On April 27, 2017, the Washington Supreme Court ruled that carbon monoxide discharged from a hot water heater was a pollutant “acting as a pollutant” and within the absolute pollution exclusion of the home builder’s liability insurance policy. The court nevertheless ruled, as a matter of law, that the insurer had a duty to defend and indemnify the policyholder, and that its failure to do so was in bad faith.
In Xia v. ProBuilders Specialty Insurance Company RRG, No. 92436-8, 2017 Wash. LEXIS 443, 2017 WL 1532219 (April 27, 2017), the court’s 6-3 majority held for the first time that Washington’s “efficient proximate cause” rule applies to an alleged “causal chain of events” in a third-party liability insurance coverage claim. The “efficient proximate cause” rule provides coverage “where a covered peril sets in motion a causal chain, the last link of which is an uncovered peril” regardless of whether a later (or simultaneous) event in the sequence is a non-covered cause of the loss. Washington courts had previously limited application of the rule to first-party claims. Here, an installer allegedly negligently failed to vent a hot water heater’s exhaust hose to the outdoors, which led to carbon monoxide polluting the home’s basement. The Xia court held that the builder’s insurer could not enforce its absolute pollution exclusion against the “covered occurrence” of the builder’s alleged negligence that set in motion the “causal chain.”
As to “bad faith,” the majority held that the insurer’s wrongful failure to defend, and/or its failure to investigate the previously limited “efficient proximate cause” rule, constituted bad faith as a matter of Washington law, even though the insurer correctly applied its pollution exclusion to carbon monoxide in this factual context. The majority opinion did not address an insurer’s widely recognized “right to be wrong” on unresolved coverage issues, nor did it conduct any examination of how the insurer had been “unreasonable, frivolous or unfounded” in its decision.
In contrast to Washington’s new Xia ruling on coverage for a “polluting occurrence … after an initial covered occurrence,” the law of Oklahoma permits insurers to enforce their clear exclusions as written regarding events “alleged to be contributed to in any way” by an indoor irritant or pollutant.
The Oklahoma Supreme Court’s opinion in Siloam Springs Hotel, LLC v. Century Surety Company, 2017 OK 14, 2017 WL 696815 (February 22, 2017), found an Indoor Air Exclusion enforceable, consistent with public policy, to prohibit coverage for bodily injury “arising out of, caused by, or alleging to be contributed to in any way by any toxic, hazardous, noxious, irritating pathogenic or allergen qualities or characteristics of indoor air regardless of cause ….” Several guests inside the Siloam Springs Hotel had allegedly suffered bodily injury due to carbon monoxide poisoning from the hotel’s leaky indoor swimming pool heater. In a federal court declaratory action, the trial court (U.S. District Court for the Western District of Oklahoma) held that the exclusion was not ambiguous and applied to exclude coverage for the loss. The Tenth Circuit Court of Appeals left this ruling undisturbed on appeal but remanded for further proceedings including certified questions on Oklahoma coverage law.
In its February 2017 response to the federal court’s certified question whether “public policy of the State of Oklahoma prohibit[s] enforcement of the Indoor Air Exclusion,” the Oklahoma Supreme Court held that except in a narrow class of cases involving established public policy, an insured and insurer generally “were free to negotiate and contract for coverage as they saw fit.” Here, they were free to include the Indoor Air Exclusion in their contract.
The Oklahoma Supreme Court rejected the insured’s arguments essentially seeking a ruling of ambiguity because the Indoor Air Exclusion would violate public policy unless it applied to only “long-term air quality” problems, and not “sudden and accidental” carbon monoxide leaks. The court also rejected the insured’s arguments that public policy would support an expectation of liability-insurance compensation to the victims of carbon monoxide leaks, observing that merely excluding coverage under the insurance contract “does not necessarily mean injured individuals will be unable to recover from [the hotel] itself.”
In March 2017, similar facts to Oklahoma’s Siloam Springs Hotel case were involved in the U.S. District Court case of Colony Insurance Company v. Victory Construction, LLC, --- F.Supp. 3d ----, 2017 WL 960024 (D. Or. March 9, 2017), where a construction company allegedly negligently installed a natural gas swimming pool heater and caused carbon monoxide poisoning. Applying Oregon law of insurance policy construction, the court held that carbon monoxide was a “pollutant” as defined in a commercial general liability policy’s Pollution Exclusion. Similar to Siloam Springs Hotel, the court held there was no coverage.
All three of these recent rulings are consistent with the trend of courts around the country concluding carbon monoxide is one of the substances qualifying as an irritant, contaminant, or “pollutant” under a liability insurance policy, even with facts not involving so-called “traditional” environmental harm. Several other jurisdictions have issued decisions to the contrary, including Illinois, New York, and Nevada. However, as demonstrated in the new Oklahoma and Washington cases, a state’s applicable authorities related to public policy in the enforcement of contracts may be crucial, especially in matters of first impression regarding commercial insurance policy exclusions. In Washington, the Xia case may further motivate insurers to take a second-look at their liability policies’ pollution exclusions and/or other exclusions, to ensure that they will not be restricted from application in Washington by the “efficient proximate cause” rule.