Slapping insurers with breach of contract and bad faith, Washington state’s highest court recently found that a general liability policy’s so-called “absolute” pollution exclusion may not be so absolute. In Xia et al. v. ProBuilders Specialty Insurance Co. RRG et al., No. 92436-8 (Apr. 27, 2017), the court held that even if a loss is caused by an excluded pollutant, there may still be coverage if the efficient proximate cause of the loss is a covered occurrence. In particular, if the event that set the loss in motion is covered under the policy, then there is coverage even if a pollutant that later contributed to the loss is excluded by the policy. This case has major implications for policyholders who have been denied coverage or have not pursued coverage on the basis of broader pollution exclusions included in policies beginning in the mid-1980s.
Importance of the Efficient Proximate Cause Rule
In May 2006, Zhaoyun Xia fell ill after moving into her new townhouse. By December of that year, it was discovered that an exhaust vent had been negligently attached to a hot water heater and was discharging carbon monoxide into Xia’s basement. Xia notified the townhouse’s construction company, which eventually assigned Xia its rights under a Comprehensive General Liability (CGL) policy. After years of being denied coverage under the policy’s absolute pollution exclusion, Xia sued the insurer for indemnification, bad faith, and violation of the state’s Consumer Protection Act and Insurance Fair Conduct Act.
The Washington Supreme Court considered whether the insurance policy’s pollution exclusion excused the insurer from its duty to defend the construction company against Xia’s claims. The exclusion, as with many pollution exclusions included in recent insurance policies, stated that it (1) precluded coverage for any bodily injury or property damage caused by the release or escape of a pollutant; (2) applied regardless of the cause of the pollution and whether any other cause of the injury or damage acted jointly, concurrently, or in any sequence with the pollutant; and (3) applied whether any other cause of the injury or damage would otherwise be covered under the policy.
Based on the plain language of the policy, the supreme court sided with the insurer that carbon monoxide was a pollutant. Its analysis as to whether there was coverage, however, did not stop there. Rather, the court went on to decide a second question―whether the carbon monoxide was the efficient proximate cause of Xia’s illness. Concluding that the escape of the carbon monoxide happened only after an initially covered occurrence―the negligent installation of a hot water heater―took place, the court not only found in favor of coverage, but also concluded that the insurer had acted in bad faith for not considering whether there was an efficient proximate cause other than the release of the carbon monoxide itself. Central to the court’s decision were the facts that the negligence preceded the release of carbon monoxide and that a hot water heater does not typically pollute when used as intended.
Opening the Door to Coverage
Most CGL policies, starting in the mid-1980s, contain some version of the so-called absolute pollution exclusion. Insurance companies routinely deny coverage for pollution-related damages based on these exclusions, and many policyholders have not pushed back. The Xia opinion, however, makes clear that even in the case of excluded pollutants, the insurer must ask if the efficient proximate cause is a covered peril, like negligence. If the answer is yes, there may be coverage. This can have resounding pro-coverage consequences in traditional environmental contamination cases, like the release of pollutants onto and into land and water.
If you have had environmental claims or damages and have been denied or did not pursue coverage under a policy with an absolute pollution exclusion, it is worth taking a few minutes to evaluate whether this case just opened the door to coverage for such claims.