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 Efficient Proximate Cause Test to Pollution Exclusion

Traub Lieberman Straus & Shrewsberry LLP | May 2, 2017

In its recent decision in Xia v. ProBuilders Specialty Ins. Co. RRG, 2017 Wash. LEXIS 443 (Wash. Apr. 27, 2017), the Supreme Court of Washington had occasion to address the concept of efficient proximate cause as it relates to the application of a pollution exclusion.

At issue in Xia was ProBuilders’ coverage obligation under a general liability policy for an underlying claim involving a hot water heater in a new home constructed by its insured.  An exhaust vent for the heater had not been properly installed, thus allowing for carbon monoxide to be released directly into the home and causing injury to the home purchaser.  ProBuilders denied coverage to its insured on the basis of its policy’s pollution exclusion, as well as on the basis of another exclusion not at issue on appeal.

The Court began its analysis by looking to its prior case law concerning the pollution exclusion, in particular its decisions in Cook v. Evanson, 920 P.2d 1223 (1996), Kent Farms, Inc. v. Zurich Ins. Co., 969 P.2d 109 (1998), and Quadrant Corp. v. American States Insurance Co., 110 P.3d 733 (2005).  Through these decisions, the Court limited application of the pollution exclusion to traditional environmental harms or to harms inflicted on persons as a result of pollutants acting as pollutants.

In Kent Farms, the Court held that the exclusion was inapplicable where an individual was injured as a result of being sprayed by diesel fuel whereas in Quadrant, the Court held the exclusion applied to a claim involving alleged injuries resulting from decking sealant.  The Court harmonized these cases by noting that in Kent Farms, the claimant was not injured as a result from the diesel fuel acting as a pollutant, but instead from the force and impact of the spray. By contrast, in Quadrant, the claimant was injured as a result of the toxicity of the sealant.  As the Court noted:

As discussed in Quadrant, the facts in Kent Farms did not result in a pollutant acting as a pollutant in such a way that would trigger the pollution exclusion. If the diesel fuel in Kent Farms had been replaced with water, for example, the liquid would still have struck, choked, and engulfed the victim just as surely as the diesel fuel—albeit with less severe consequences. As this court noted, the toxic nature of the pollutant was not central to the event that triggered coverage under the insurance policy. Id.

With this context in mind, the Court agreed that the underlying claim in Xia, involving injuries as the result of exposure to carbon monoxide, could come within the pollution exclusion.  The Court nevertheless observed that per the rule of efficient proximate cause, when a “covered peril” sets in motion a causal chain, the last link of which is an “uncovered peril,” then there is coverage under the policy.  The Court reasoned that this analysis should apply in the context of a general liability policy if a covered “occurrence” gives rise to a loss that might otherwise be excluded.  The Court noted, however, that there are limitations to this rule:

… the efficient proximate clause 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.” … It is perfectly acceptable for insurers to write exclusions that deny coverage when an excluded occurrence initiates the causal chain and is itself either the sole proximate cause or the efficient proximate cause of the loss.

But such an exclusion, explained the Court, cannot overcome the efficient proximate cause rule.  The Court reasoned that the non-standard pollution exclusion in ProBuilders’ policy applicable to any harm “regardless of the cause of the pollution and whether any other cause of said bodily injury, property damage, or persona injury acted jointly, concurrently, or in any sequence with said pollutants or pollution” was improperly broad since it would have circumvented the efficient proximate cause rule.  The Court, therefore, held that this causation language was unenforceable.

With this in mind, the Court turned to the question of what was the efficient proximate cause of the underlying claim.  The Court observed that the underlying suit alleged that the carbon monoxide resulted from the improper installation of the hot water heater’s venting, which in and of itself would be a covered “occurrence” under ProBuilders’ policy.

ProBuilders’ argued that the Court’s application of the efficient proximate cause rule would essentially negate the pollution exclusion, since all acts of pollution can be traced to an accident or an instance of negligence that could qualify as an “occurrence” under a general liability policy.  The Court did not agree, observing that when the pollution event is the first step in the chain of causation leading to the injury, such as application of flooring sealant, then the pollution exclusion will apply.  The Court further reasoned that ProBuilders could have drafted a more specific exclusion applicable to the occurrence giving rise to the pollution, such as an exclusion applicable to installation of home fixtures of hot water heaters, which would have avoided the efficient proximate cause rule.

In summing up its decision, the Court explained:

Pollution exclusion clauses are an important tool for insurers to avoid liability stemming from loss caused by pollutants acting as pollutants where the insured has paid no premiums for such coverage. However, emphasis must be given to the phrase “caused by.” The efficient proximate cause rule continues to serve the underlying purpose of insurance policies and applies just as effectively to these facts as it has in prior cases. We hold that the efficient proximate cause of Xia’s loss was a covered peril: the negligent installation of a hot water heater. Although ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide in Xia’s home, ProBuilders breached its duty to defend in the face of an alleged covered occurrence that was the efficient proximate cause of the loss.

The Court therefore held that ProBuilders improperly breached its duty to defend, and did so in bad faith.

