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Causation and Insurance Liability: Of Squirrels and Electrical Arcing

With respect to drafting San Diego business and insurance contracts, special attention should be paid to drafting clear and comprehensive definitions of causation particularly because causation is one of the more difficult concepts to understand in the law. Indeed, causation is a difficult concept in nearly every context including, for example, business success. What caused the drop in sales that occurred last business quarter? What caused my supplier to be late with the delivery? Causation issues arise with various types of contractual provisions, including:

  • Indemnity provisions
  • Hold harmless clauses
  • Excusable delay clauses
  • Insurance policy exclusions
  • Quality control standards

The best business practice is to clearly define in the contract what the parties mean by causation. In this way, the courts will be properly guided and will not have to resort to their own interpretations. In this regard, an experienced San Diego corporate attorney is essential.

An interesting case involving a squirrel and electrical arcing provides an example of good drafting in an insurance context. See City of West Liberty, Iowa v. Employers Mutual Casualty Co., Case No. 16-1972 (Iowa Supreme Court February 1, 2019). We normally write about California law, but occasionally cases from our sister States can be interesting and instructive. The relevant facts of City of West Liberty are these: in November 2014, a gray squirrel scampered into an electrical substation owned by the City of West Liberty, Iowa. The substation was insured by Employers Mutual Casualty Company (“EMC”). As the squirrel was climbing on equipment, it touched a cable clamp which was electrified at 7200 volts and simultaneously touched the grounded steel frame of the substation. In so doing, the squirrel completed an electrical circuit that caused a large and powerful arcing to occur, lasted 30 to 45 seconds. The equipment and the substation sustained substantial damage.

The city submitted the damage claim to the insurance company, but EMC denied coverage. The insurance policy at issue had an exclusion for any property damage that was the result of electrical arcing. Specifically, the policy stated:

“PERILS EXCLUDED: … 2. “We” [EMC] do not pay for loss or damage that is caused by or results from one or more of the following excluded causes or events: …

(g) Electrical Currents — “We” do not pay for loss caused by arcing or by electrical currents other than lightning. But if arcing or electrical currents other than lightning result in fire, “we” cover the loss or damage caused by that fire.”

EMC argued that the damage to the substation was caused by electrical arcing; the city argued that the damage was caused by the squirrel. Based on a reading of the insurance contract (policy), the trial court agreed with EMC and, just recently, the Iowa Supreme Court affirmed.

This policy exclusion is a good example of clear contract drafting. The words “arcing or electrical currents” are well-understood in the power-generating industry. Furthermore, there is only one exception to the non-coverage for “arcing and electrical currents” which is “lightning.” The existence of an exception — “lightning” — was a signal to the courts that the parties meant to exclude other events and things that might cause arcing or electrical currents such as squirrels. Had the parties intended to cover arcing caused by squirrels, the parties could have done so. But they did not. As such, the victory for the insurance company was affirmed.

Legal lesson: clear and unambiguous contract drafting is important.

Contact San Diego Corporate Law

If you want more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law and the legal needs of San Diego businesses including contract review and drafting. Mr. Leonard can be reached at (858) 483-9200 or via email.

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