Court Sharpens Causation Standard in All-Risk Policies in NC Church Mutual Case

In all-risk policies, an excluded cause of damage must be the sole cause of damage for the exclusion to apply, a federal appeals court decided last week in an opinion that clarifies North Carolina law but could make some claims more costly for insurers.

“The district court’s conclusion comports with North Carolina precedent, which has set out different causation standards for all-risk insurance policies than what applies to other types of insurance coverage,” the U.S. 4^th Circuit Court of Appeals wrote in Wake Chapel Church vs. Church Mutual Insurance.

The precedent is a 1973 decision by the North Carolina Supreme Court, which laid down a general rule that, for all-risk policies, “coverage will extend when damage results from more than one cause—even though one of the causes is specifically excluded,” the appellate judges explained.

The 4^th Circuit’s Feb. 19 decision hinged on the cause of scratches and scrapes on Wake Chapel’s metal roof in Raleigh. The church filed a claim in 2018, arguing that the damage was the result of a heavy snowstorm. An engineer reported that ice and snow sliding on roof was one cause of the damage.

Wisconsin-based Church Mutual, one of the world’s largest insurers of churches, denied the claim, contending that the scratches came from workers and a crimping machine when the roof was installed almost two decades earlier. The installers had also failed to apply a protective coating on the roof, the insurer said. The church’s policy excluded payment for damages caused by decay, deterioration, latent defect or “a quality of the property that causes it to damage itself.”

The chapel filed suit, alleging breach of contract and bad faith. After a four-day trial, a jury found in favor of Wake Chapel, noting that the snowstorm caused the damage. The jury awarded $1.1 million for actual cash value on the roof. Church Mutual asked for a directed verdict overruling the jury. The district court judge declined, and the insurer appealed to the 4^th Circuit.

Church Mutual argued on appeal that the lower court had applied the wrong causation standard. Under North Carolina law and a 1957 high court ruling, an excluded cause may be considered only the predominant cause of the damage, not the sole cause, in order to be excluded. Put another way, a covered cause must be the main cause of damage to permit recovery. The chapel’s engineer had not established that, the insurer argued. Also, the harm from the roof installation came well before the policy period.

“If property is already damaged, and a separate cause later makes the damage worse, that does not transform existing and uncovered damage into a covered loss,” wrote Church Mutual’s attorneys, Steven Bader and Jennifer Welch, in a reply brief in the appeal.

But the appellate panel pointed out that the precedent opinion cited by Church Mutual’s lawyers did not examine an all-risk policy. In a 1973 case, known as Avis vs. Hartford Fire Insurance, the state court established a different standard for all-risk policies. Later, the state Supreme Court clarified further and explained that, in the Avis ruling, court held that the insurer must provide coverage where one cause of an accident is covered by an all-risk insurance policy and the other is not.

“Avis and later cases compel the conclusion that all-risk insurance policies provide coverage where a cause that is not subject to an exclusion at least partially contributed to the damage,” the 4^th Circuit panel concluded.

Because the parties do not dispute that Church Mutual issued Wake Chapel an all-risk policy, the district court correctly employed a causation standard in line with the Avis opinion, the panel noted.

Attorneys involved in the case could not be reached Monday.