Poisoning the Well: Washington Supreme Court Applies Efficient Proximate Cause to Eviscerate Pollution Exclusion in Liability Policy

Meredith Whigham Caiafa | PropertyCasualtyFocus | July 7, 2017

Professionals and practitioners in first party property insurance are likely familiar with the efficient proximate cause rule, which requires an insurance policy to provide coverage where “a covered peril sets in motion a causal chain,” even if subsequent causes-in-fact of the loss are excluded by the policy. As indicated by our previous coverage [123] of this doctrine, this can be a confusing analysis that leads to unpredictable results.

Until recently, the efficient proximate cause rule has only been applied to first party insurance policies. But this is no longer the case, at least in the state of Washington. In Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017), the Washington Supreme Court held that, due to the efficient proximate cause rule, a pollution exclusion in a CGL policy did not apply to a claim for bodily injury from carbon monoxide inhalation, because the release of the pollutant was caused by negligence. Moreover, the consequences of the insurer’s failure to consider efficient proximate cause were severe; despite no precedent for the application of this rule to a liability policy, the court also held that the insurer acted in bad faith by failing to defend the claim based on efficient proximate cause.

In Xia, the claimant bought a house constructed by Issaquah Highlands 48 LLC (“Issaquah”), which had a CGL policy issued by ProBuilders. Soon after moving in to the home, the claimant became sick due to inhalation of carbon monoxide. The release of the carbon monoxide was caused by improper installation of an exhaust vent.

After Issaquah notified ProBuilders of the claim, ProBuilders denied coverage under the policy’s pollution exclusion, which excluded, in pertinent part:

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.

After receiving a $2 million judgment and an assignment of the claim against ProBuilders from Issaquah, the claimant filed a declaratory judgment action against ProBuilders for breach of contract and bad faith. ProBuilders won summary judgment on a different exclusion in the trial court, which the Washington Court of Appeals rejected. However, the appellate court affirmed the judgment on the alternative ground that the pollution exclusion applied.

The Washington Supreme Court took up the issue of whether the pollution exclusion applied to relieve the insurer of its duty to defend. Ultimately, the court held that although the insurer did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, because the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater – the pollution exclusion could not bar coverage despite its clear application to the facts of the case.

The court summarily dismissed any claim that efficient proximate cause had not previously applied to third party policies, stating:

We have never before suggested that the rule of efficient proximate cause is limited to any one particular type of insurance policy. Instead, the rule has broad application whenever a covered occurrence under the policy-whatever that may be-is determined to be the efficient proximate cause of the loss.

Having established that the efficient proximate cause rule applied, the court held that the fact that the pollution exclusion unambiguously applied did not matter, because the underlying complaints alleged that the release of the pollutant was caused by negligence. Further:

If ProBuilders sought to avoid liability for damages resulting from particular acts of negligence, it certainly could have written specific exclusions to that effect-for instance, an exclusion for acts of negligence relating to the installation of home fixtures generally or hot water heaters specifically. . . . Such an exclusion may have been foreseeable given that this policy was for the construction of a new home, but no such exclusion is found in this insurance policy. Issaquah Highlands paid valuable premiums for an insurance policy providing broad coverage for all forms of negligence except those acts specifically excluded, and it was a covered act of negligence that was the efficient proximate cause of Xia’s loss.

The court accordingly granted judgment as a matter of law to the claimant on both breach of contract and bad faith.

The key to the court’s reasoning appears to be in its statement that “[h]aving received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril.” The Xia decision essentially establishes a rule that, regardless of the type of policy, insurers cannot draft exclusions that will be upheld “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.”

Two dissenting justices took issue with the majority decision’s extension of the application of the efficient proximate cause rule to CGL policies, and the finding of bad faith when no other case prior to this one had ever applied the efficient proximate cause rule to CGL policies.

Already known as an unkind venue to insurers, the Xia decision demonstrates that, at least in the state of Washington, insurers cannot be confident that clear and unambiguous policy exclusions will be upheld (at least in multi-peril situations), and should be wary of drawing distinctions in the application of legal doctrines based on the type of insurance policy at issue.


