In a 2017 opinion, Xia v. ProBuilders Specialty Insurance Company, the Washington State Supreme Court analyzed whether an insurer breached its duty of good faith and fair dealing in refusing to defend its contractor insured on the basis of a pollution exclusion clause where it was alleged that the damages arose from negligent installation of a hot-water heater, which was a covered occurrence under the policy. The Court’s finding that coverage existed should cause both insurers and insureds to conduct a deeper analysis of the particular events that form the basis of a claim that facially appears to be barred under a policy exclusion.
In May 2006, Zhaoyun “Julia” Xia (“Ms. Xia”) purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”). Issaquah carried a commercial general liability policy (the “CGL policy”) through ProBuilders Specialty Insurance Co. (“ProBuilders”). Soon after moving into her home, Ms. Xia began to feel ill. On December 8, 2006, a service technician determined that an exhaust vent attached to the hot water heater had not been installed correctly and was discharging carbon monoxide into the basement of Ms. Xia’s home.
Ms. Xia notified Issaquah of her injuries and provided information regarding the exhaust vent issues. ProBuilders’s claims administrator, NationsBuilders Insurance Services Inc. (“NBIS”) declined coverage of Issaquah under the CGL policy on multiple grounds, including the CGL policy’s pollution exclusion. On that basis, NBIS refused to defend or indemnify Issaquah for Ms. Xia’s claimed damages. Ms. Xia initially pursued a lawsuit against Issaquah and provided a courtesy copy of her complaint to NBIS. Issaquah and Ms. Xia ultimately entered an agreed judgment whereby the parties stipulated to damages and Issaquah assigned its claims against ProBuilders and NBIS to Ms. Xia in exchange for a covenant not to execute or enforce the judgment. Ms. Xia then filed suit against ProBuilders and NBIS regarding their failure to defend or indemnify Issaquah on the basis of the CGL policy’s pollution exclusion.
The Washington Supreme Court analyzed: (1) whether the specific pollution exclusion in the CGL policy included the carbon monoxide released from the hot water heater exhaust vent; and (2) whether the pollution exclusion precluded coverage under the CGL policy where the cause of the loss was a covered occurrence under a different provision in the CGL policy. As a first point, the Court found that ProBuilders correctly determined the plain language of its pollution exclusion applied to the release of carbon monoxide into Ms. Xia’s house. The Court held, however, that the rule of “efficient proximate cause” provides insurance coverage where a “covered peril” (i.e., negligent installation of the hot water heater’s exhaust vent) sets in motion a chain of events that leads to an uncovered peril (damages arising from the release of carbon monoxide). Since the initial event or “efficient proximate cause” was covered under the CGL policy, there was insurance coverage regardless of the pollution exclusion. The Court did state, however, that insurers could continue to write exclusions into policies that deny coverage where the excluded event or occurrence starts the causal chain that leads to the claimed loss.
Based upon these findings, the Court held that the allegations in Ms. Xia’s lawsuit provided a reasonable basis for ProBuilders and NBIS to believe that Issaquah’s negligent installation of the hot water heater exhaust vent started the process which led to Ms. Xia suffering damages related to the discharge of carbon monoxide.
The Xia decision should prompt insurers and insureds to analyze the precise factual scenario underlying an insurance claim to determine whether the catalyst for the claim is a covered occurrence or is within a policy exclusion.