In its recent decision in Century Surety Co. v. Casino West Hotel, 2014 Nev. LEXIS 50 (Nev. May 29, 2014), the Supreme Court of Nevada, deciding a certified question by the United States Court of Appeals for the Ninth Circuit, had occasion to consider the application of an absolute pollution exclusion and an indoor air quality exclusion to bodily injury claims arising out of indoor exposure to carbon monoxide.
Century’s insured, Casino West Hotel, was sued in connection with the death of four people at its hotel resulting from carbon monoxide poisoning. Century denied coverage for the suits on the basis of two exclusions in its general liability policy. The first was an absolute pollution exclusion barring coverage for:
(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of “pollutants”:
(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured. However, this subparagraph does not apply to:
(i) [Building-heater exception:] “[b]odily injury” if sustained within a building caused by smoke, fumes, vapor or soot from equipment used to heat that building.
The second exclusion, described as an indoor air quality exclusion barring coverage for:
b. “Bodily injury[,]” “property damage[,]” or “personal and advertising injury” arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating, pathogenic or allergen qualities or characteristics of indoor air regardless of cause . . . .
The United States District Court for the District of Nevada found both exclusions ambiguous in its application to the facts. On interlocutory appeal, the Ninth Circuit certified the questions of whether the exclusions applied to the underlying claims.
In considering the application of the pollution exclusion, the Court noted the split in authority throughout the country as to whether the pollution exclusion is limited to matters considered “traditional environmental pollution,” or instead applies on a broader scale to any matters involving any type of pollution. Noting the lack of Nevada authority on the question, the Court sided with the former line of cases, concluding that a broader application of the exclusion would subvert the insured’s reasonable expectations since nearly any item – such as shampoo, soap and rubbing alcohol – could be considered “pollutants.” The court, therefore, held that the pollution exclusion was ambiguous as applied to nontraditional indoor pollutants and that the issue had to be resolved in favor of the insured.
The Court concluded similarly with respect to the indoor air quality exclusion. While the Court agreed that the broad language of exclusion applied to an indoor release of carbon monoxide, it also found reasonable Casino West’s argument that the exclusion should be limited in application to injuries arising from “inherent and continuous air quality issues,” explaining:
In line with Century’s interpretation, one could read the exclusion’s language to exclude coverage for any injury caused by any condition of the air, regardless of whether the condition is permanent or temporary. Specifically, the policy states that it excludes coverage of any bodily injury resulting from hazardous air quality, and the “regardless of cause” language indicates that no limitations restrict the exclusion’s applicability. On the other hand, Casino West’s interpretation—limiting the exclusion’s applicability only to inherent and continuous air quality issues—is also reasonable. As with the pollution exclusion, the indoor air quality provision is drafted so broadly that, if no limitations are applied to it, its applicability could stretch well beyond a reasonable policyholder’s expectations and lead to absurd results. For instance, read to exclude coverage for any condition of the air, the policy would not cover any injury resulting from a guest’s inhalation of smoke from a fire inside the motel, but would cover any burn injuries caused by that same fire. Such potentially absurd results illustrate the need for some limitations on the exclusion’s applicability.
Thus, taking into account the insured’s reasonable expectations, the Court concluded that the exclusion was ambiguous as applied to an indoor release of carbon monoxide and did not operate to bar Casino West’s right to coverage for the underlying claims.