Last week, the Washington Supreme Court issued its long-awaited decision in Xia v. ProBuilders Specialty Ins. Co. on the subject of the absolutely pollution exclusion (“APE”) as applied to a carbon monoxide leak in a private home from an incorrectly installed water heater exhaust vent. The plaintiff, Ms. Xia, sued the builder of the home, and the builder’s insurer declined to defend under the APE. In its opinion finding that there was coverage, the Supreme Court turned liability insurance itself upside down.
The court first acknowledged that the APE applied to the facts of the case under its prior precedents relating to exposure to toxic fumes. Rather than ending the analysis there though, the court went on to apply a distorted version of the “efficient proximate cause” rule, a rule previously used only in the first party property insurance context. Specifically, the Court held that an otherwise applicable pollution exclusion did not apply because the polluting event was preceded in the causal chain by the “covered peril” of negligence:
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 ruling is fundamentally flawed. Washington courts had never previously engaged in an efficient proximate cause analysis outside the context of property insurance policies, and with good reason. The concept of covered “perils” only exists in the property insurance context for the purpose of determining what causes of loss will be covered. The efficient proximate cause rule is designed to resolve coverage for damage to property caused by both covered perils and excluded perils. In those cases, if the initial event, the “efficient proximate cause,” is a covered peril, then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy. Safeco Ins. Co. of Am. v. Hirschmann, 112 Wn.2d 621, 628, 773 P.2d 413, 416 (1989)
In liability insurance, by contrast, there is no such thing as a “covered peril.” Rather, the basic extension of coverage is to any “bodily injury” or “property damage” caused by an “occurrence,” which is defined as an “accident.” The exclusions work within this coverage grant to exclude specific liabilities that would otherwise fall within the coverage grant. In other words, the exclusions in a liability policy already assume that the “accident” causation requirement is met.
It is viciously circular to reason that an exclusion for bodily injury caused by the release of pollutants is inapplicable when the release of pollutants was the result of a “covered” accident or negligent act. If it were otherwise, there would be no reason to even look at the exclusions because the coverage grant itself would not be satisfied. And, by the same token, there would never be any reason to look at any exclusions if there was an accident because the “accident” would trump them. If Washington Courts apply Xia’s reasoning consistently to other liability-policy exclusions, most of them are now meaningless.
The implications of this opinion are hard to overstate. The case may open insurers once again to liability for “traditional” industrial pollution at polluted sites because polluters will argue that their liability for leaking barrels of toxic waste is not excluded because their negligence is the “efficient proximate cause” of the pollution. Every liability case has a screw-up or “accident” of some kind by the insured or someone else somewhere in the casual chain. And the screw-up will necessarily always come before the harm to the plaintiff in the “causal chain.”
The extreme impact of the Court’s analysis is hard to exaggerate. The Court would have done much less violence to the doctrine if it simply voided modern pollution exclusions on an inchoate “public policy” rationale. What happens, for starters, to the auto, watercraft, aircraft, and professional services exclusions? If followed, Xia’s reasoning stands to destroy entire lines of liability coverage.
To add insult to injury, the Court went on to multiply its error by holding that the insurer was not only wrong on coverage but acted in bad faith as a matter of law by failing to foresee the court’s absurd reasoning. In her dissent, Justice Madsen pointed out the unfairness of this analysis, noting that “even with the majority’s extension of the efficient proximate cause rule, . . . ProBuilders did not act in bad faith when it did not anticipate that we would expand the rule to new facts.”
We sincerely hope the Washington Supreme Court sees fit to reconsider this terrible decision. – Dan L. Syhre
