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Caused by

“Caused by”: these two words appear in almost every policy of insurance, but what do they mean in the context of a claim, particularly when there can be more than one cause of loss? This is an Award-winning essay by Louise Baker, prepared for the 2012 ANZIIF TurksLegal Claims Scholarship.

Little pig, little pig, let me come in. Not by the hair of my chinny chin chin.Then I’ll huff and I’ll puff and I’ll blow your house in! And he huffed and he puffed and he blew the house in …

The outcome:

  • The pig claimed indemnity for the loss on the basis that it was caused by the wolf.
  • The insurer denied the claim, asserting the loss was caused by the pig’s choice of straw as the building material.
  • The pig sued on the claim to try and recover his bacon.
  • The court found there was more than one cause and that the Wayne Tank principle(see below) applied. Ipso facto the policy did not respond.
  • The pig was left with a sty of a house and a strong sense of injustice. Just a silly fairy tale – or does it sound all too familiar?
Caused by 

Insurance policies almost invariably contain the pivotal term “caused by”, also variously expressed as “occasioned by”, “flowing from”, “resulting from”, “happening through” or “directly due to”. These terms operate triggers to enliven inclusionary and exclusionary provisions in policies. There are subtle differences between some of these terms, but they each relate to the principle of “cause and effect”. Its forensic application, however, is at the other extremity, commencing with the general proposition causa proxima non remota spectator (the immediate rather than the remote cause should be considered). That said, causation in an insurance context is not determined by just temporal and physical proximity, rather, it is concerned with the effectiveness of the cause or the causes in direct relationship to the loss or damage and how that policy responds.

As Lord Shaw stated in the seminal causation case in Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd1:

One must be careful not to lay in accent upon the word “proximate” in such a sense as to lose sight of or destroy altogether the idea of cause itself ... to treat proxima causa as the cause which is nearest in time is out of the question.

Lord Shaw went on to say:

The cause which is truly proximate is that which is proximate in efficiency.

The view expressed by Lord Shaw in 1918 prevails to this day. In Hams v CGU Insurance Limited2 Einstein J of the New South Wales Supreme Court said:

The word caused is used in terms of the cause which was proximate in efficiency. The real, effective or dominant cause.

In practice, the last causal event, the causa causans, is usually, but not always, the dominant, effective cause. Einstein J said:

I accept that the question of causation is to be determined by the common sense evaluation of the facts. I further accept that the last causal event to occur will usually be an effective contributing cause, especially when it has a cumulative and independent origin.

In the unfortunate case of the little pig and his house of straw, the lack of structural integrity was a factor in its ultimate demise, but it did not operate independently and effectively to bring about the loss. In theory, the house could have stood intact indefinitely “but for” the wicked intervention of the wolf. The “but for” test is a useful determination tool in separating remote and proximate causes. It is also likely to expose any nova causa interveniens, that is, any new and intervening causes which break the chain of immediate causation.

The Supreme Court of Canada provided a useful description of the “but for” test in CCR Fishing Ltd v British Reserve Insurance Co Ltd3 where the policy required that the causal event be fortuitous.

... It is my view that in determining whether a loss falls within the policy, the cause of the loss should be determined by looking at all the events which gave rise to it and asking whether it is fortuitous in the sense that the accident would not have occurred but for or without an act or event which is fortuitous in the sense that it was not to be expected in the ordinary course of things.

A remote but necessary cause, such as building the house from straw, is a causa sine qua non, that is, a necessary precondition, but one that played no active hand in generating the loss itself.

Multiple causes 

Loss or damage can have many causes, some remote and some proximate and effective.

They can be broadly categorised as follows:

  • Loss and/or damage occasioned by two or more interdependent causes where any one cause would not have led to the loss/damage without the others.
  • Loss and/or damage occasioned by two or more effective causes where each cause would have led to the loss/damage even in the absence of the others.

Subject to the terms of any particular policy, the above categories attract different policy responses.

