High Fire Season Followed by El Nino Sets California Policyholders on Collision Course With Property Insurers

Regular readers of the San Francisco Chronicle saw two familiar headlines in the September 10, 2015 issue of that paper.  The first – “Northern California wildfire explodes in size”[1] – 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 Nino Odds Rise Again, Tracking to Be a Blockbuster” – was more unusual, and almost certainly more welcome to local readers.  The El Nino 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.  The last strong El Nino occurred in 1997-1998, when severe storms caused flooding in the southeast, ice storm in the northeast, tornadoes in Florida, and flooding in California.[2]  In 1998, California had its wettest February on record, causing widespread flooding, mudslides, and agricultural disruptions.  News of the impending 2015-2016 El Nino 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 Nino may have more damaging effects, especially in areas impacted by fire.

The Science of Fire and Mudslides

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.”[3]  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.[4]

Another factor involves the chemical composition of the soil itself.  As fire destroys vegetation, it releases oils, resins and gases into the soil.  During wildfires, temperatures under the earth are far lower than above – soil is an excellent insulator – and as the heated plant matter travels downward, it rapidly cools, forming a waxy layer inches from the surface.  The waxy layer is hydrophobic, and prevents the ground from absorbing water.[5] 

During storms, the layer of hydrophobic soil combines with weakened root systems, causing topsoil to rapidly saturate and, in hilly areas, slide downwards.  The lack of any forest canopy, another result of fire, magnifies the effect of precipitation because there is nothing to shield the ground from the rain.  The resulting mudslides can destroy property that only recently survived a fire.  Because vegetation takes time to recover, and hydrophobic soil layers can last for years, mudslides can occur many rainy seasons after the wildfire that originally caused them.

My Policy Excludes Earth Damage, But This Mudslide Is Covered?

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. 747, 754 (2005).  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).  In that case Barbara Howell owned a home and several rental properties on a hillside that was susceptible to mudslides.  In the summer of 1985,  a fire destroyed much of the vegetation on the hillside in question. The following winter, a storm overwhelmed the denuded hillside, causing a mudslide that damaged the Ms. Howell’s home and rental property.    

Ms. Howell made a series of claims on various property insurance policies, each of which excluded damage caused by water or earth movement.  State Farm denied, arguing that the loss would not have occurred “but for” an excluded peril.  Ms. Howell sued, and presented expert testimony that the landslide “probably would not have happened had the ground cover been intact.”  Id. at 1449.  The trial court granted summary judgment for State Farm, but the court of appeals reversed, holding that California law required property insurers to provide coverage when an insured peril is the efficient proximate cause of loss, “regardless of other contributing causes.”  Id. at 1452.  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).  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’s, burning their garage instead.  One month later, a mudslide on a nearby hillside finished the job and destroyed the Stankova home completely.

The Metropolitan homeowner’s policy covered direct loss caused by fire, but excluded coverage for loss caused by either water or earth movement, including mudslides.  The policy also included an “anti-concurrent causation provision” designed to avoid coverage for losses with both covered and uncovered causes.  The policy explicitly excluded damage that would not have happened but for an excluded cause, even if the excluded case was itself caused by a covered event. 

Metropolitan paid for the garage, but denied Ms. Stankova’s claim for the house, stating that water and earth movement was the “obvious” cause.  A district court agreed and granted Metropolitan summary judgment.    Ms. Stankova appealed and, citing Howell, argued that the evidence showed the fire had directly caused the mudslide. Metropolitan argued that, even if the loss was indeed caused by both fire (covered) and the mudslide (uncovered), the Policy language clearly barred coverage in such situations. According to Metropolitan, Howell did not apply, because Arizona did not follow the doctrine of efficient proximate cause. 

The Ninth Circuit agreed with Metropolitan that the efficient proximate cause rule did not apply, but nonetheless reversed the district court, holding that there was a triable issue of fact as to whether the loss was covered.  Arizona law mandates a standard fire insurance policy that covers 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.