Determining appropriate policy limits is no easy task. On one the hand, an insured has motivation to keep its retentions, deductibles and premiums down to a reasonable level. On the other hand, that fiscal interest is balanced against the security found in high policy limits designed to protect against a potential serious claim that requires a large payout. Often clients rely on the advice of a broker to help them select appropriate limits and policy terms. When claims come in the door, and the limits are insufficient to cover the damages, the broker may find themselves in the crosshairs of an angry client liable for damages not covered by their policy - and open the door for claims of professional negligence against the broker. Whether an insurer is obligated to defend and indemnify the broker against a claim of professional negligence is a question of policy interpretation recently addressed by the Ninth Circuit in Bliss Sequoia Ins. & Risk Advisors v. Allied Prop. & Cas. Ins. Co., No. 20-35890 (9th Cir. Oct. 27, 2022).

Bliss Sequoia acted as an insurance broker for a water park that experienced a near drowning incident involving a six-year old child. The broker came under fire when the water park settled the personal injury claim for $49 million, or $44 million short of its liability coverage. In a third party action, the water park assigned its claims against the broker to the injured party, who filed suit against the broker for professional negligence for failing to secure the appropriate amount of coverage for the water park. Bliss Sequoia requested that its insurer defend and indemnify it against the professional negligence claim. The injured party attempted to rely upon language in the policy covering any amounts that Bliss Sequoia was “legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” The court ruled that the insurer was not obligated to defend or indemnify an insurance broker against a professional negligence lawsuit. It found that pure but-for causation by itself would result in uncontained liability for insurers and without a limiting tort principle, such as proximate causation, liability could potentially extend into infinity and beyond.


Does the term “because of bodily injury” in an insurance policy refer to purely but-for causation, or should a more restrictive causation standard be applied?

Background Facts

Cowabunga Bay Water Park requested professional risk management advice from Bliss Sequoia Insurance and Risk Advisors, Inc. and Huggins Insurance Services, Inc. (collectively herein Bliss Sequoia) as to the type and amount of insurance that would be sufficient to cover its water park. Bliss Sequoia obtained coverage on the water park's behalf with an overall limit of $5 million. A little over a year after the policy was secured, a six year old boy suffered a near drowning accident at the water park. The family of the injured boy brought a claim against the water park alleging that the park did not have a sufficient number of lifeguards to maintain safe conditions. The suit eventually settled for $49 million.

Given the fact that the water park's coverage was $44 million short of the settlement amount, it sued Bliss Sequoia claiming professional negligence. It specifically claimed that the limits of the insurance policy were unreasonably low. In the settlement agreement, the water park assigned its right to all claims against Bliss Sequoia to the family that brought the original lawsuit. The family filed a third-party complaint which asserted the assigned claims and subsequent harm suffered "as a result of the substandard and insufficient risk management and insurance brokerage advice given by Bliss Sequoia."

Bliss Sequoia argued that its general liability insurer, Allied Property and Casualty Insurance (Allied), was required to defend and indemnify it against the claim. Bliss Sequoia pointed to a provision in their contract with Allied which provided, "Allied will pay those sums up to the applicable limit of insurance that Bliss Sequoia becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies. Allied will have the right and duty to defend Bliss Sequoia against any suit seeking those damages for which there is coverage under this policy."

The policy went on to state that bodily injury must be "caused by an occurrence, including an accident and that damages because of bodily injury include damages claimed by any person or organization for care, loss of services or death resulting at any time from the bodily injury."

Allied denied coverage to Bliss Sequoia and it filed this action in the District of Oregon as a result. Bliss Sequoia requested a declaratory judgment that Allied had a duty to defend and indemnify them in the water park matter. Allied filed for summary judgment and the court granted their motion finding that the claims did not arise out of bodily injury as is required by the policy. Bliss Sequoia appealed the judgment.

Did the professional negligence claim arise out of the water park patron's "bodily injury?"

