Proximate Cause: Principle of Insurance Law

Author: Samparna Mishra, Xavier Law School, XIM University.

The principle of proximate cause is an important aspect of insurance law that determines liability by identifying the dominant cause of a loss. This paper explores the doctrine of Causa Proxima that holds the immediate and effective cause of loss rather than a remote cause should be considered in insurance claims. In this paper judicial precedents in UK, US, India and Canada is analysed and it evaluates how courts have interpreted proximate cause in various insurance disputes. The findings of this paper illustrate the important role of proximate cause in ensuring fair and consistent claim settlements and emphasis in contractual interpretation.

Insurance Law, principles of Insurance Law, Proximate Cause, Liability Determination, Insurance Claims, Insured Perils, Policy Interpretation

The principle of Proximate Cause in insurance law has been extensively discussed in this paper along with judicial precedents and academic studies. This paper reviews the foundational theories, judicial interpretations and emerging challenges related to proximate cause. Several scholars and policymakers argue for clearer definitions of proximate cause in insurance contracts to reduce litigation. Courts have moved from a rigid, immediate-cause approach to a more contextual and fact specific analysis.

The study adopts a doctrinal research approach, analysing statutory provisions, case laws, and legal principles that govern proximate cause in insurance law. Primary sources include legislation (Insurance ACT 1938, Consumer Protection Act 1986) and Judicial decisions from Supreme court of India and other relevant jurisdictions. Secondary sources include legal commentaries and journal articles. It also includes a comparative legal method for examining interpretations of proximate cause across different countries to address similarities and differences.

Insurance is financial arrangement where an individual or entity i.e. the insured pays a premium to an insurance company i.e. the insurer for protection against specific risks. If risks like damage, loss, illness, or liability occur then the insurer compensates the insured according to the terms of the policy. The Main purpose of taking insurance is to provide financial security and reduce the impact of unexpected losses.

The rule of Causa Proxima is derived from a latin phrase Causa Proxima Non Remota Spectator (the immediate, and not the remote cause is to be considered). In this paper we will discuss the importance of the rule of Causa Proxima which is a key principle of Insurance and is concerned with how the loss or damage actually occurred and whether it is actually a result of an insured peril. It lays down the test of proximate cause in Insurance Law, in order to identify the causation of the loss or damage. It seeks to support the topic by examining how the rule has been interpreted over time, considering trends in countries such as the UK, US, India and Canada.

Cause is a fundamental component in insurance law. Insurance cannot restore the life or property lost but it can compensate to some extent for the financial loss. Insurance law recognises that loss or damage may be the product of multiple causes. Every field follows well-established and systematically structured principles to accomplish its objectives. In insurance law there exists a body of doctrines that has its theories and procedures that provides clarity on its practices and guides the people in making decisions when multiple options are available to them. These principles serve as fundamental rules of action that are widely accepted and followed by various participants in the insurance industry.

Proximate cause is a legal limitation on cause-in-fact. In insurance law, for the purpose of paying the insured loss, it has to be seen what was the cause of loss. If the immediate cause is an insured peril, the insurer is bound to make good the loss. The concept of causa proxima is highly significant, and determining it correctly is crucial. This principle can be interpreted in two distinct ways, it was addressed in Leyland Shipping Co. Ltd. Vs. Norwich Union Fire Society Ltd. 

In Pink Vs Fleming it was held that only the immediate cause of the loss should be considered since the test of the final event in a chain of occurrences is well established, contracts are presumed to be made with this understanding in mind.  In Reischer Vs. borwick the foundation of modern interpretation was upheld which states that the principle does not refer to the immediate cause but rather to the most effective or dominant cause. So the proximate cause is the one that has the most influence in bringing about the result. The proximate cause can be the initial cause or the final cause. 

