Assessing appropriate policy limits is a daunting task for any insurance broker. Errors in judgment can result in significant losses for the client as well as insurers. Businesses have an interest in maintaining affordable coverage, but also need to ensure that they are adequately covered by insurance should the worst scenario occur. Businesses look to insurance brokers to help them properly assess their risk and determine the amount of coverage required to minimize that risk. When a broker provides inaccurate advice and their clients find themselves in the pickle of having lacking insurance coverage, the broker may be on the hook for professional negligence.  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).

Question Before the Court

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?

Summary of Facts

Cowabunga Bay Water Park obtained 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.

Due to the fact that the water park’s coverage was $44 million short of the settlement amount, it sued Bliss Sequoia claiming professional negligence. It 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 water park patron’s claim stem from actual bodily injury sustained at the water park or from the alleged professional negligence of the insurance broker?

This case examines the policy language 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. If the lawsuit had never been filed, the water park would not have been sued by 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 responded by pointing to a series 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.

In other words, 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 sections. 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.

The Nuances of Interpreting “But For” Causation

In Holman Erection Co. v. Employers Insurance of Wasau, 920 P.2d 1125 (Or. Ct. App. 1996), the court addressed the application and meaning of “but for” causation in this context. 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.

Although there is currently no case directly on point, the Oregon Supreme Court generally applies traditional principles of tort law. Notably, 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.

Meet the Authors

Graham Miller is the Managing Partner of Wood, Smith, Henning & Berman’s Portland office and a Partner in the firm’s Rancho Cucamonga office. A trial and litigation attorney, Graham represents firm clients in an array of practice areas. His areas of expertise include complex commercial, business, and financial matters. He also handles professional liability, employment, catastrophic injury, transportation, railroad and construction litigation. Graham has extensive experience representing public entities in connection with a wide range of litigated matters. His experience includes all aspects of the litigation process, successfully representing clients at depositions, mediations, arbitrations and trials.

Graham attended the University of La Verne, where he received an International Business and German degree. Graham went on to attend the University of La Verne, College of Law where he graduated cum laude
Karin Schaffer is a partner at Wood, Smith, Henning & Berman and actively practices in Oregon and California. She specializes in complex civil litigation in both state and federal courts involving construction; civil rights issues; professional liability; transportation; labor and employment matters, including the defense of discrimination and wage and hour matters; catastrophic injury; and general tort (personal injury and premises liability) and product liability. In addition to handling civil litigation matters, Karin’s practice focuses on providing clients’ executive teams with strategic advice on labor and employment issues, and resolving pre-litigation employment claims related to wrongful discharge, retaliation, harassment, discrimination, wage and hour compliance, and FMLA leave and employment agreements. She possesses a broad range of experience in handling transactional matters, including those in the areas of real estate, trust and estates, construction, and business.

Karin received her law degree from Loyola Marymount University, and holds a Bachelor of Arts in Sociology from the University of California at Berkeley.