A homeowners’ insurance policy does not always mean what it says.  That is, in effect, what the California Court of Appeal recently concluded in Vardanyan v. AMCO Ins. Co., 243 Cal. App. 4th 779 (2015), a case involving the well-established “efficient proximate cause” doctrine.  The insurer’s policy explicitly stated it did not cover property damage caused by collapse of a building unless the collapse was caused “only by” hidden decay, hidden insect damage or a couple other listed perils.  Although the collapse was caused in part by non-listed perils that were excluded by the policy, the Court of Appeal still concluded the loss should be covered if the jury on remand decides one of the listed perils is the most important cause of the loss.  It looked not just to the written contract language, though the claim would have been excluded if it did that, but to public policy as well.  The court held the insurer’s collapse provision “is an unenforceable attempt to contract around the efficient proximate cause doctrine.”

In Vardanyan, Artyun Vardanyan sued his homeowners’ insurer, AMCO Insurance Company, alleging it breached their insurance contract and acted in bad faith by refusing to cover damage to his house when it partially collapsed.  Mr. Vardanyan submitted a claim which resulted in numerous experts investigating what caused the collapse and, ultimately, in AMCO denying the claim.  At trial, “The evidence presented by both sides indicated there were multiple causes of the damage to plaintiff’s house.”  Mr. Vardanyan’s experts testified dry rot, decay, termite damage and water coming from behind the walls caused a bedroom and the living room to collapse (i.e. those floors sunk and were resting on the ground).  AMCO’s experts testified that various sources of moisture—roof leaks, gutters and downspouts that did not channel the water away from the house, a faucet spraying water on the exterior of the house for a significant length of time, a leaking toilet and bathtub, and humidity—contributed to the collapse, along with poor construction, termite damage and decay.

The policy’s basic insuring provision stated it covered Mr. Vardanyan’s house “for risk of direct physical loss . . . except collapse other than as provided in Other Coverage 9 . . ..”  Other Coverage 9, in turn, provided coverage for losses involving collapse of a building or part of a building “caused only by one or more” of a list of specific perils, including hidden decay, hidden insect or vermin damage, or “weight of contents, equipment, animals or people.”  The “general exclusions” section of the policy contained exclusions for water damage, neglect by the insured, inadequate or defective design, workmanship, construction, remodeling, or materials, and inadequate or defective maintenance.  In denying the claim, AMCO reasoned the damage to the home was not covered by many of these policy exclusions.  The evidence at trial showed that both covered perils listed in the Other Coverage 9 collapse provision and non-listed, excluded perils jointly caused the home to partially collapse.

At trial, AMCO’s lawyers requested a special jury instruction based upon the collapse provision’s explicit language.  Namely, AMCO’s proposed jury instruction read in pertinent part, “If you find that the property or a part of the property collapsed, Mr. Vardanyan bears the burden of proving that the collapse was caused only by one or more of the following:  . . . hidden decay; hidden insect or vermin damage; weight of contents, equipment, animals or people; . . . . The insurance policy’s coverage for collapse does not apply if the cause of the collapse involved any cause other than those listed above.”  Mr. Vardanyan, in contrast, requested the form jury instruction that is routinely given in homeowners’ property damage claims where there are multiple causes of the loss, CACI No. 2306, that is, where the “efficient proximate cause” doctrine applies.  That doctrine was developed by California courts decades ago and applies where multiple perils cause a loss, at least one of which is covered by the insurance policy and one of which is not.  The doctrine is that the most important cause of the loss or, stated another way, the predominant cause of the loss, also called the “efficient proximate cause,” dictates whether the loss is covered.  In other words, if two perils caused the loss but the covered peril was its predominant cause, then the loss is covered despite that the excluded peril also contributed to the loss.  Mr. Vardanyan’s proposed instruction followed that doctrine and stated in pertinent part, “You have heard evidence that the claimed loss was caused by a combination of covered and excluded risks under the insurance policy.  When a loss is caused by a combination of covered and excluded risks under the policy, the loss is covered only if the most important or predominant cause is a covered risk.”

The trial court refused Mr. Vardanyan’s jury instruction and concluded AMCO’s instruction should be read since it accurately reflected what the policy’s collapse provision stated.  It decided the jury should be instructed “that plaintiff’s property damage loss was covered by his policy only if it was caused by perils specifically listed in the collapse coverage provision and no others.”  Mr. Vardanyan conceded he could not prevail at trial under AMCO’s instruction because the evidence was clear that both covered perils listed in the policy’s collapse provision and uncovered, excluded perils not listed there jointly caused the loss.  Consequently, the trial court granted AMCO’s motion for a directed verdict, and Mr. Vardanyan appealed.  He contended his jury instruction should have been used because AMCO’s instruction ignored the “efficient proximate cause” doctrine.

The California Court of Appeal agreed with Mr. Vardanyan.  It stated:

We conclude plaintiff’s interpretation of the Other Coverage 9 [collapse] provision is the correct interpretation, consistent with the efficient proximate cause doctrine. A policy cannot extend coverage for a specified peril, then exclude coverage for a loss caused by a combination of the covered peril and an excluded peril, without regard to whether the covered peril was the predominant or efficient proximate cause of the loss. Other Coverage 9 identifies the perils that are covered when the loss involves collapse. If any other peril contributes to the loss, whether the loss is covered or excluded depends upon which peril is the predominant cause of the loss. To the extent the term “caused only by one or more” of the listed perils can be construed to mean the contribution of any unlisted peril, in any way and to any degree, would result in the loss being excluded from coverage, the provision is an unenforceable attempt to contract around the efficient proximate cause doctrine.

The Court of Appeal also sided with the policyholder on the burden of proof.  AMCO’s proposed jury instruction stated it was Mr. Vardanyan’s burden to prove his loss fell within the policy’s collapse provision instead of requiring AMCO to prove that the loss was excluded.  But that instruction reverses the well-established rule that an insurer has the burden to prove an exclusion or other provision that limits coverage applies (once the policyholder first meets its initial burden of showing the loss comes within the policy’s basic insuring provision).  The Court of Appeal reversed the directed verdict in favor of AMCO, remanded the case to the trial court for a new trial, and instructed it to read Mr. Vardanyan’s instruction to the jury instead of AMCO’s.

The Vardanyan case illustrates why it is critical that a homeowner retain an experienced insurance coverage lawyer before battling his insurance company.  While the insurer may quote seemingly insurmountable exclusionary language from its policy, California courts may have interpreted the language differently in favor of policyholders or, as in the case of Vardanyan, held the policy provision is unenforceable because it contravenes well-established California law.