and root systems, which hold soil in place and provide barriers to mudslides and flooding. Hillsides denuded of vegetation are far more susceptible to mudslides during a storm.

The interplay of fire and weather has crucial implications in the context of first party property insurance, where causation determines coverage. Most property policies exclude damage caused by earth movement and water damage and, as a result, policyholders who suffer damage from mudslides are almost guaranteed to have their claims denied. But policyholders, particularly in western states, should not be afraid to push back on a denial if the mudslide occurs in an area previously damaged by fire.

California courts analyze first party insurance coverage by determining “the predominant, or most important cause of [the] loss” – a concept known as “efficient proximate cause.” Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747, 754 (2005), [subscribers can access an enhanced version of this opinion: | Lexis Advance]. If the efficient cause of loss is a covered peril (e.g. fire), but an excluded peril (e.g. earth movement) plays a role in the loss, the entire loss is covered, even if the policy language purports to exclude any loss in which an excluded peril plays a part. See id. The reverse is also true; when an excluded peril is the efficient proximate cause of a loss, the entire loss is excluded, even if a covered peril played a role.

This framework, combined with the science of mudslides, can allow policyholders to find the potential for coverage where, on first glance, a loss appears excluded. That is exactly what happened in Howell v. State Farm Fire & Casualty. 218 Cal. App. 3d 1446 (1990), [subscribers can access an enhanced version of this opinion: | Lexis Advance]. In that case, property was destroyed by a mudslide that had followed shortly after a wildfire. State Farm denied coverage, citing an earth movement exclusion. The court held that it was a question of fact as to whether the fire, as opposed to earth movement or water damage, was the predominant cause of loss. The court emphasized that the same hillside had avoided landslides in previous storms – it was only after the fire that the hillside gave way – and a reasonable juror could find that fire was the efficient proximate cause.

A unanimous panel in the Ninth Circuit recently reached the same result, although for different reasons, in Stankova v. Metropolitan Property and Casualty, 788 F.3d 1012 (9th Cir. 2015), [subscribers can access an enhanced version of this opinion: | Lexis Advance]. That case arose out of a massive wildfire that swept through Northern Arizona in 2011, destroying vast swaths of brush and vegetation. The fire narrowly missed the home of Magda Stankova and Victor Nikolaev, burning their garage instead. One month later, a mudslide on a nearby hillside finished the job and destroyed the Stankova home completely. The insurer denied the claim, citing an exclusion for earth movement.

The Ninth Circuit held that there was a triable issue of fact as to whether the loss was covered. Arizona law mandates a standard fire insurance policy cover all direct loss caused by fire, and if a given policy conflicts with the provisions in the standard policy, the standard policy governs. Because the standard policy states that an insurer will provide coverage “against all direct loss by fire,” language purporting to exclude losses directly caused by both fire and earth movement was ignored.

Both the Howell and Stankova cases illustrate why insureds should not be afraid to question coverage determinations that may, at first glance, appear logical and justified. The policies in both cases appeared to exclude the loss of the house. But the insureds pushed back, and were rewarded with appellate victories. Residents in western states, who are in the midst of an epic fire season and who will likely face massive winter storms in the coming months, would do well to follow their example.

    By Richard Robinson, Associate, Farella Braun + Martel LLP

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