9^th Cir. applies “efficient proximate cause” test and finds “corrosion” can constitute “direct damage.”

The Ninth Circuit, applying Nevada law, affirmed a jury’s finding that Continental Casualty Company (“Continental”) was responsible for covering damage to equipment at an Olin Corporation (“Olin”) chemical plant in Nevada.   Continental issued Olin an insurance policy covering the plant’s boilers and machinery.  In late 2008, a series of incidents caused damage to the machinery.  Continental denied coverage based on its position that the damage was not covered because it was from corrosion and thus was not caused by an “accident” within the meaning of the policy.  According to the jury findings, corrosion was involved in the equipment failure, but the corrosion was the effect of an accident that occurred about a week earlier. The district court entered judgment for Olin based on the verdict and a partial settlement agreement.  Continental appealed.

At issue in the case was whether the term “corrosion” includes the penetration of magnetite dendrites into asbestos diaphragms that are baked onto metal cathodes inside the cells.  The district judge ruled that the “corrosion” was ambiguous and therefore allowed the jury to determine where the damage originated.  The Ninth Circuit agreed and held that whether this process was corrosion was ambiguous.  The policy did not define “corrosion,” and as applied to the case, the term corrosion led to multiple reasonable interpretations.  Therefore, the district court did not err in allowing the jury to make the determination.

On appeal, Continental argued that the district court improperly applied the “efficient proximate cause” doctrine.  Under this doctrine, “where covered and noncovered perils contribute to a loss, the peril that set in motion the chain of events leading to the loss or the ‘predominating cause’ is deemed the efficient proximate cause or legal cause of loss.”  According to Continental, the doctrine is limited to “all risk” policies and does not apply to specific-peril policies such as Continental’s boiler-and-machinery policy at issue.  The ninth circuit disagreed and concluded that the efficient proximate cause doctrine is not limited to all-risk policies.

Continental also argued that because its policy covers only “direct damage” to covered property caused by a covered cause of loss, the policy language precludes use of the efficient proximate cause doctrine.  According to Continental, its policy language means that coverage exists only when a covered peril is the last link in the causal chain that results in the damage and not when a covered peril only sets in motion the chain of events leading to the loss.  Again, the Ninth Circuit disagreed and concluded that the use of “direct damage” in the policy is consistent with the efficient proximate cause doctrine and therefore, as the jury found, the earlier accident could be found to be the cause of the later corrosion and ultimate damage.

Olin Corp. v. Continental Cas. Co., No. 14-15017 (9th Cir. Mar. 17, 2016).