Drilling Down Policy Language Results in Finding Two Occurrences Because Two Separate Events were Proximate Cause of Insured’s Losses
Hundreds, if not thousands, of cases have been decided based on the meaning of “arising out of” and “arising from” when used in an insurance policy. The recent case of Seahawk Liquidating Trust v. Certain Underwriters at Lloyds London, 2016 U.S. App. LEXIS 871 (5th Cir. Jan. 19, 2016)demonstrates that it is not only the words that matter, but the context in which the words are used is equally important. In Seahawk, the Fifth Circuit Court of Appeals held that two storms occurring months apart and causing damage to an oil rig, were two separate occurrences. As such, the insurer was not required to pay the insured’s $17 million claim because two separate deductibles of $10 million had not been met.
The oil rig was damaged initially by a storm in February 2010. While repairs to the damage caused by the February storm were underway, a second storm struck in July 2010 causing additional damage. The insured then made a $17 million claim for the cost of all repairs. The insurer rejected the claim on the grounds that the two storms were two different occurrences and the policy’s $10 million deductible for each occurrence had not been met.
The insured sued for coverage. The district court agreed with the insurer’s position that the two storms were two separate occurrences. The Court of Appeals affirmed. The parties’ arguments focused on policy language which defined an “occurrence” to include “a sequence of losses or damages arising from the same occurrence.” The insured argued that the court should apply simple “but-for” causation when evaluating whether the damages that occurred in the second storm “arose from” the first storm and were therefore caused by the same occurrence. Under this standard, the insured argued, damages that occurred in the July storm were caused by the earlier storm because the repairs needed after the February storm were incomplete when the July storm hit. But for the February storm and the damaged condition of the rig resulting from that storm, the July storm would not have caused damage to the rig.
The Fifth Circuit disagreed with the insured’s position. The court rejected the argument that “arising from” could be satisfied by but-for causation. Instead, the court relying on Texas law used a “proximate-cause” analysis to determine whether damages from the second storm arose from the first storm and were therefore the result of one occurrence. In doing so, the Court distinguished a number of cases decided under Texas law in which courts interpreted the phrase “arising out of” to require only “but-for” causation because the interpretation was used in those cases to broaden coverage. The court declined to adopt “but-for” causation because interpreting “arising from” so broadly in the context of the definition of occurrence would not always expand coverage. Rather, court focused on Texas cases in which courts determined the number of occurrences by focusing on the cause and not the effects. Accordingly, the court used a proximate cause test and held that damages that occurred after the August storm were not proximately caused by the earlier storm.
The court’s decision is noteworthy because courts in Texas and throughout the country typically assign “but-for” causation to “arising out of” and even “arising from.” However, assigning such a broad interpretation to “arising from” as it was used in the policy’s definition of occurrence appeared to be too much of a stretch for the court. Therefore, two storms, separated by months, each causing damage to the insured’s oil rig were two separate occurrences.