In April, the Washington Supreme Court issued a ruling narrowing the application of an absolute pollution exclusion in a case involving a carbon monoxide leak. The court’s decision in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, No. 92436-8, 2017 WL 1532219 (Wash. April 27, 2017), primarily addressed the applicability of a pollution exclusion when the cause of the loss was a covered occurrence under a different provision. Applying the “efficient proximate cause” rule, the court ultimately concluded that the loss was covered, and further concluded that the insurer acted in bad faith by denying coverage.
Xia involved the purchase of a new home constructed by Issaquah Highlands 48 LLC, which carried commercial general liability insurance issued by ProBuilders. Shortly after moving into her home, Xia began to feel ill and it was soon discovered that an exhaust vent attached to the hot water heater had not been installed correctly and was leaking carbon monoxide into the basement of her home.
After Xia notified Issaquah Highlands of her injuries, its insurer responded to Xia and indicated that coverage was not available under the builder’s policy, in part, due to the presence of a pollution exclusion. Xia commenced litigation against Issaquah Highlands and ultimately entered into a settlement agreement for stipulated damages in the amount of $2 million. In exchange for a covenant not to enforce the judgment, Issaquah Highlands assigned Xia all of its rights under the ProBuilders’ policy. Coverage litigation between Xia and ProBuilders ensued. The lower courts ruled in ProBuilders’ favor and concluded that the pollution exclusion precluded coverage.
The pollution exclusion in question read:
Bodily injury, property damage, or personal injury caused by, resulting from, attributable to, contributed to, or aggravated by the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants, or from the presence of, or exposure to, pollution of any form whatsoever, and regardless of the cause of the pollution or pollutants.
This Exclusion applies regardless of the cause of the pollution and whether any other cause of said bodily injury, property damage, or personal injury acted jointly, concurrently, or in any sequence with said pollutants or pollution. This Exclusion applies whether any other cause of the bodily injury, property damage, or personal injury would otherwise be covered under this insurance.
The Court’s Opinion
In issuing its opinion, the Washington Supreme Court addressed two interrelated questions: 1) whether the applicable pollution exclusion covered the carbon monoxide release; and, if so, 2) whether the exclusion precluded coverage when the cause of the loss was a covered occurrence under a different provision.
In answering the first question in the affirmative, the court distinguished between cases where a “pollutant was acting as a pollutant” in which case the exclusion would apply, and cases where a pollutant was involved but was not acting as a pollutant (and thus the exclusion did not apply). As an example of the latter category, the court pointed to its decision in Kent Farms, Inc. v. Zurich Ins. Co., 998 P.2d 292 (Wash. 2000). In that case, a fuel delivery driver was injured after a defect in the delivery hose caused fuel to back up and spill over him. As he struggled to replace the hose and prevent the spillage of thousands of gallons of diesel fuel, the fuel engulfed him and was driven into his eyes, lungs and stomach. In later determining that the applicable pollution exclusion did not apply, the Washington Supreme Court noted that the fuel was not acting as a pollutant, but instead as a “high-pressure jet of liquid that struck, engulfed, and choked the victim.” In other words, the toxic nature of the pollutant was not central to the event that triggered coverage under the policy (the court noted that if the fuel was replaced with water, the driver still would have been injured, albeit with less severe consequences).
Applying the above, the Washington Supreme Court concluded that ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide in Xia’s home. Here, the carbon monoxide was “acting as a pollutant” and the process of polluting the air in Xia’s home was accomplished by the release of the pollutant by the hot water heater.
However, this did not end the court’s ultimate analysis. Instead, the court was required to consider whether the excluded occurrence (i.e., the release of the carbon monoxide) was the efficient proximate cause of the claimed loss. Under Washington law, the rule of efficient proximate cause provides coverage where a covered peril sets in motion a causal chain, the last link of which is an uncovered peril. If the initial event, the efficient proximate cause, is a covered peril, then there is coverage under the policy regardless of whether subsequent events within the chain are excluded by the policy.
Applying the above rule, the court concluded that the efficient proximate cause of Xia’s injuries was the negligent installation of a hot water heater, a peril covered by the ProBuilders’ policy. As a result, the court reversed the lower court rulings and held that Xia was entitled to judgment as a matter of law with regard to both her breach of contract and bad faith claims.
In doing so, the court rejected ProBuilders’ argument that the language in its policy nullified the efficient proximate cause rule. ProBuilders argued that, under the express terms of its policy, the pollution exclusion applied “regardless of the cause of the pollution and whether any other cause of said bodily injury…acted jointly, concurrently, or in any sequence with said pollutants or pollution.” The court rejected the insurers’ argument and held that the language could not be used to conflict with established Washington law.
The Xia case demonstrates that policyholders must consider several interrelated issues when faced with the potential application of a pollution exclusion. These questions include whether the pollutant was “acting as a pollutant” and, even if so, whether the harm resulted directly from the release of the pollutant or was the result of a chain of events. If so, coverage may exist if the initial event was a covered peril.
Keywords: Insurance, coverage, litigation, pollution exclusion, commercial general liability, Washington.
Michael B. Rush is with Gilbert LLP, Washington, D.C.
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