U.S. Washington State Supreme Court Creates a Roadmap for Circumventing Pollution Exclusions
The Washington state supreme court set a new course when it held that the "efficient proximate cause doctrine," which has been an issue in property coverage cases, can also be applied to liability policies. This ruling opens the door to coverage of certain pollution incidents despite the inclusion of an absolute or total pollution exclusion in General Liability and/or Commercial Umbrella policies.
In Xia v. ProBuilders Specialty Insurance Companies, the claim involved a plumbing contractor's commercial policy. The state high court held that a total pollution exclusion did not bar coverage for injuries resulting from a carbon monoxide release because the efficient proximate cause of the incident was the plumber's negligent installation of a hot water heater. The court held that the negligent installation was a covered occurrence under the policy and this led to the subsequent discharge of carbon monoxide.
The court stated, "When a nonpolluting event that is a covered occurrence causes toxic pollution to be released, resulting in damages, we believe the only principled way for determining whether the damages are covered or not is to undertake an efficient proximate cause analysis. We have long utilized the 'efficient proximate cause' rule for determining coverage, and we see no reason why this case should turn on a different analysis."
The court continued, "We have never before suggested that the rule of efficient proximate cause is limited to any one particular type of insurance policy...Like any other covered peril under a general liability insurance policy, an act of negligence may be the efficient proximate cause of a particular loss. Having received valuable premiums for protection against harm caused by negligence, an insurer may not avoid liability merely because an excluded peril resulted from the initial covered peril...This court has repeatedly rejected attempts by insurers to draft language into the exclusion that expressly circumvents the rule. The exclusion cannot eviscerate a covered occurrence merely because an uncovered peril appeared later in the causal chain."
In August 2017 the Washington state supreme court refused to reconsider its April decision.
Some carriers seeing this particular claims scenario may not have raised the pollution exclusion as a coverage defense. Also, some jurisdictions have held that pollution exclusions do not apply to indoor or non-environmental incidents. However, the state supreme court now leaves insurers with an outcome that will apply to other claim scenarios involving environmental or broader pollution events.
The new legal landscape in the state of Washington is:
1. The efficient proximate cause doctrine can be applied to claims under liability policies.
2. Absolute and/or total pollution exclusions will not bar pollution claims where there was an efficient proximate cause covered by the policy.
3. The court will continue to reject attempts to draft policy language to circumvent this decision. There may still be policy wording solutions, but they are probably not simple fixes.
As one could imagine, the efficient proximate cause doctrine could be applied to defeat total and/or absolute pollution exclusions under a variety of fact patterns beyond the faulty installation of hot water heaters. What about faulty installation or repair of oil or chemical storage tanks, farm animal waste pits, or even pollution control equipment? The facts of the claim will matter, and they may or may not support application of the exclusion. Insurers cannot rely on it for all liability claims that involve a pollution loss.
What can insurers do? It may be a good time for commercial liability carriers writing risks domiciled or operating in the state of Washington to review their risk selection guidelines and rates with pollution exposures in mind.