Washington State Ruling Heightens Liability Risk for Design Professionals

Ross Siler | Government Contracts Insider | October 4, 2016

Recently, the Washington Court of Appeals potentially expanded the scope of tort duties owed by design professionals. In a May decision, the court held that an engineer’s duty of care to developers and property owners encompasses “the prevention of safety risks” even when no personal injury or property damage has resulted from claimed deficiencies.  See Pointe at Westport Harbor Homeowners’ Ass’n v. Eng’rs Nw., Inc., — P.3d —-, 2016 WL 2643729,  (Wash. Ct. App. May 3, 2016).  As the court concluded in the published portion of its opinion:  “Where an engineer’s design services ultimately result in the construction of an unsound structure, the engineer has breached his duty of care.”  Id. at *5.

The case arose from the construction of an upscale condominium building in Westport, Washington, that turned out to have significant seismic deficiencies.  Engineers Northwest, Inc. (ENW) provided structural engineering work on the project.  The Court of Appeals reported that evidence connected the seismic deficiencies to ENW’s structural calculations and design.  Id. at *1.  The homeowners’ association (HOA) brought a negligence claim against ENW that ultimately went to trial, where a jury found ENW liable for more than $1.1 million in damages.  Id. at *2.

ENW argued on appeal that the trial court erred in denying its motion for summary judgment, in which ENW asserted that it owed no independent tort duties to the HOA or developer.  Id. at *3.  The Washington Supreme Court has held that liability for design professionals is generally contract, not tort, based, and the independent duty doctrine further “bars recovery in tort for economic losses suffered by parties to a contract unless the breaching party owed a duty in tort independent of the contract.”  Id. at *4 (citingEastwood v. Horse Harbor Found., Inc., 170 Wn.2d 380, 393-94 (2010)).

At the same time, Washington courts have recognized that design professionals owe a duty of reasonable care to developers, contractors, and holders of property interests.  Id.at *4.  ENW asserted that this tort duty is limited to cases in which the design professional’s failure to exercise reasonable care results in personal injury or property damage.  Because the HOA alleged only potential damage resulting from the seismic deficiencies, ENW contended the trial court should have granted summary judgment in its favor in the absence of any evidence of actual injury.  Id.

But the Court of Appeals disagreed with this limitation to the scope of tort duties owed by ENW as structural engineer.  Id. at *5.  The Court held that the engineer’s duty of care extends to “the prevention of safety risks.”  Id.

“Even where such safety risks do not cause consequential damage to persons or property, the risk itself constitutes an injury within the class of harm contemplated by a design professional’s duty of care.”  Id. (citing Affiliated FM Ins. Co. v. LTK Consulting Servs., Inc., 170 Wn.2d 442, 456-57 ( )).

ENW therefore owed a duty to the developer and HOA members “to take reasonable care to design a building that did not present safety risks to its residents or their property.”  Id.

Chief Judge Thomas Bjorgen authored the opinion for a three-judge panel on Division II of the Court of Appeals. The ruling seemingly increases the ability for property owners and developers to assert negligence claims against engineers, architects, and design professionals when structural deficiencies (particularly those connected to structural safety) are present, even though no actual injury has yet resulted. 

More Common Sense: Coverage for Collapse Requires More Than an Engineer’s Finding of Substantial Impairment

Craig Bennion | Property Insurance Law Observer | July 15, 2016

In February this blog commented on Washington State’s newly-adopted definition of “collapse” in property insurance policies that contain no specific definition of the term. (Observer, February 8, 2016, Common Sense Prevails:  State of Collapse Nonexistent Thirteen Years before Discovery of Decay)  At issue was the building owner’s attempt to tap its property policy’s coverage for collapse when hidden decay, although severe, did not result in the building falling down. Under Washington’s new definition, the Ninth Circuit Court of Appeals found no collapse of a condominium building that remained in use and occupied seventeen years after the insurance policy expired and severe decay allegedly developed. Queen Anne Park Homeowner’s Ass’n v. State Farm, 633 F. Appx. 415 (9th Cir. 2016).

On July 7, 2016, the federal court for the Western District of Washington issued its decision in another collapse case, applying the new definition. American Economy Insurance Company insured the Masters Apartments in Seattle with annual policies from 1999 to 2005. The first three policies provided coverage for collapse caused by hidden decay, but did not define “collapse.” Significant decay to the building’s rim joists was discovered in 2014. Because rot and decay were excluded from coverage, the owner sought coverage for collapse. American Economy hired a structural engineer who, after investigation, concluded that some of the rim joists suffered from “substantial structural impairment,” meaning that, according to the engineer, they did not meet the building code, and the building could be classified by a building inspector as dangerous. He also opined that several joists had reached substantial structural impairment between 1999 and 2002.

American Economy denied coverage and filed a declaratory judgment action in federal court. In a summary judgment motion, it argued that the Masters Apartments, which remained standing and occupied in 2014 when decay was discovered, had not reached a state of collapse and coverage did not apply. The federal court agreed and granted the motion. American Economy Ins. Co. v. CHL, LLC, C15-899-RSM, 2016 U.S. Dist. LEXIS 88286 (W.D. Wash., July 7, 2016).