Two prominent principles are:

  • If a loss has two or more proximate or effective causes, and at least one is excluded from cover, the insurer is not liable. This principle was founded in Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd4 – the “Wayne Tank principle”.
  • If a loss has two or more causes, and loss from one is insured against and none of the others is expressly excluded (that is, the policy is silent), the insured is entitled to recover (HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc)5.
Wayne Tank 

To understand this much talked about principle it is useful to examine the facts of the 1974 English decision. Wayne Tank and Pump Co Ltd manufactured and sold plastic pipes. One customer required pipes suitable for use in high temperature operations. The pipes manufactured by Wayne Tank were not suitable for the customer’s purpose. To assess the heat resistance of the pipes an employee attached and activated a heat blanket to warm the pipes prior to testing. The employee neglected to switch the heat blanket off and left it on overnight unattended. A fire ensued. The relevant policy of insurance excluded cover for loss or damage caused by “the nature or condition of any goods or the containers thereof sold or supplied by or on behalf of the insured ...”

The court ruled that despite the employee’s negligence (the causa causans) the effective, dominant cause was the defective pipes because they were not heat resistant. If they had been heat resistant, the fire would not have occurred. Being an exclusion, the court rejected the entire claim. Relevantly, however, the court agreed with Cairns LJ, that in the alternative, even if both causes were deemed effective and dominant, the fact that one was excluded from cover meant the policy did not respond.

As expressed by Cairns LJ:

On this approach, if one cause is within the words of the policy and the other comes within an exception in the policy, it must be taken that the loss cannot be recovered under the policy. The effect of an exception is to save the insurer from liability for a loss which but for the exception would be covered. The effect of the cover is not to impose on the insurer liability for something which is within an exception.

The court, therefore, had looked to the policy to ascertain the intention of the insurer. In McCann v Switzerland Insurance Australia Limited6 Gleeson, CJ said inter alia:

A policy of insurance … requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.

This purpose approach was adopted in McCarthy v St Paul International Insurance Co Ltd7 where Allsop J stated:

In each such case the solution was seen as an application of the revealed contractual intention of the parties. The scope of the insurance cover is identified by reading the policy as a whole, insuring clauses and exclusions in particular, and appreciating that loss caused in a particular way is excluded ...

And importantly:

It may be doubted that the solution in any given case is to be found in the application of any principle of insurance law, other than one which states that the rights of the parties to the policy are to be determined by reference to the terms of the contract as found.

The upshot of this is that each case will turn on the specific facts and the particular policy. Hams v CGU provides a useful case study and demonstrates that applying the Wayne Tank principle requires a careful examination of the facts.
Hams v CGU

Max Hams ran a 24,676 hectare sheep station. The property had numerous creeks and natural geographic depressions know as sumps. The creeks and sumps were usually dry but would retain water during periods of rain. The property was insured under a policy that excluded loss or damage caused by flood. The property was progressively inundated during an exceptional rain event in 2000. There was damage to the property and a hangar. Relevantly, the property had timber frames, floors and doors, carpet and general household contents. The hangar had steel frames and a concrete floor. The property and the hangar were both initially inundated by runoff from surface water from surrounding areas (prima facie covered under the policy), with subsequent inundation by flood when the creeks and sumps overflowed (not covered under the policy because it fell within the flood definition).

The court ruled as follows:

  • The initial inundation by runoff of surface water was the proximate and effective cause of the damage to the property. That is, the substantial damage was effectively caused by this insurable event operating independently of and prior to, that latter flood.
  • The initial inundation of the hangar by runoff of surface water was not a proximate or effective cause of damage as it had little
    effect on the steel frames and concrete floors. The damage was a combination of the two causes with the latter being more effective.
  • The policy did respond to cover the damage to the property.
  • The Wayne Tank principle applied to the hangar damage, ergo the policy did not respond.

So, interestingly, the same initial inundation was a proximate and effective cause of the damage to one building, but not to the other. If the initial storm water runoff had been mixed with floodwaters, that is, occurring simultaneously, the Wayne Tank principle would have applied and the claim denied.

