The Australian Financial Complaints Authority (AFCA) has outlined its approach to the proximate cause of losses and how contentious cases are decided where multiple issues have led to damage.

The proximate cause is the “dominant, effective or operative cause” of a loss, an AFCA Approaches paper says. It is “well settled in law” and its interaction with insurance policies has been in place for a long time.

“It is a question of fact that depends on the circumstances of each case. It requires a common-sense evaluation of the evidence,” AFCA says.

In some examples, if one event would have caused the loss on its own and the other would not have caused the loss without the first, then the first is the proximate cause.

The issue becomes more complex when multiple proximate causes are at play, which may have contributed nearly equally to the loss, with outcomes depending on policy wordings.

In such instances, if one cause is an insured event under the policy and other not excluded, the insurer is liable for the claim.

But if one of the causes is an excluded event, such as wear and tear, the insurer can deny the claim regardless of whether the other cause is a covered event, such as a storm. The approach is known as the Wayne Tank principle, in reference to an English court case that also applies in Australia.

“AFCA will only apply the Wayne Tank principle if we are satisfied there are multiple proximate causes to a loss and one of the causes of the loss falls within an exclusion in the policy that applies to the insured event,” it says.

The paper gives an example of a someone who lodges a claim for water inundation damage to their home after an almost equal combination of stormwater run-off, insured under storm cover, and water that has escaped from a nearby river, which comes under a general exclusion for floodwater under the policy.

The Wayne Tank principle would then apply and the insurer could deny the claim, it says.

“We consider that this is a fair outcome because the policy has been designed specifically to exclude damage caused by floodwater,” AFCA says.

In some situations, there may be more than one loss with independent proximate causes, such as when a property is inundated twice, the first time by storm water run-off, and later by floodwater that causes further damage as the water reaches a higher level.

The discussion says in a court case example, the damage caused by the initial storm water run-off was covered, while the later damage wasn’t covered due to the flood exclusion.

The paper is available here.