Giant Concrete Coverage Suit Tests Conn. Bad Faith Laws

Ryan Boysen | Law 360 | July 3, 2017

National insurance giants including State Farm, AIG, Allstate and a slew of others are staring down the barrel of an unconventional proposed class action in Connecticut that could cost them billions of dollars and will test the limits of the state’s insurance industry bad faith laws — all because of a mineral hardly anyone has ever heard of.

Pyrrhotite-contaminated concrete is the culprit behind a vast outbreak of crumbling basements and foundations currently sweeping eastern Connecticut. Fixing a crumbling basement or foundation can cost up to $250,000 per home and the problem is estimated to affect roughly 35,000 homes across eastern Connecticut.

The crisis threatens to crush the region’s real estate market and now it’s sucking in the state’s home insurers, as the massive liability goes unaddressed by both the state and federal government.

The proposed class action — which names all of Connecticut’s major property insurance carriers, roughly 30 in total — alleges the insurers were well aware of the problem before it exploded into the spotlight two years ago, and have been denying claims in bad faith in an attempt to wall themselves off from the crisis, one policyholder at a time.

It seeks to certify a class of all homeowners with crumbling foundations in three Connecticut counties and is asking for, among other things, a declaratory judgment that all of the insurers must cover repairs to all crumbling foundations in those counties, a provision one legal insurance blog termed a “Mega DJ” shortly after the suit was first filed last year.

“If the insurance companies continue to go down this path, it’s going to crush the middle class in eastern Connecticut,” Ryan Barry of Manchester-based Barry Barall & Spinella, who filed the suit, told Law360. “The whole thing is just crying out for a solution, and that’s what we’re trying to craft with this case.”

A “Massive, Unwieldy Class Action”

Since the crisis came to light in 2015 it’s become a contentious issue at every level of the state’s politics, with candidates for the 2018 governor’s race campaigning on it and state lawmakers deadlocked over a handful of hotly contested relief bills. Requests to the Federal Emergency Management Agency for aid have been denied, twice.

Given lawmakers’ inability to tackle the problem, it’s no surprise the courts have become the main source of relief for affected homeowners. Dozens of lawsuits against insurers who have denied crumbling concrete claims are pending in Connecticut state court right now, while a dozen or so have gone to district court.

Homeowners have prevailed in many of those district court suits, but thus far they’ve done little to address the problem as a whole, leaving plenty of room for a broader suit like Barry’s class action.

In addition to the declaratory judgment, the suit also seeks bad faith damages, and alleges the state’s insurers have a “general business practice” of denying claims in bad faith, in violation of the Connecticut Unfair Insurance Practices Act and the Connecticut Unfair Trade Practices Act. Those claims can result in substantial punitive damages, on top of the basic coverage sought by the declaration.

Every insurer Law360 contacted for this article declined to comment, except for Nationwide.

A spokesman told Law360 the company “is aware of the lawsuit” but “cannot discuss it.” However, he added that Nationwide “investigates each claim individually, applying the specific facts, laws, regulations and the purchased coverage to every claim decision.”

The insurers have come out against the suit with guns blazing, filing a flurry of individual and joint motions to dismiss in June, as well a joint motion to strike the class claims.

They argue the crumbling concrete issue is complicated and that coverage depends on the specifics of each policy and the damage to each foundation. Given the “fact-intensive investigation” needed to sort out each claim, a “massive, unwieldy class action” won’t fly, they say, in their joint motion to dismiss.

“Plaintiffs cannot improperly seek to have the court ignore the facts and the policy language in favor of an overarching, and inevitably inaccurate, declaration,” the motion says. “That such a broad declaratory judgment lumping all defendants together could possibly enter is wishful thinking.”

Barry counters that all class actions inevitably involve a group of plaintiffs with facts specific to each of them. The important thing, he says, is that his proposed class are all suffering from the same basic problem: Having paid their premiums for years, they’re now left without coverage just when they need it most.