Claims

Some eminently sensible and simple steps for claims professionals emerge from the law and from my own experience when determining the proximate or effective cause of the loss, and deciding what contributed to the loss when multiple causes are evident. The ten-step model I use is:

  • Know all the facts. Don’t assume facts and if you don’t know – ask! A thorough review of the expert report is very important, don’t just read the conclusion.
  • Establish what the claimant is seeking and why it is that he or she believes that they are entitled to the relief sought under the policy.
  • Identify the specific loss or damage.
  • Identify the proximate, effective causes. If appropriate, apply the “but for” test. Assess the timing of the damage and what caused the most damage.
  • Read the policy. Identify what it intended to say about the situation in question. Understand what it includes and what it expressly excludes.
  • Apply the policy to the facts. Don’t ask “how can I avoid this claim?” Instead, ask “how does the policy respond?” and look for any insurable events the claim could fall under.
  • Check if there are any special meanings or defined terms. If not, give the words their everyday dictionary meaning.
  • Consider whether the Wayne Tank principle applies.
  • Consider whether a strict application of the policy is required and is appropriate, or whether any commercial consideration should be considered i.e. compassionate or public interest grounds.
  • Explain the matter clearly to the insured. Take the time to explain the decision. This goes a long way and is often neglected.
Dispute Claims

No insured will be happy to learn that his or her claim has been rejected or limited. Be mindful that from the insured’s perspective, the raison d’être for insurance is peace of mind against the risk of loss or damage from insurable events. It is my experience that much of the anger and frustration relating to insurance claims stems from a lack of understanding of the policy’s inclusions, exclusions and payment limits (capped claims), which is exacerbated by poor communication at the point of sale or the initial claims notification. Point of sale is the most effective and appropriate time to ensure a clear understanding of the policy and to mitigate against disappointment.

Conclusion

Dealing with claims involving multiple causes of loss requires a common sense approach to each case based on the particular facts and policy terms. Determinations made in good faith through a careful application of facts and law is all that can be asked of any insurer or claims professional. Following the above ten-step model assists me in determining whether the claim is covered where one or multiple causes have contributed to the loss. Further, the spirit of utmost good faith should be the guiding principle for all insurance professionals.

Section 13 of the Insurance Contracts Act 1984 states:

A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to act toward the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

The reputation of an insurer rides heavily and predominantly on the shoulders of its frontline. A good reputation is vital. It is, in effect, an insurer’s best insurance policy. Getting it right the first time is important, especially when someone’s livelihood depends on it. However, unfortunately there will be times, like the case of the three little pigs, where the claim is not covered as a result of multiple causes contributing to the loss, and just one being expressly excluded by the policy.

A good name retains its lustre in the dark.


Bibliography

1 Insurance Contracts Act 1984.
2 The Three Little Pigs: The Nursery Rhymes of England, by Halliwell c 1886.
3 Understanding the ISR Policy: Manning, A. Mannings of Melbourne, 2005.
4 Causation in Australia Insurance Law, TressCox Lawyers, Newsletter 8 March 2011.
5 Proximate Cause in Insurance Law, Saunders, A.J, Canadian Advocates Quarterly Vol 32.
6 Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918-19] ALL ER Rep 443.
7 Hams v CGU Insurance Limited [2002] NSWSC 273.
8 CCR Fishing Ltd v British Reserve Insurance Co Ltd [1990] 1 SCR 814.
9 Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] QB 57.
10 HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc [1998] NSWSC 436.
11 McCann v Switerland Insurance Australia Limited [2000] 203 CLR 579.
12 McCarthy v St Paul International Insurance Co Ltd [2007] 157 FCR 402.

Notes
1  [1918-19] ALL ER Rep 443.
2  [2002] NSWSC 273.
3  [1990] 1 SCR 814.
4  [1974] QB 57.
5  [1998] NSWSC 436.
6  [2000] 203 CLR 579.
7  [2007] 157 FCR 402.

[1] Morgan, Re Brighton Hall Securities Pty Ltd (in liq) [2013] FCA 970 at 74

[2] Morgan, Re Brighton Hall Securities Pty Ltd (in liq) (No 2) [2013] FCA 1228 at 77

[3] Morgan, Re Brighton Hall Securities Pty Ltd (in liq) (No 2) [2013] FCA 1228 at 78