Why it matters

In answering certified questions from the Ninth Circuit, Nevada joined numerous other jurisdictions in holding that standard-form “absolute” pollution exclusions are ambiguous as to releases of non-traditional indoor pollutants – in this case carbon monoxide. Reasoning that the standard-form pollution exclusion lends itself to more than one reasonable interpretation in this respect, the Nevada Supreme Court held that the insurer “must plainly state that the exclusion is not limited to traditional environmental pollution” if it intends to exclude coverage for non-traditional indoor pollution.

Detailed Discussion

Four people died from carbon monoxide poisoning while sleeping in a room above a pool heater at Casino West Motel in Nevada. Casino West sought coverage from its insurer, Century Surety, which denied based on the absolute pollution exclusion and the indoor air quality exclusion.

Century then filed a declaratory judgment action in Nevada federal court. The district court denied Century’s motion for summary judgment and Century appealed. Finding that Nevada law did not clearly address the scope of these exclusions, the Ninth Circuit certified two questions to the Nevada Supreme Court.

The first was whether the absolute pollution exclusion in Casino West’s policy barred coverage for the carbon monoxide-related deaths. The exclusion precluded coverage for “‘[b]odily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’” “Pollutant” was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste.” The exclusion was subject to an exception for building heaters.

The second was whether the indoor air quality exclusion precludes coverage. Under this exclusion, coverage was unavailable for “‘[b]odily injury,’ ‘property damage,’ or ‘personal and advertising 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.”

As to the first question, Century took the position that carbon monoxide constituted a “pollutant” under the absolute pollution exclusion, and the building heater exception demonstrated that the exclusion was meant to apply to both indoor and outdoor pollution.

Conversely, Casino West argued that the exclusion applied only to traditional environmental pollution because it contained terms of art typically applied in that context. Moreover, the fact that the parties disagreed about the provision’s meaning provided further support its ambiguity.

The Nevada Supreme Court agreed with Casino West. “As drafted here, the absolute pollution exclusion permits multiple reasonable interpretations of coverage,” the Court opined, finding language to support both Century’s and Casino West’s interpretations. “Taken at face value, the policy’s definition of a pollutant is broad enough that it could be read to include terms such as soap, shampoo, rubbing alcohol, and bleach insofar as these items are capable of reasonably being classified as contaminants or irritants.”

The potential for such absurd results was contrary to any reasonable policyholder’s expectations, the Court held. Moreover, the building heater exception could be read as a clarification rather than an expansion of the exclusion’s scope.

“In light of the exclusion’s ambiguity, we must interpret it to effectuate Casino West’s reasonable expectations,” the Court held. “To demonstrate that the absolute pollution exclusion applies to non-traditional indoor pollutants, an insurer must plainly state that the exclusion is not limited to traditional environmental pollution.”

Turning to the second question regarding the indoor air quality exclusion, the Court reached a similar conclusion. “As with the pollution exclusion, the indoor air quality provision is drafted so broadly that, if no limitations are applied to it, its applicability could stretch well beyond a reasonable policyholder’s expectations and lead to absurd results,” the Court opined.

For instance, in the case of a hypothetical fire inside the motel, the insurer’s reading would exclude coverage for injuries resulting from a guest’s inhalation of smoke but would cover any burn injuries caused by the same fire. “Such potentially absurd results illustrate the need for some limitations on the exclusion’s applicability,” the Court concluded.

To read the opinion in Century Surety Co. v. Casino West, Inc., click here.