“Everyone has homes with crumbling concrete and their insurance companies refuse to cover their claims,” he says. “So long as that suffering is at the center of our case, I look forward to our day in court.”

“Nothing Has Been Done”

The situation in Connecticut has been simmering since the 90’s, as isolated reports began to trickle in of homes whose basements and foundations were falling apart for no discernable reason.

When pyrrhotite oxidizes on contact with air and water, it expands. When the mineral is present in concrete, that expansion leads to cracking that can ultimately cause the concrete to collapse into rubble, a process that can take years or even decades to run its course.

And as Connecticut’s residents are now beginning to realize, a sizeable portion of all the foundations poured in the state since the 80’s contain pyrrhotite-contaminated concrete.

The crisis didn’t come into full view until 2015 however, when a series of local news reports catapulted the issue into the spotlight. Now, as property values and tax revenues continue to fall in the affected areas, resentment among homeowners has reached a fever pitch.

“Nothing has been done — the politicians have failed us,” Tim Heim, an affected homeowner who’s currently suing his insurer and has founded a grassroots organization around the issue, told Law360. “There have been a million proposals, and in the meantime we’re stuck over here grabbing our ankles.”

Heim owns a stately three-bedroom in Willington that’s typical of the houses in Connecticut’s northeastern Quiet Corner, a region that lies somewhere between rural and suburban. On paper, it may well be worthless however. Fixing a crumbling foundation — a complicated process that involves lifting the entire house up on stilts while the concrete below is demolished and repoured — can take months to complete and costs anywhere from $100,000 to $250,000, depending on the home.

For a blue-collar region where the median home price hovers around $245,000, according to Zillow, it’s a price that’s simply not payable by most homeowners, including Heim.

“This is my home, it’s my biggest investment,” Heim says. “When you learn that it’s worthless, it’s absolutely devastating. It’s an emotional roller coaster I wouldn’t wish on my worst enemy.”

“Broader Pattern Of Bad Faith”

The crux of Barry’s suit alleges Connecticut’s insurance carriers began to see the writing on the wall before most of the state’s residents did, sometime around the early 2000’s.

Since then they’ve used multiple tactics to build a legal firewall between them and the crumbling concrete crisis, the complaint says, like denying all claims outright regardless of their merit, and changing the language in their policies, all allegations the insurers vigorously dispute.

While the suit’s construction might be relatively untested, a dozen or so one-off crumbling concrete suits between homeowners and their insurers have gone to Connecticut district court thus far. Ten of those suits have survived motions to dismiss and a handful have survived summary judgment — many of them settling shortly thereafter — with one case being won by the plaintiff at trial.

The insurers have won outright in only three of those cases. In each one, the insurer’s victory rested on language in the policy at hand that qualified coverage for a “collapse” as applying only to a “sudden” or “abrupt” collapse.

Barry’s suit alleges the insurers inserted that language into policies specifically to delete coverage for crumbling concrete, without properly notifying policyholders or reducing premiums, meaning the language is null and void, but the issue is sure to be a major battleground as the suit goes forward.

Donna Tommelleo, a spokeswoman for the Connecticut Insurance Department, which must sign off on all policy language changes, says the department has “determined that the vast majority of carriers provided proper notification” and is “currently not aware of facts or circumstances to indicate that unfair practices have occurred.”

The suit’s most imposing claims ultimately rest on the insurers’ alleged practice of denying claims for crumbling foundations across the board.

“We’re trying to lay out the broader pattern of bad faith denial of claims that has only been hinted at in the other cases,” Barry says.

That allegation forms the basis of the CUTPA and CUIPA claims, and the Connecticut district court’s treatment of such claims in the one-off suits has evolved in a fairly one-sided direction over the past few years: in favor of homeowners, and against insurers.

In a 2009 ruling that dismissed CUTPA and CUIPA claims from the earliest crumbling concrete case, Bacewicz v. NGM Ins. Co., U.S. District Judge Janet C. Hall wrote that the plaintiffs “failed to allege the multiple violations necessary to support [those claims] … They have only alleged improper handling of their own, single claim.”

