It’s Tradition! Pollution Exclusion Applies Only to Traditional Environmental Contamination: New Cases from Washington and Connecticut

Lucas M. Blower | Brouse McDowell | September 17, 2017

In general, a pollution exclusion precludes coverage for liabilities arising from the “discharge, dispersal, release or escape” of “irritants, contaminants or pollutants.” The exclusion was incorporated in commercial general liability (CGL) insurance policies in response to the massive environmental liabilities incurred by companies in the 70’s and 80’s.

And the exclusion has been effective, by in large, in precluding coverage for liabilities that are the result of traditional environmental contamination. But, for some insurers, that was not enough. These insurers argued that the pollution exclusion leaches out in new directions, applying not only to traditional environmental contamination, but extending to apply in new, non-pollution contexts as well.

For example, in Andersen v. Highland House Co., 93 Ohio St. 3d 547, 757 N.E.2d 329 (2001), the insurers relied on the pollution exclusion to deny a claim based on carbon monoxide poisoning in an apartment—hardly the sort of widespread environmental damage first envisioned by the pollution exclusion. The insurer nonetheless argued that the pollution exclusion applied because carbon monoxide was a “pollutant,” which the policy defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. at 548. The Ohio Supreme Court, however, disagreed, holding that the pollution exclusion would not apply because it did not “specifically, and unambiguously state that coverage for residential carbon monoxide poisoning is excluded.” Id. at 548. According to the Court, the pollution exclusion was limited to situations involving “traditional environmental contamination.” Id. at 552.

While insurers have been rebuffed in their efforts to expand the scope of the pollution exclusion in Ohio, in other states, they continue to push at the edges of the pollution exclusion, hoping to spread its reach past the confines of traditional environmental contamination. But, in two recent cases—from Washington and Connecticut—the courts rightly halted the insurer’s attempts to expand the exclusion.

The recent decision from Washington’s Supreme Court, in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 393 P.3d 748, 750 (Wash. 2017), mirrors Andersen in the facts, and reaches the same conclusion, but by a slightly different route. The underlying claim in Xia was based on the “negligent installation of a hot water heater that led to the release of toxic levels of carbon monoxide in a residential home.” The insurer denied the claim based on the pollution exclusion.

In interpreting the pollution exclusion, the Xia court, similar to the Andersen court, recognized that the pollution exclusion should only apply when the underlying cause of alleged liability “stems from either a traditional environmental harm or a pollutant acting as a pollutant.” Id. at 753. Unlike the Andersen court, however, the Xia court found that the carbon monoxide poisoning could be characterized as pollution. Still, the Xia court found that the insurer’s interpretation of the pollution exclusion violated Washington’s efficient proximate cause rule. Under that rule, a loss is covered, even if there are uncovered events within the causal chain leading to that loss, so long as the initial event—or the “efficient proximate cause”—is a covered peril. In Xia, the court found that the efficient proximate cause of the loss was the negligent installation of the hot water heater, which was covered. Accordingly, the pollution exclusion did not apply.

In Connecticut, likewise, an appellate court addressed a case where the insurer was arguing for an expansive version of the pollution exclusion. In R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 156 A.3d 539 (Conn. App. 2017), the policyholder was accused of mining and selling industrial talc that contained asbestos, which allegedly injured a host of claimants. The policyholder submitted a claim based on the lawsuits to its insurers, which denied the claims, in part, based on the pollution exclusion. The Connecticut appellate court disagreed with the insurers’ interpretation of the exclusion after an exacting review of the policy language. According to the court, the “policy language, when read as a whole, is intended to exclude coverage only for traditional environmental pollution, such as the intentional disposal or negligent release of industrial and other hazardous waste into the public air, land, or water resources.” Id. at 638. Since talc mining didn’t count as traditional environmental pollution, the court held that the pollution exclusion did not apply.

These two cases, and many others like them, should give insurers pause when they argue for a broad application of the pollution exclusion in non-traditional settings. Even if the terms in the pollution exclusion, standing alone, may seem broad enough to encompass ever new risks, the courts have rightly decided that they will not read the terms of the pollution exclusion standing alone. Rather, courts will continue their long-standing practice of interpreting the pollution exclusion solely within the limited context in which it was written. It’s tradition.

