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.
RSUI Indemnity Company, Inc. v. Vision One, LLC, Western District of Washington case number 2:08-cv-01386-RSL, Order on Summary judgment (Dkt. No. 152) (February 21, 2013)
After the state court reasonableness action was litigated and the reasonable settlement value of the udnerlying action was determined to be $2.3M, Vision One, the insured’s assignee, then sought summary judgment against insurer, RSUI, that the presumptive measure of RSUI’s liability was $2.3 million, the value of the settlement between Vision One and the insured in the underlying litigation (that was found reasonable). RSUI opposed Vision One’s motion on the basis that there must be a finding of bad faith before the presumptive value of the damages may exceed the limits of the underlying insurance policy. In this coverage action, the court had previously ruled that the RSUI policy provided coverage, but that RSUI had not committed a bad faith coverage determination, but left open whether RSUI had committed bad faith in its claims handling.
First, RSUI opposed Vision One’s request for presumptive damages on the basis that presumptive damages were not appropriate in this case because the insured had not been harmed by the underlying litigation. The court did not find this argument persuasive and reasoned, “Washington courts have repeatedly rejected this argument, finding that “[an] agreement not to execute does not preclude a showing of harm.” Besel, 146 Wn.2d at 737 (alteration in original) (quoting Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 397 (1992)). “[A] covenant not to execute coupled with an assignment and settlement agreement is not a release permitting the insurer to escape its obligation.” Kagel v. Aetna Life & Cas. Co., 40 Wn. App. 194, 198 (1985).”
Second, RSUI contended that even if presumptive damages were appropriate in this case, the amount of the presumed damages cannot exceed the $1 million limit of the policy with RSUI, absent a finding of bad faith. Vision One, relying primarily on Mut. Of Enumclaw Ins. Co. v. T&G Const., Inc., 165 Wn.2d 255 (2008), argued that this Court’s earlier finding of coverage under the RSUI policy and the recent appellate court decision affirming the trial court’s reasonableness finding mandated a finding that the presumptive measure of RSUI’s liability in this case is $2.3 million, the reasonable settlement value.
The court found that presumptive damages were appropriate in this case, and having found so, the next issue that court must address is what the amount of the presumptive damages should be. The court reasoned, “Unlike the present case, T&G Construction did not involve a covenant judgment that exceeded the insured’s policy limits. Vision One concedes that T&G Construction does not expressly address the circumstances presented here, but it concludes that the Washington Supreme Court nevertheless intended its holding in that case to apply to situations in which the covenant judgment is higher than the insured’s policy limits. The Court disagrees.”
The Court reasoned that bad faith needed to be shown to have a presumption of damages in excess of policy limits. Although the court had earlier ruled that RSUI did not act in bad faith by making an unreasonable coverage determination, the court indicated that Vision One may still be able to establish RSUI’s bad faith based on its failure to investigate, which could enable Vision One to recover more than the policy limits. That issue was reserved for trial, so in order to get a presumptive measure of damages above policy limits, the court ruled that Vision One must prove RSUI’s bad faith claims handling at trial.
The court also found that Vision One was entitled to pre-judgment interest on the presumptive measure of damages. The court reasoned, “Having determined that coverage existed and that the presumptive measure of damages is the policy limit, the Court finds that the amount Vision One seeks to recover is a “liquidated sum,” and therefore, Vision One is entitled to prejudgment interest.” Vision One argued that it was entitled to a 12% rate for prejudgment interest and RSUI argued that the rate should be set under RCW 4.56.110(3)(b) for tort claims. The court found that issues of fact regarding the components of the final judgment existed, and that determining how the interest rate would be set was a question to be left for after trial.
First Mercury Insurance Company v. Miller Roofing Enterprises, WDWA Case No. 2:11-cv-00105-JCC, Dkt. No. 51, Order on summary Judgment (February 22, 2013)
This coverage action arises out of a construction defect claim alleging water intrusion due to roofing repairs made on an EIFS clad building. The Roofer’s insurer, First Mercury, defended the roofer in the underlying construction defect suit under a reservation of rights and then filed a declaratory judgment action seeking a determination of no coverage. The insurance policy at issue contains the following EIFS exclusion:
This insurance does not apply to . . . “property damage” included in the “products-completed operations hazard” and arising out of “your work” described as . . . [a]ny work or operation with respect to any exterior component, fixture or feature of any structure if any “exterior insulation and finish system” is used on any part of that structure.
First Mercury moved for summary judgment that the policy did not cover the breach-of-oral-contracts damages Miller Roofing allegedly owes McClincy Brothers and Tim McClincy in the underlying construction defect action. The court did not hesitate in finding that the EIFS exclusion applied to bar coverage:
“The EIFS exclusion bars coverage. Defendants do not contest that the alleged breach-of-oral-contracts damages are for “property damage” arising out of Miller Roofing‟s “work” on the roof. They do not contest that “exterior insulation and finish system‟ is used on any part of th[e] [building].” And they do not contest that the roof is “an exterior component, fixture or feature of . . . that [building].” Under the plain language of the EIFS exclusion, there is no coverage. See, e.g., Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 292 S.W.3d 48, 62–63 (Tex. Ct. App. 2006), reversed in part on other grounds, 279 S.W.3d 650 (Tex. 2009).”
Defendants argued that the EIFS exclusion did not apply because the leak was the result of “defective workmanship to the roof itself,” and “Miller Roofing did not install the EIFS on the building, nor did it undertake to make any repairs to the EIFS itself.” The court stressed that “[e]ven if that is true, it is irrelevant. The exclusion applies not only to property damage arising from EIFS-related work by the insured; it applies to property damage arising from “any” work by the insured on an exterior component, fixture, or feature of a structure, as long as “exterior insulation and finish system‟ is used on any part of that structure.” Those conditions are met here.”