In the Queen Anne Park case, the Washington Supreme Court defined “collapse” as “substantial impairment of the structural integrity of a building” that renders the building “unfit for its function or unsafe.”  The Washington court defined “structural integrity” as “a building’s ability to remain upright.” Queen Anne Park Homeowner’s Ass’n v. State Farm, 183 Wn.2d 485, 352 P.3d 790 (2015). The court in CHL noted that the meaning of collapse used by American Economy’s engineer was based on the building code and whether an inspector would declare the structure dangerous. But that’s not the standard established in Queen Anne Park. The federal court concluded that the structural integrity of the building, that is, its ability to remain upright, was not compromised in 2002, when American Economy’s coverage for undefined collapse ended, since the building remained upright and in use twelve years later when the rot was discovered. Therefore, the Masters Apartments had not reached a state of collapse between 1999 and 2002 and American Economy correctly denied coverage.

The federal court’s application of the collapse definition is noteworthy in that the court carefully considered each part of the definition given by the Washington Supreme Court. The CHL decision is a hopeful sign that “collapse” in a property policy will return to its traditional, common sense meaning. It should not apply to a structure that remains standing and in use, even if it also has sustained hidden decay or other excluded damage.

Unanimous Washington Supreme Court: No Coverage for Water Damage to Vacant Building

Melissa O’Loughlin White | Cozen O’Connor | June 14, 2016

The Washington Supreme Court, often described as pro-policyholder, issued a unanimous decision in favor of an insurance company on June 9, 2016: Lui v. Essex Insurance Company, No. 91777-9 (Wash., Jun. 9, 2016). Addressing a first-party property claim, the court rejected the policyholder’s arguments that certain provisions in a “Vacancy or Unoccupancy” endorsement were ambiguous and must be construed in favor of coverage.

Essex Insurance Company issued a property insurance policy to Kat Suen and May Far Lui (the Luis) that included certain coverages for property damage to their building. The Luis evicted their tenant, but did not notify Essex that the building was unoccupied. Then a sprinkler pipe froze, burst and caused water damage to the building.

The Luis reported the claim to Essex and received payments totaling $293,598.05. Thereafter, Essex discovered that the building had been unoccupied for almost 60 days at the time the pipe broke. Essex sent a letter to the Luis, stating that coverage could not be provided for the claimed loss based upon the following endorsement:

Please read carefully as this changes coverage under your policy.


Coverage under this policy is suspended while a described building, whether intended for occupancy by owner or tenant, is vacant or unoccupied beyond a period of sixty consecutive days, unless permission for such vacancy or unoccupancy is granted hereon in writing and an additional premium is paid for such vacancy or unoccupancy.

Effective at the inception of any vacancy or unoccupancy, the Causes of Loss provided by this policy are limited to Fire, Lightning, Explosion, Windstorm or Hail, Smoke, Aircraft or Vehicles, Riot or Civil Commotion, unless prior approval has been obtained from the Company.

Essex also advised the Luis that it would not seek reimbursement of the $293,598.05 paid if the Luis did not pursue additional payment for the balance of their claim, which they maintained totaled $758,863.31.

In response, the Luis sued Essex to recover the full claimed amount plus additional sums that included damages for alleged bad faith. Their primary theory was that the coverage restrictions for vacant properties did not apply because they did not become effective until after the property was vacant for 60 consecutive days.

In its unanimous opinion addressing only the coverage issues, the Washington Supreme Court focused on the “Vacancy or Unoccupancy” endorsement’s plain and unambiguous language. The Supreme Court noted that the “average insured” would understand that the first paragraph ends all insurance coverage if the building is vacant for more than 60 days. Addressing the second paragraph, the Supreme Court reiterated that the endorsement provides only limited coverage starting at the moment the building becomes vacant. As it was undisputed that the building was not vacant for more than 60 days at the time the pipe burst, the first paragraph did not control. Although there was limited coverage for the building starting the day it became vacant until the 60th day, such coverage was limited to the perils listed. As exposure for water damage caused by broken pipes does not fall within any of these perils, the court concluded that there was no coverage for the water damage to the Luis’ vacant building.

The Supreme Court rejected as unreasonable the Luis’ argument that the “after 60 days of vacancy” concept in first paragraph controls the reading of both paragraphs, which would render the limited coverages described in the second paragraph likewise not effective until after 60 days of vacancy. In doing so, the court explained that the Luis’ proposed interpretation (1) ignores the plain language, (2) causes much of the endorsement’s language to become superfluous and (3) creates an unresolvable contradiction between the two paragraphs.

It is notable that the Supreme Court included in its opinion a paragraph explaining the supporting public policy. According to the Supreme Court, “it makes sense” for an insurance company to restrict coverage for vacant buildings, considering that the response time and resulting damage could have been reduced had the building been occupied. Although the context of the claim is typically not the stated reason for a favorable or unfavorable coverage result, insurers are well-advised to proceed mindful of the entire picture and, if possible, narrow the scope of issues to be decided.