In another example of bad facts make bad law, the Washington Supreme Court, in a six to three decision, ruled that the “efficient proximate cause rule” applies to the interpretation of general liability policies. See Xia v. ProBuilders Specialty Insurance Company RRG, __Wn.2d __, __ P.3d __ (April 27, 2017).
Turning insurance contract construction on its head, the court first analyzed whether an absolute pollution exclusion applied to a bodily injury claim caused by the inhalation of carbon monoxide fumes from an improperly installed water heater. The Court found that the pollution exclusion would preliminarily apply to a bodily injury claim caused by carbon monoxide poisoning, because the pollution exclusion applies when a “pollutant is acting as a pollutant.” The Court reasoned that, “the choice of analysis under Kent Farms versus Quadrant and the antecedent “fumes” cases, Cook and Harbor Insurance, necessarily turns on a determination of whether an occurrence, as defined under the policy, stems from either a traditional environmental harm or a pollutant acting as a pollutant. If the answer to this inquiry is yes, barring any ambiguities in the policy language, courts must apply the plain language of the pollution exclusion to determine whether the exclusion applies to the facts at hand.”
However, the Court then added an additional step to the analysis, and found that the insurer must next determine whether the excluded occurrence is the “efficient proximate cause of the claimed loss.” Thus, it appears that the Court has instituted an additional step in the contract interpretation requirement under general liability policies, at least with respect to “[w]hen a nonpolluting event that is a covered occurrence causes toxic pollution to be released, causing damages.” In this scenario, it appears that the Insurer must first determine whether the insuring clause is satisfied, then determine whether the exclusion applies to prohibit coverage, and then finally determine whether the “efficient proximate cause” of the loss was the direct cause of the excluded damage.
Prior to this decision, the efficient proximate cause rule had only been applied to first party coverage which is generally based on “covered perils.” Nevertheless, the Washington Supreme Court rejected its own precedent and explicitly held that an efficient proximate cause analysis must be undertaken under the terms of general liability policies as well, at least in the context of a pollution claim when the pollution is proximately caused by “a nonpolluting event.”
The Court stressed, “[h]owever, 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 predominate or efficient cause of the loss.” The Court went to great lengths to distinguish the facts at issue before it with traditional environmental harm cases. The Court reasoned:
ProBuilders contends that application of the efficient proximate cause rule would defeat the exclusion entirely, arguing that all acts of unintentional pollution begin with negligence. This is not so, and application of the rule may be harmonized with Washington’s prior pollution exclusion jurisprudence. In Cook, the initial peril that set in motion the causal chain was the polluting event: the application of a chemical sealant. 83 Wn. App. at 151. Up until the point of using the sealant and creating the toxic fumes, no negligent act had occurred. Rather, the negligence in permitting the fumes to migrate occurred after the fumes had been created intentionally. Id. (“The contractors did not seal off a six-[ ]by eight-foot fresh air intake, which drew air into the building’s HVAC system. [Sealant] fumes entered the building, requiring evacuation.”). Similarly, in Quadrant, the initial peril that set in motion the causal chain was also the application of a chemical sealant, which was toxic even when used as intended. 154 Wn.2d at 168. There were no covered perils prior to the release of a pollutant acting as a pollutant. As such, application of the efficient proximate cause rule in both cases would have led to the same outcome.
The Court found that because the “efficient proximate cause” of the carbon monoxide poisoning was the negligent installation of the hot water heater (which it characterized as a covered event), and not the escape of the carbon monoxide from the heater, that the absolute pollution exclusion would not apply to bar coverage.
Moreover, the Court found that the insurer committed bad faith in not defending its insured because “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,” because the complaint alleged negligent installation of the hot water heater. The Court further found that ProBuilders acted in bad faith by failing to conduct an investigation into Washington law (before it denied the claim) “that might have alerted them to the rule of efficient proximate cause and this court’s unwillingness to permit insurers to write around it.”
The ruling in this case has the potential to have a significant impact on the duty to defend and indemnify analysis under general liability policies.
Please feel free to contact Soha & Lang, P.S. to learn more.