In Century Surety Company v. Casino West, Inc., ____ P.3d ____, 2014 WL 2396085 (Nev. 2014), the Nevada Supreme Court applied Nevada law to interpret absolute pollution and indoor air quality exclusions in a comprehensive general liability policy. Specifically, the court found that the absolute pollution exclusion only barred coverage for outdoor releases of contaminants. The court also found that the indoor air quality exclusion applied only where the injuries arose from dangerous gases that had been continuously present for lengthy periods. Based on its interpretations of the exclusions, the court concluded that they did not bar liability coverage in the case before it.
The litigation in Century Surety arose from an incident in which four guests staying at the policyholder’s motel died because of a carbon monoxide leak from a pool heater. 2014 WL 23960185 at *1. After the policyholder sought coverage under the carrier’s liability policy, the carrier responded by denying coverage based upon the absolute pollution and indoor air quality exclusions. Id. The carrier subsequently initiated a declaratory judgment action in federal court, the policyholder counterclaimed, and the carrier thereafter filed a summary judgment motion in which it argued that the exclusions barred coverage. Id. The district court denied the carrier’s motion, and the carrier appealed the district court’s decision to the US Ninth Circuit Court of Appeals. Id. That court concluded that Nevada law was unclear and it therefore submitted certified questions to the Nevada Supreme Court regarding the exclusions’ scope. Id.
In its decision, the Nevada Supreme Court found that the absolute pollution exclusion is limited to circumstances involving “traditional” outdoor environmental pollution and hence did not prevent the policyholder from obtaining coverage for the carbon monoxide leak. 2014 WL 23960185 at **2-4. The exclusion in the carrier’s policy stated that it barred coverage for bodily injury arising from the escape of “pollutants,” which the policy defined as “any . . . gaseous . . . irritant or contaminant, including smoke, vapor, . . . fumes, chemicals, and waste.” Id. at *2. The court found this language could potentially lead to absurd results if the exclusion was not limited to outdoor pollution releases, since “irritants” could be read broadly to encompass such common household items as “soap, shampoo, rubbing alcohol, and bleach.” Id. at *3. The court further found that the drafting history of the exclusion supported the conclusion that it was intended to prevent coverage for litigation arising from outdoor pollution releases. Id. Finally, the court addressed language in the carrier’s policy that provided an exception to the exclusion for bodily injury “sustained within a building caused by smoke, fumes, vapor, . . . from equipment used to heat that building.” Id. at **3-4. The court found the existence of this exception did not compel the conclusion that the exclusion was intended to bar coverage for indoor releases. Id.
The Nevada Supreme Court also found in its opinion that the so-called indoor air quality exclusion in the carrier’s policy did not exclude injuries arising from the temporary presence of harmful gases, and hence did not bar the policyholder’s coverage claim. Id. at **4-5. The indoor air quality exclusion stated that it barred coverage for bodily injury “contributed to in any way by any toxic, hazardous, noxious, . . . qualities or characteristics . . . of indoor air regardless of cause . . . .” Id. at *4. As with the absolution pollution exclusion, the court found that, absent some limitation, the indoor air quality exclusion would potentially lead to absurd results. Id. at **4-5. Specifically, the court noted that, in the event of a fire, the exclusion could give rise to the incongruous result that burn injuries would be covered while injuries from smoke inhalation would not be. Id. at *4. The court also concluded the phrase “qualities and characteristics” in the exclusion implied a longstanding condition. Id. at *5. Based on these considerations, the court concluded that the exclusion would not bar coverage for liability arising from a condition that merely temporarily affected indoor air quality. Id. at *5.
The Century Surety decision is a significant one. The case provides yet another example of a court wrestling with the proper scope of the absolute pollution exclusion. It is also significant for its discussion of the indoor air quality exclusion, a provision which has not yet been the focus of much judicial attention.