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.

 

Washington Supreme Court Applies the Efficient Proximate Cause Rule to Third Party Liability Policy to Find a Duty to Defend

Sally S. Kim | Gordon & Rees LLP | May 11, 2017

The efficient proximate cause rule is one of the more confusing analyses that an insurance company must undertake when investigating certain coverage issues under first party insurance policies. And until now, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But that has now changed with the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017). In Xia, the Washington Supreme Court not only ruled that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy, but that ProBuilders acted in bad faith by failing to do so, despite no prior precedent for application of the rule in a CGL coverage analysis.

In Xia, the claimant purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”), which was insured under a CGL policy issued by ProBuilders. The claimant fell ill soon after moving in due to inhalation of carbon monoxide, caused by improper installation of an exhaust vent.

The claimant notified Issaquah about the issue, and Issaquah notified ProBuilders. ProBuilders denied coverage under the pollution exclusion and a townhouse exclusion. The claimant filed a lawsuit, which Issaquah then settled by a stipulated judgment of $2 million with a covenant not to execute and an assignment of rights against ProBuilders. The claimant filed a declaratory judgment action against ProBuilders for breach of contract, bad faith, violation of the Consumer Protection Act and the Insurance Fair Conduct Act.

At the trial court level, ProBuilders won summary judgment on the townhouse exclusion. Division One of the Washington Court of Appeals reversed in part, finding that the pollution exclusion applied, but not the townhouse exclusion.

The Washington Supreme Court accepted review to determine whether the pollution exclusion applied to relieve ProBuilders of its duty to defend. The Court held that even though ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

The application of the efficient proximate cause rule to CGL policies in Washington is troublesome for insurers. The Washington courts have long held in cases involving first party policies that under the efficient proximate cause rule, “[i]f the initial event, the “efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994). Also, the efficient proximate cause rule applies only “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.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012).

In Xia, the Court noted that like any other covered peril under a general liability policy, an act of negligence may be the efficient proximate cause of a particular loss. “Having 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.” Xia at *14. The Court stated:

…it is clear that a polluting occurrence happened when the hot water heater spewed forth toxic levels of carbon monoxide into Xia’s home. However, by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.

Xia at *17.

Justice Madsen took issue with the majority decision in a dissenting opinion, specifically with respect to a finding of bad faith when no other case prior to this decision had ever applied the efficient proximate cause rule to CGL policies. Justice Madsen also disagreed with the majority in extending the application of the efficient proximate cause rule to CGL policies when this Court specifically declined to do so in the earlier case of Quadrant Corp. v. American States Insurance Co., 154 Wn.2d 165, 110 P.3d 733 (2005).

The State of Washington unfortunately has been historically unkind to insurers on the duty to defend, and the Xia decision only further cements that reputation.

Efficient Proximate Cause Doctrine in California

Kenneth Kan | Property Insurance Coverage Law Blog | February 22, 2016

How should coverage be determined if a loss is caused by a combination of both covered and excluded risks?

Two months ago, in Vardanyan v. Amco Insurance Company,1 a California Court of Appeal issued an important decision addressing this issue. The court reaffirmed that where there are multiple causes of damage to an insured’s property, with some covered and some excluded, the loss is covered if the most important or predominant cause is a covered risk. The holding is based on the efficient proximate cause doctrine codified in Insurance Code section 530, which provides:

An insurer is liable for a loss for which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss; but he is not liable for a loss of which the peril insured against was only a remote cause.2

Moreover, the appeals court in Vardanyan relied on the California Supreme Court decision in Sabella v. Wisler, which established the general rule:

In determining whether a loss is within an exception in a policy, where is a concurrence of different causes, the efficient cause–the one that sets others in motion–is the cause to which the loss should be attributed, though the other causes may follow it, and operate more immediately in producing the disaster.3

What prompted the appeal by the insured in Vardanyan, a case involving collapse of the insured’s house, was an erroneous jury instruction proposed by the defense and given by the trial judge. The appeals court found that jury instruction as essentially circumventing the efficient proximate cause doctrine. The case is an important read to understand how the efficient proximate cause doctrine works and is applied. Policyholders in California can thank…

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