In recent landmark judgements the SC of India has significantly influenced the interpretation of proximate cause in insurance law. In Sonell Clocks and Gifts Ltd Vs New India Assurance Co. Ltd. 2018 the insured’s claim was repudiated due to delayed notification of the loss. The SC upheld the insurer’s decision that timely notification requirement is not a technical matter but sine qua non for a valid claim to be pursued by the insured as agreed upon between the parties. This judgement underscores the importance of adhering to policy conditions, as failure to do so can be considered as the proximate cause for claim denial. 

In Reliance Life Insurance Vs. Rekhaben Nareshbhai Rathod 2019 the insured’s obligation to disclose material facts was questioned where the SC exclusively discussed the duty of disclosure noting that the proposal form is crucial for gathering information about a potential client. The court observed that any suppression, untruth, or inaccuracy in the proposal form constitutes a breach of the duty of good faith. This decision highlights that non-disclosure or misrepresentation by the insured can be proximate cause for the insurer to repudiate a claim  

In Pawsey & Company v. Scottish Union and National Insurance Co., proximate cause was defined as "the active, efficient cause that initiates a sequence of events leading to a particular outcome, without any interruption from an independent and new force."

1. Finding out the causes of damage in an insurance claim

2. To check whether the proximate cause is an insured peril 

3. If the proximate cause is an insured peril, the insurer is liable to compensate the insured for their loss.

   
   

EXAMPLES

1. A man was cycling to work, he encountered a riot erupting on the street. Due to the unrest, authorities imposed a curfew, forcing him to turn back and preventing him from reaching his workplace. In this situation, the primary reason he could not attend office was the street riot.

2. If a ship malfunction causes a fire that damages cargo, then the fire is the proximate cause. 

3. If a flood causes electrical short-circuits that cause a fire, the flood is the proximate cause.

4. A textile company took an insurance policy covering fire damage. A fire broke out in the insured premises, and while the fire was being controlled, water used for extinguishing caused further damage to the textile stock. When the company claims for fire damages stating fire as the proximate cause of the entire loss. The insurance company cannot deny the claim for water damage arguing that the immediate cause was water and not fire because water damage was a direct and inevitable consequence of efforts to control the fire. The insurer cannot escape the liability by separating the causes into fire and water damages and would be held liable to pay for the entire loss.  

5. Suppose a company dealing in precious gems and jewellery had taken a burglary insurance policy from an insurance company. One day riots took place and a mob forcefully entered the insured premises and looted the jewellery. The insured company claimed that the proximate cause of the loss was a burglary, even if it occurred during a riot. The insurance company can deny the claim arguing that the loss was due to a riot and not a burglary because a burglary means forcible entry with criminal intent which was not the primary motive of the rioters.

ORIENTAL INSURANCE CO. LTD. VS M/S J.K CEMENT WORKS AIR 2020 SUPREME COURT 921

Facts of the Case: 

This case revolves around an insurance dispute where the respondent (complainant) is a cement manufacturer with a factory in Nimbahera, Rajasthan, where coal is stored in an open yard. The respondents had a Standard Fire and Special Perils insurance policy from the Appellant covering damages from floods and inundation among other risks. On 29.08. 2003 and 30.08. 2003 heavy rains caused coal to be washed off and damaged. The respondent reported the loss and a surveyor assessed damages at Rs 58,89,400/-.

The insurance company refused the claim stating that the loss was due to heavy rain and not a flood or inundation. It also stated that there was no overflowing water body so it did not qualify as a flood. 

The National Consumer Disputes Redressal Commission (NCDRC) ruled in favour of the insured, for which the insurance company appealed before the Supreme Court of India

Legal issues:

1. Whether the loss caused by heavy rainfall and accumulation of water qualifies as a flood or inundation under the policy terms.

2. Whether the direct and dominant cause of the loss was an insured peril (flood/inundation) or merely heavy rainfall.

3. The extent to which the surveyor’s findings and the appointment of a chartered accountant impacted the claim settlement.