Compare that to Judge Hall’s ruling last year on the insurer’s motion to dismiss in another of those cases, Liston-Smith v. CSAA Fire & Casualty Insurance Co. The plaintiffs cited only state court suits in which CUTPA/CUIPA claims had survived motions to strike to support their own claims, but Judge Hall said those suits weren’t relevant, since the standards for motions to strike aren’t as strict as the federal standards that govern a motion to dismiss.

Even so, Judge Hall took the unusual step of taking judicial notice of the other crumbling concrete suits involving CSAA in district court — including the class action — to allow the plaintiff’s CUTPA/CUIPA claims to survive, essentially doing their work for them.

Many of the other suits filed within the last few years have routinely sailed through motions to dismiss and motions for summary judgment on bad faith and CUTPA/CUIPA claims, unless they involve policies with the sudden and abrupt language.

Ultimately, all of the crumbling concrete cases rest on the Connecticut Supreme Court’s 1987 ruling in Beach v. Middlesex Mutual Assurance Co. That case, which didn’t involve pyrrhotite-contaminated concrete, held that “collapse” is an ambiguous term in an insurance contract, and applies to any “substantial impairment of the structural integrity of a building,” even if the building is still uninhabitable.

The crumbling concrete cases have thrown into sharp relief the ambiguity of the phrase “substantial impairment” itself however, and U.S. District Judge Stefan R. Underhill now says in a crumbling concrete case he’s overseeing that he’s “strongly considering” certifying that term and others to the Connecticut Supreme Court for clarification.

“Billion Dollar Problem”

The pyrrhotite problem ultimately stems from a single quarry operated by J.J. Mottes, just down the road from Tim Heim’s house, according to a joint investigation between Connecticut’s Attorney General and its Department of Consumer Protection that concluded late last year. That quarry has provided the majority of the region’s concrete aggregate for the past 30 years, the report says, and it sits atop a large vein of pyrrhotite.

J.J. Mottes continues to dispute its role in the crisis, though it’s since shut down the quarry and sold it off. A company spokesman declined to comment for this story. A few years ago its office burned down, Connecticut’s Journal Inquirer reports, with the fire destroying all of its records.

One Connecticut resident, Linda Tofolowsky, sued J.J. Mottes in 1997 after her home’s foundation inexplicably began bulging and cracking a few years after it was poured. That suit was tossed in 2003 however, because she couldn’t prove that the problem stemmed from the concrete itself, which meant her claim was barred by the 10-year product liability statute of limitations.

Pyrrhotite was never mentioned in the suit, and Tofolowsky opened a complaint with the Department of Consumer Protection in 2003, only to see the agency close it two days later.

“They kept pouring more and more foundations with the same stuff,” Tofolowsky told Law360. “Nothing ever happened to them. If the state had moved on this sooner they could have prevented a billion-dollar problem.”

District Court Rules “Professional Services” Exclusion means Professional Services

R. Bruce Wallace | Nexsen | Pruet | June 29, 2017

Recently, the United States District Court for the District of South Carolina granted judgment in favor of an insurance carrier, finding the carrier did not owe a duty of defense or a duty to indemnify the insured in an underlying professional malpractice claim. In State Farm Fire and Casualty Company v. Morningside Consultants, Inc., State Farm initiated a declaratory judgment action against Morningside Consultants, Inc. (MCI). MCI was the defendant in eight separate tort suits alleging, in effect, that MCI had negligently inspected several construction projects, which were rife with construction defects. State Farm had issued two policies to MCI seriatim, which were the subject of the declaratory action. Each policy contained an exclusion for damage resulting from “the rendering or failure to render any professional services.” During the policies’ effective periods, MCI provided professional building inspection services.

MCI advanced two theories in support of coverage: (1) MCI holds no professional licenses, such that it could not render “professional” services within the meaning of policies; and (2) application of the exclusion would render the two policies meaningless.