The crux of this appeal centers around the policy language quoted above which required Allied to defend and indemnify in cases arising out of "bodily injury" or "property damage." Bliss Sequoia argues that the professional negligence claims would not have come to fruition but-for the boy's bodily injuries at the water park and the subsequent lawsuit filed by his family. In other words, if the lawsuit had never been filed, the water park would have never sued Bliss Sequoia for professional negligence. Bliss Sequoia followed the reasoning of the court in United States v. George, 949 F.3d 1181, 1187 (9th Cir. 2020), which held that a "but-for cause of harm can be anything without which the harm would not have happened." Here they connected the dots by arguing that if the boy had not been hurt, Bliss Sequoia wouldn't be facing a professional negligence lawsuit.

Allied countered with a long line of court cases that dispute such a literal interpretation of the "but-for" causation principle. The Supreme Court of Oregon reasoned, "In a philosophical sense, the consequences of an act go forward to eternity, and the causes of an event go back to the dawn of human events, and beyond." Holmes v. Securities Inv. Prot, Corp., 503 U.S. 258, 266 n.10 (1992). The court here went on to further state that if it followed Bliss Sequoia's suggested interpretation of "but-for" causation, then the boy's injury would not have occurred but-for the construction of the water park, or but-for "the first patent for a water slide in the United States," etc.

Explained another way, allowing the scope of 'but-for" liability proposed by Bliss Sequoia would mean that "liability insurance companies would have no way of setting premiums equal to expected costs; they would be insuring against a range of possible claims so vast that an estimate of the probability that a claim within that range would actually be filed would be arbitrary." James River Ins. Co. v. Kemper Cas. Ins. Co., 585 F.3d 382, 387 (7th Cir. 2009). "Pure but-for causation would result in infinite liability for all wrongful acts. The law almost never employs that standard without limiting it in some way." Holmes, 503 U.S. at 266 m.10.

The law uses proximate causation to set the potentially endless line of liability into manageable chunks. Proximate causation exists "only when a harm was a foreseeable result of the wrongful act." George, 949 F.3d at 1187. The majority of jurisdictions employ proximate causation in the determination of liability.

Have Oregon Courts Interpreted "But For" Causation With a Broad Stroke, or By Way of a More Narrow Tailoring?

The Oregon Court of Appeals addressed this issue in the informative case of Holman Erection Co. v. Employers Insurance of Wasau, 920 P.2d 1125 (Or. Ct. App. 1996). In that case a subcontractor failed to obtain the proper insurance on behalf of the general contractor, as required in the agreement between the parties and was subsequently sued by the general contractor. The subcontractor then asked its own insurer to defend and indemnify it against the general contractors' suit. The subcontractor's insurer denied the request. Like this case, the only applicable clause that could be stretched to imply liability included the language "insurer will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury." Id. at 1129. The court ruled that bodily injury did not extend to a breach of contract suit. It found that "pure, but-for causation" was not enough.

The Oregon Supreme Court has not decided a case directly on point to the question at hand, but it does apply general principles of tort law. Although Oregon does not refer to it as "proximate cause" in tort cases, the court "limits liability to situations in which the harm to the plaintiff was a reasonably foreseeable result of the defendant's negligence." Lasley v. Combined Transp., Inc. 261 P.3d 1215, 1219 (or. 2011). In fact, the Oregon Supreme Court has applied these general tort principles in cases involving insurance contracts as well. In the case of Oakridge Community Ambulance Service, Inc. v. United States Fidelity & Guaranty Co., 278 Or. 21 (Or. 1977), the court found that "construing the policy required identifying an appropriate stopping point on the continuum of causal connection." This case supports the court's conclusion here that pure but-for causation is not sufficient to hold a party liable in insurance cases of this type.

Therefore, the term "because of bodily injury" in the insurance policy held by Bliss Sequoia and issued by Allied only includes damages for injuries that result reasonably or foreseeably from bodily injury. It does not include all of the other possible lawsuits that could arise as a result of the injury. The family's lawsuits against the water park arose out of bodily injury, but the water park's claims against its broker premised on professional negligence did not and as such were not covered under the policy with Allied. Therefore, Allied did not have a duty to defend or indemnify Bliss Sequoia in this case. The judgment of the lower court was affirmed. 

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