Mass. Appeals Court holds that "results in" means "causes," and that chain of causation theory does not apply to third party claims

Four related companies known as Cold Storage Solutions operated cold storage warehouses. They hired Eastern Insurance Group to obtain warehouse liability insurance for them.  Eastern informed them that it had done so, but in fact it had failed to obtain insurance for one of the entities, CSS III.

On October 9, 2011, a forklift operator drove into a racking system in a freezer at the CSS III warehouse, causing racks holding millions of pounds of frozen food to collapse.

Whitecap International Seafood Exporters stored snow crab at the warehouse. Some crab was undamaged in the accident but had to be moved from the warehouse because of the risk that additional racks would collapse.  CSS employees allowed the crab to be left outside the freezer for five to six hours during the process of moving it from the warehouse.  That caused temperature fluctuation damage.

Litigation ensued.  As part of the settlement agreement, Cold Storage Solutions assigned to Whitecap the claim against Eastern for its failure to obtain insurance for CSS III.  In Whitecap Int'l Seafood Exporters, Inc. v. Eastern Ins. Group, LLC, __ N.E.3d __, 2020 WL 3023105 (Mass App. Ct.), the issue before the court was whether CSS III's liability would have been covered if Eastern had obtained insurance for it.

The Superior Court had granted summary judgment to Eastern, holding that there would have been no coverage under the policy that Eastern would have obtained for CSS.  On appeal, the Massachusetts Appeals Court examined three policy provisions.  It held that there was a factual dispute as to coverage under one of the provisions, and remanded the case to the Superior Court.

 EXCEPTION TO SPOILAGE EXCLUSION DOES NOT APPLY; "RESULTS IN" MEANS "CAUSES" NOT "RESULTS FROM"

The policy was an all risks policy.  It contained an exclusion for "loss to perishable stock caused by spoilage."

The spoilage exclusion had an exception providing that "if spoilage results in a specified peril, we do cover the loss or damage caused by that specified peril."  Specified perils as defined by the policy means explosion, falling objects, hail, fire, etc. 

Eastern argued that the phrase "results in" in the exception means "causes."  Whitecap argued that it means "results from."

The Appeals Court agreed with Eastern.  It held that because the temperature fluctuation to the crab did not cause a specified peril the exception did not apply.

COURT REJECTS CHAIN OF CAUSATION ARGUMENT

The policy included supplemental coverage for cold storage, if spoilage "is caused by . . . a sudden or accidental breakdown or malfunction of refrigeration equipment" or by "the incorrect usage of the refrigeration equipment."  The court held that that coverage did not apply because those causes were not the immediate cause of the damage to the crab.  Rather, the damage was caused by the decision of CSS to leave the crab in the loading area for five to six hours. 

Whitecap made a chain of causation (sometimes called train of events) argument, under which "if the efficient proximate cause is an insured risk, there will be coverage even though the final form of  property damage, produced by a series of related events, appears to take the loss outside the terms of the policy."

Chain of causation arguments are among my least favorite to make or oppose in the entire realm of insurance coverage, because when fully analyzed under the case law interpreting it the theory is confusing and slippery and usually requires me to make a chart with arrows.

The court did not dive into the weeds of the argument.  It dismissed the theory on the ground that chain of causation applies only to first-party claims.

Alas, that was a fake out.  The court proceeded to a chain of causation analysis before again concluding that the doctrine did not apply. 

The court held that a chain of causation analysis distinguishes between "an excluded event which causes a loss and a covered event which causes a loss in the form of an excluded event.  An insured may recover under a policy only in the event of the latter."

The court held that the chain of causation theory did not apply because the decision to leave the crab in the loading area for five to six hours was an intervening force and efficient proximate cause of the damage.  

COURT FINDS DISPUTED ISSUE OF FACT

Finally, the policy included a coverage extension for "any direct physical loss to covered property while it is being moved . . . to prevent a loss caused by a covered peril."  The court held that the word "any" means that any type of direct physical loss is covered unless excluded.

Whitecap argued that there were genuine issues of material fact as to whether the crab was moved to prevent a loss caused by additional freezer racks collapsing and whether the loss occurred within the ten day time period from when the crab was first moved, as required by the coverage extension.  The court agreed, and vacated the trial court's grant of summary judgment to Eastern.

1st Circuit holds that efficient proximate cause of water damage from leaky roof is failure of drain, not rain

Matthew and Sondra Knowles owned a five story rental property building.  Nova insured the building.

The Nova policy contained an exclusion for water damage, but an amendatory endorsement deleted the exclusion.  (This is why I can't give advice about coverage under a policy unless I have the complete policy.)  An additional endorsement added flood coverage for loss attributable to "flood, meaning a general and temporary condition of partial or complete inundation of normally dry land due to the unusual or rapid accumulation or runoff of surface waters from any source."

The policy also contained a "rain limitation" which excluded coverage if a loss suffered to the interior of the building was caused by or resulted from rain, whether driven by wind or not, unless the building first sustains damage by a covered cause of loss to its roof or walls through which the rain enters.

A tropical storm caused a significant amount of water to accumulate of the roof of the building.  The water overwhelmed the rooftop drain and pooled on the roof, eventually leaking through the building's two skylights, resulting in property damage.

Nova denied the claim in part on the basis of the rain limitation. 

Due to the financial losses, the Knowles defaulted on their mortgage and Fidelity took title to the property.  Fidelity then brought an action against Nova. 

In Fidelity Co-operative Bank v. Nova Casualty Co., __ F.3d __, 2013 WL 4016361 (1st. Cir. 2013), the United States Court of Appeals for the First Circuit found that the rain limitation did not exclude coverage. 

The court applied the "efficient proximate cause test" or the "train of events test" set forth in Jussim v. Mass. Bay Ins. Co., 415 Mass. 24 (1993).  Under that test, if the efficient proximate cause of a loss is an insured risk then the policy provides coverage even if the final form of the property damage, produced by a series of related events, appears to take the loss outside the terms of the policy.  The court noted that the efficient proximate cause test applies to any policy that does not have an anti-concurrent causation clause. 

Nova's experts had determined that the blocked or inadequate roof drain caused water to accumulate of the roof, flooding it.  Thus, the blocked or inadequate drain set in motion a train of events that caused the interior water damage.  "The failure of the drain must properly be determined the efficient proximate cause of the damage, not the rain."  The court found that the blocked or inadequate roof drain was a covered loss under the  policy, so that the policy provided coverage for the damages.