Fifth Circuit Reinstates Coverage Despite Controlled-Substance Exclusion in Homeowners Policy

When Causation Gets Complicated: A Fifth Circuit Ruling That Insurers Should Not Ignore

In a recent decision that has the insurance industry talking, the U.S. Fifth Circuit Court of Appeals reinstated a jury verdict requiring coverage under a homeowners insurance policy, despite the presence of a controlled substance exclusion. The ruling serves as a reminder that causation remains one of the most nuanced, scrutinized, and litigated components of policy interpretation, especially when exclusions hinge on what actually triggered an injury.

The case stemmed from a July 2019 incident in which two individuals reportedly ingested substances believed to be LSD and THC. Not long after, one of them suffered a catastrophic fall and severe injuries. Occidental Fire & Casualty attempted to apply its controlled substance exclusion, arguing that the injury arose out of the use of illicit drugs.

A jury disagreed, and the appellate court ultimately agreed with the jury.

“The injury did not arise out of drug use. It resulted from subsequent negligent actions.”
Fifth Circuit Court Opinion

Texas law applies a broad interpretation of the phrase “arising out of,” giving insurers and insureds plenty to debate when an exclusion is in play. Even so, the appellate court deferred to the jury’s factual determination that the injury was caused not by the ingestion of substances, but by events that followed, including how the injured party was handled after the fall.

A Closer Look at the Court’s Reasoning

The court devoted significant attention to the causal chain. While controlled substances were part of the fact pattern, the court emphasized that their mere presence does not automatically trigger an exclusion. The question is always what actually caused the injury.

Here, intervening conduct played a major role. The handling of the injured individual after the fall, and the alleged negligence surrounding those actions, became essential elements in determining causation.

“Causation is not a checkbox. It is a sequence, and every link matters.”
Insurance Litigation Analyst, commenting on the ruling

What This Means for Insurers

For underwriting, claims teams, and litigation counsel, the ruling reinforces the need for precision. Exclusions tied to controlled substances can appear straightforward, but a real world scenario rarely fits neatly into a single causal bucket. Courts often examine the full timeline of events, searching for any intervening acts that may supersede or dilute the excluded conduct.

Key Considerations for Carriers

• Review controlled substance exclusions to ensure they are drafted with clear and specific causal language.

Why This Case Matters

The reinstated jury verdict illustrates a larger legal trend. When exclusions depend on causation, courts may be especially cautious about permitting insurers to deny coverage if multiple events contribute to the harm. Even when an excluded act is present, it may not be the proximate or even the predominant cause.

For insurers, the lesson is practical. Invest in detailed expert analysis early in the claims process. Make sure causation theories are supported by facts that stand up not only to scrutiny, but to a jury’s common sense perspective.

Coverage disputes under homeowners policies rarely revolve around just one moment in time. They often hinge on a sequence of decisions, actions, and reactions. This ruling reminds the industry that when the causal story becomes complex, courts may give juries considerable authority to decide what really happened and why.

In short, insurers must be prepared for a deeper dive into causation than ever before, especially when controlled substance exclusions are involved.