Unfortunately, MCI did not articulate a basis for the first argument. In fact, MCI did not provide any facts or legal precedent in support of the argument that the lack of a professional license moves the provision of inspection services beyond the ambit of “professional services” as described in the policy. In the words of the district court “[n]o one, of course, would suppose, suggest, or suspect it is within the purview of this Court to take a single simple sentence in a counseled case, fashion an argument, adorn it with legal citations, and then judge the strength of its own argument.” As such, the district court summarily rejected MCI’s argument on this point. Moreover, the insurance policies at issue defined “professional services” to specifically exclude “inspection services.” So, not only did MCI fail to provide facts to support its argument, the only facts discussed by the court on this point directly contradicted MCI’s position.

The district court then moved to MCI’s “futility” argument, and soundly rejected it as well. In support of its second argument, MCI relied on the case of Isle of Palms Pest Control Co. v. Monticello Ins. Co.  In Monticello, the Court of Appeals held that the exclusion (extermination services) sought to bar coverage for the very operations the insured meant to be covered. The district court distinguished Monticello because that policy did not define “professional services,” unlike the MCI policy. Second, the district court found that not all claims were barred by the policy language in the MCI policy. Quoting from the insured’s deposition, the district court found that MCI’s owner did not seek coverage under the subject policies for mistakes in his “written [inspection] reports,” but rather for other risks associated with visiting properties during inspection appointments. Finally, the district court found that the Monticello policy premiums were based in part on the gross receipts from that insured’s exterminating business, whereas MCI’s policy premiums were de minimus.

While Morningside presents a vindication for clarity and contractual interpretation, it contains three reminders for practitioners in the insurance realm. First, if you advance a position, you better support it with factual and legal arguments. Second, do not suggest a defined term in a policy means the opposite of its plain meaning. Finally, consider and articulate the risks insured versus the premium paid as a whole to assist the court in determining whether the exclusion swallows the allegedly covered risks.

In California, Can an Insured Homeowner Recover Full Replacement Cost by Purchasing a Home at Another Location?

Stephanie Poll | Property Insurance Coverage Law Blog | June 25, 2017

The short answer is yes. In Conway v. Farmers Home Mutual Insurance Company, the California Court of Appeal followed several out-of-state authorities in considering the issue and ruling in favor for the insured.1 Chip Merlin raised this issue with respect to Texas back in 2009 – finding that the courts there apply the law a bit differently. You can revisit the blog here: Obtaining Full Replacement Cost Benefits Through Replacement at a Different Location – Texas Style.

In Conway, the plaintiffs purchased a house in Imperial Beach, California, paying $230,000 for the home and subsequently renting it out to tenants. They also obtained $100,000 in fire insurance on the property from Farmers Home Mutual Insurance Company (Farmers). The home was damaged by fire and although it could have been replaced, the Plaintiffs decided not to make any repairs because they believed it made more economic sense to develop the subject parcel in conjunction with development of an adjacent parcel they owned. So instead of repairing the damage within months of the fire, they paid $230,000 for another single-family home in Imperial Beach. After disagreements as to the value the insureds were entitled to, Farmer’s paid the actual cash value and refused to pay the replacement value of the loss.

The policy Farmers issued to Plaintiffs was pretty straightforward, promising that in the event of a fire at the insured premises, Farmers would pay for: “c. Buildings under Coverage A or B at replacement cost without deduction for depreciation…”2 Plaintiffs argued that the policy placed no restriction on where an insured may replace a damaged building.

Conway was a case of first impression in California, however the appellate court considered the other states that found replacement costs can include purchase of another building at a different location, namely Connecticut, Alabama, Michigan, New Jersey, New York, Maine, and Washington.3

The court noted in particular, that in the case of Hess v. North Pacific Insurance Company out of Washington, the policy there had standard limitations on the recovery of replacement costs identical to the ones in the Farmer’s policy in Conway. Quoting Hess the court noted,

[T]he insured desires to rebuild either a different structure or on different premises. In those instances, the company’s liability is not to exceed what it would have cost to repair an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.4

In rejecting Farmer’s arguments and analyzing the definition of “replace,” the court held,

