Posted In: Insurance Recovery
on August 22, 2017
Today, most, if not all, commercial general liability (CGL) policies contain absolute pollution exclusions. An example provision commonly excludes:
The Facts. Now, consider the situation where a builder negligently installed a hot water heater that led to the release of toxic levels of carbon monoxide in a residential home causing bodily injury to the homeowner. The homeowner sued the builder, and the builder then tendered the claim to its insurer for a defense and indemnification. The insurer denied coverage based on the absolute pollution exclusion in the policy. The homeowner and the builder then settled for $2 million, and a coverage action was brought against the insurer. Under these circumstances, did the insurer properly deny coverage based on the pollution exclusion? According to the insurer, the homeowner was injured by the release of carbon monoxide, which arguably falls within the definition of “pollutant.”
The Coverage Determination. In a recent case, the Washington Supreme Court, dealing with these very facts, held that the insurer improperly denied coverage. It concluded that the insurer, while correctly identifying “the existence of an excluded polluting occurrence,” “ignored the existence of a covered occurrence—negligent installation—that was the efficient proximate cause of the claimed loss.” Xia at ¶ 2. The efficient proximate cause rule provides coverage when “‘two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.’” (Citation omitted.) Id. at ¶ 26. Thus, the court determined that the insurer not only erred by denying the builder a defense, but also acted in bad faith in the denial. Id. at ¶ 2. The bad-faith finding was due, in part, to the insurer’s failure to conduct “any investigation into Washington law that might have alerted them to the rule of efficient proximate cause and this court’s unwillingness to permit insurers to write around it.” Id. at ¶ 39.
The Takeaways. Both policyholders and insurers would be well advised to be aware of whether their jurisdiction has adopted the efficient proximate cause rule, or the broader concurrent causation doctrine, which mandates coverage where both insured and uninsured causes result in indivisible injury. Andray v. Elling, 6th Dist. Lucas No. L-04-1150, 2005-Ohio-1026, ¶ 34, quoting Gen. Am. Transp. Corp. v. Sun Ins. Office, Ltd., 369 F.2d 906, 908 (6th Cir.1966); see also Sav-o-Mat, Inc. v. Nat’l Farmers Union Prop. & Cas. Co., Colo.Dist.Ct. No. 00 CV 8556 (Aug. 25, 2005)(slip op.); Textron, Inc. v. Aetna Cas. & Sur. Co., 754 A.2d 742 (R.I.2000); SCSC Corp. v. Allied Mut. Ins. Co., 536 N.W.2d 305 (Minn.1995).
Such rules may preserve coverage for losses that, at first blush, appear to be excluded by policy exclusions. They also can lead to extracontractual liability for insurers.
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