Washington Federal Court Rejects Policyholder’s “Separate Claim” Argument

Jason Morris | PropertyCasualtyFocus | July 14, 2017

In April, a federal district court in the Western District of Washington issued a decision in National Union Fire Insurance Co. v. Zillow, Inc.While at first blush, it may seem only of interest to those who work with media policies, this decision has potential broader application. In short, the decision rejects the argument that a demand letter and subsequent litigation based on the facts asserted in the demand letter are separate claims and thus should be treated as such for claim evaluation purposes. While policyholders have successfully convinced courts in other jurisdictions to accept the opposite position, the decision in Zillow provides a helpful counterweight.

How much is my suit worth? Zestimate: $8 Million

In July 2014, VHT, Inc., a property photography company that may or may not have been founded by avid viewers of the cable classic TV-series Behind the Music, sent Zillow a demand letter, asserting that “Zillow was misusing VHT’s images and demanding that Zillow,” in the words of the opinion, “immediately take those images down.”

According to National Union, Zillow did not remove the images, and about a year later, VHT filed suit against Zillow for infringement. Using, among other things, the demand letter itself, VHT obtained an $8 million jury verdict against Zillow.

After 13-Month Delay in Providing Copy of Demand Letter, National Union Files Suit

Zillow notified National Union of the suit shortly after its filing in July 2015. A month later, Zillow provided National Union a copy of VHT’s demand letter, the one VHT sent to Zillow 13 months earlier. In September, National Union informed Zillow that National Union believed there was no coverage, as the claim was first made when the demand letter was sent in July 2014, prior to the policy period, and Zillow had failed to timely report the claim. National Union filed suit a year later in September 2016.

Court Finds “Separate Claim” Argument Ignores “Basic Grammatical Considerations”

In defense, Zillow contended “that the 2014 demand letter was a separate ‘Claim’ from the VHT litigation and therefore Zillow’s failure to report the 2014 letter should not affect National Union’s obligation to cover the timely-reported VHT litigation,” arguing: (1) the policy’s use of the word “or” in the definition of “Claim” makes the claims different, (2) there are differences in the demand letter and litigation, and (3) National Union could have used other language.

The court rejected the “or” argument, finding:

Zillow gives too much weight to the term “or,” the use of which is required by basic grammatical considerations. If National Union had used the term “and” in place of “or,” the clause would require National Union to cover only those claims where there had been a demand letter and a lawsuit. Further, the definition of “Claim” is necessarily broken into two clauses. . . .The first clause is modified by the term “written demands,” followed by the categories of demands that qualify as a Claim under the Policy. . . . The second clause includes only the term “Suit,” which is not modified by “written demands,” and therefore must be separated from the first clause.

In doing so, the court dismissed a contrary result in the Northern District of Georgia decision Cox Communications, Inc. v. National Union Fire Insurance Co., reasoning that “the court’s analysis in Cox did not address this argument” and that “[c]ourts that have addressed Zillow’s argument regarding the disjunctive use of the term ‘or’ have rejected it.”

Next, the court disagreed with Zillow’s argument “that the demand letter is not related enough” to the litigation, finding that the “VHT complaint alleges identical facts,” which was more than sufficient to satisfy the “relevant question [of] whether the two Claims involve the same relevant acts.”

The court essentially sidestepped Zillow’s argument that the policy lacked “commonly used language that would have defined the 2014 letter as part of the same Claim as the litigation” by finding that Zillow “ignore[d] Policy language that highlights the importance of the Policy’s ‘Claims first made’ provision.’” But the court found that, among other things, Zillow ignored the policy’s language providing National Union the “rights to direct the court of any Claim,” “direct the potential litigation in this case,” “the opportunity to settle a claim, with the insured’s consent, and the right to investigate any Claim.”

Is the Ninth Circuit on Board?

Attention now turns to the Ninth Circuit Court of Appeals, as Zillow appealed the decision. Should the Ninth Circuit affirm, insurers will have at their disposal an opinion providing a strong affirmation of the insurer’s contractual rights in the face of an insured’s multimillion dollar jury verdict.

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. *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.