4. Whether the refusal of the claim constituted a deficiency in service under consumer protection laws.

Legal provisions: 

• Insurance Act 1938 

• Consumer Protection Act 1986

• Principles of Contract Interpretations 

Contentions of the Parties:

Contentions of the Appellant 

The insurance company argued that the policy covered only losses due to "flood" or "inundation" but not damages directly caused by heavy rainfall. It contended that the mere occurrence of heavy rainfall does not amount to a flood unless there is an overflow of a natural or artificial water body. The insurer relied on the findings of its surveyor who suggested that heavy rainfall, not flood led to the coal being washed away. It also pointed out that the appointment of a chartered accountant to verify stock records was not an admission of liability.

Contentions of the Respondent 

The insured argued that the heavy rainfall resulted in flooding and the subsequent inundation of the storage yard, leading to the coal being washed away. It contended that the proximate cause of the loss was flooding and water accumulation, which was covered under the policy. The insured also relied on past judicial precedents where heavy rainfall leading to similar damages was considered as an instance of "flood and inundation." It claimed that the insurer’s denial of the claim amounted to a deficiency in service.

Judgement of the Case:

The Supreme Court upheld the decision of the NCDRC, ruling in favour of the insured. The Court extensively analysed the meaning of "flood" and "inundation" by referring to various dictionaries and legal precedents. It noted that flooding does not necessarily require the overflow of a river or water body but can include excessive accumulation of water due to rainfall.

Applying the doctrine of proximate cause, the Court held that the dominant cause of the loss was water accumulation, which falls within the policy’s definition of "inundation." The insurer’s argument that the loss was due to heavy rain alone was rejected, as heavy rain resulting in flooding is a recognized form of loss under insurance policies.

The Court dismissed the appeal and directed the insurance company to pay Rs. 58,89,400/- with 9% interest per annum from 01.06.2004 until the date of payment. The judgment reaffirmed the principle that insurance claims should be interpreted in a manner beneficial to the insured when there is ambiguity.

Current Status of the Case:

As of the latest updates, the Supreme Court’s judgment remains binding, and the insurer has been directed to comply with the order. The decision has set an important precedent in insurance law, particularly in the interpretation of flood-related claims. This case has also influenced subsequent rulings regarding proximate cause and policy interpretation in favour of policyholders in ambiguous insurance claim scenarios.

Proximate cause is a fundamental principle in insurance, focusing on determining how the loss or damage occurred and whether it was directly caused by an insured peril. It is a well-established rule that assesses whether a claim falls within the scope of an insurance policy, proximate cause must first be identified. As noted in the previously discussed case, merely considering the final event in the sequence is not a sound approach but rather a mechanical process that involves careful selection. This reinforces the importance of the Causa Proxima principle. 

Causation by its very nature is complex. The cases analysed in this discussion highlight the necessity of applying the proximate cause doctrine and judicial decisions have not complicated the concept rather they reflect an inherent understanding of the different levels of causation. Therefore, differentiating between proximate and remote causes is neither arbitrary nor artificial but a logical and essential aspect of determining liability.

1. Nimish Patanakar, ‘Re insurance and Double insurance’, Scribd available at http://www.scribd.com/doc/59335976/Re-Insurance-Double-Insurance 

2. C. Sivadasan v. The New India Assurance Co., Kerala High Court, India, A.S. no. 647 of 1994, decided on 25 March 2011 

3. Leyland Shipping Co. Ltd. v. Norwich Union Fire Society Ltd., HL, the United Kingdom, [1918] AC 350 

4. Pink v. Fleming, Queen’s Bench, the United Kingdom, (1890) 25 QBD 396.

5. Reischer v. Borwick, Queen’s Bench, the United Kingdom, (1894) 2 QB 548

6. M/S. Sonell Clocks and Gifts Ltd. Vs The New India Assurance Co. Ltd. on 21 August, 2018 AIR 2018 SUPREME COURT 4146

7. Reliance Life Insurance Co. Ltd. vs Rekhaben Nareshbhai Rathod on 24 April, 2019 AIR 2019 SUPREME COURT 2039, 2019 (6) SCC 175