The dictionary definition does not draw any distinction between what can be repaired and what cannot be repaired. More importantly, although the term replace certainly includes rebuilding on the same premises, the term also includes the notion of substituting for an original item another item which serves the same function as the original but is different in nature from the original. The broader and widely accepted meaning would certainly encompass the purchase of another house at a different location. Thus at best, Farmers can only contend there is an ambiguity in the policy with respect to the limitations on replacement of a damaged home…Because the ordinary and popular use of ‘replace’ includes the purchase of a replacement dwelling at another location and no other provision of the policy alerts the insured to a narrower limitation on payment of replacement costs, Farmers’ argument brings us to the rule which requires that ambiguities are to be resolved in favor of the insured.5

Therefore, it is important to carefully review all fire insurance policies for any limitations with respect to replacement costs. But absent such limitations, obtaining full replacement cost benefits by replacement at a different location is allowable under California law.
1 Conway v. Farmers Home Mutual Ins. Co., 26 Cal.App.4th 1185 (1994).
2 Conway, at 1188.
3 (See, e.g.S and S Tobacco v. Greater New York Mut. 224 Conn. 313 (1992); Huggins v. Hanover Ins. Co. 423 So.2d 147, 150 (Ala.1982); Smith v. Michigan Basic Property Ins. Assn. 441 Mich. 181, (1992); Ruter v. Northwestern Fire & Marine 72 N.J.Super. 467, 471–473 (1962); Johnson v. Colonial Penn Ins. Co. (1985) 127 Misc.2d 749, 751–752, 487 N.Y.S.2d 285; Blanchette v. York Mut. Ins. Co. (Me.1983) 455 A.2d 426, 427–428; see also Hess v. North Pacific Ins. Co. (1993) 122 Wash.2d 180, 859 P.2d 586, 588).
4 Conway, 26 Cal.App.4th at 1190 (citing Hess, 859 P.2d at 587).
5 Conway, at 1191-92.

Water Damage Loss Time Limits and Hidden Damage—What Do Insurers Promise to Departments of Insurance?

Chip Merlin | Property Insurance Coverage Law Blog | June 26, 2017

I spoke about water damage loss at the National Association of Public Insurance Adjusters Annual Convention last week. One issue I discussed was the time limits of water damage. A recent post, Avoiding Denials of Water Damage Claims Based on “Long Term Damage Exclusions” also discussed the issue.

Following my presentation, Lorinda Mikesell, the Vice President of the Texas Association of Public Adjusters, asked whether such time frames are effective when water damage is hidden.. Lorinda said that at least one insurer promised to cover water damage despite the time limitation if the loss was hidden, and she sent me the following Texas Department of Insurance Order which stated:

“USAA has indicated how it intends to adjust a covered water claim if mold is present on the damaged covered property. USAA has represented to the Department that even though its Homeowners policy and Condominium Unit Owners policy excludes loss caused by or consisting of mold, mold is necessarily removed or treated in the process of repairing damage resulting from a covered water loss. Mold that is present upon water damaged materials will be removed in the course of repairing the covered water loss. Expenses which are related solely to the existence of mold are the only expense which would not be covered in the course of repair of a covered water damage claim. In addition, notwithstanding the exclusion for constant repeated seepage or leakage of water or steam over a period of weeks, months, or years, USAA agrees to cover the cost of reasonable and necessary repair of direct physical damage to the dwelling or property caused by a covered water loss that is hidden or undetected and the associated direct physical damage consisting of mold, fungi, or other microbial damage to the dwelling or property, provided the insured reports the loss within thirty days of the date the damage was or should have been detected. This would not cover the cost of remediation, testing, loss of use, or debris removal. Remediation means to treat, contain, remove, or dispose of mold, fungi, or other microbes beyond that which is required to repair or replace the covered property physically damaged by water or steam.”

(Emphasis added)

I often say that I learn more when speaking at conferences than an audience may learn from my presentation. I was not aware of this “promise” by USAA, and I am thinking of how we may ask insurers in discovery for similar filings with Departments of Insurance that explain the language used in policies. I wonder if USAA has this promise explained in writing to their claims adjusters.