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June 1st, 2017
coverage
STATE SUPREME COURT ISSUES CONFUSING RULING EXTENDING EFFICIENT PROXIMATE CAUSE RULE TO THIRD PARTY COVERAGE QUESTION

The Washington State Supreme Court recently published an opinion that may impact how courts will approach exclusions in certain liability policies. In Xia v. ProBuilders Specialty Insurance Company, 2017 WL 1532219 (Wash. Apr. 27, 2017), a homeowner became ill soon after moving into a new house. It later was determined an improperly installed exhaust vent for the hot water heater discharged carbon monoxide into the basement of the home.

The homeowner sued the homebuilder, which tendered the claim to its general liability carrier. The general liability carrier denied coverage, relying in part on the pollution exclusion. The plaintiff homeowner entered into a stipulated settlement and pursued the insurer directly for breach of contract and bad faith. The insurer prevailed on summary judgment at the trial court level, and the Washington Court of Appeals affirmed the lower court’s ruling that the pollution exclusion barred coverage and the insurer had no duty to defend.

The Washington Supreme Court agreed that the pollution exclusion applies generally to carbon monoxide exposure. However, the court reversed the lower courts and ruled in favor of the homeowner after applying an “efficient proximate cause” analysis. Under this rule, a loss is covered where “two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” The court reasoned that the polluting occurrence, the carbon monoxide exposure, happened only after the initial covered occurrence, which was the negligent installation of the hot water heater that normally does not pollute when used as intended.

The court acknowledged that until this case, it had applied the efficient proximate cause rule only in first-party property coverage cases. However, the court could identify no reason why the rule should not be extended to third-party cases. The court further noted that the insurer was well within its rights to draft an exclusion that covered the initial cause of loss, in this case negligent installation. That said, the court explained that insurers may not phrase exclusions to circumvent the efficient proximate cause rule.

The court determined the efficient proximate cause of the loss was a covered peril and that the insurer therefore had a duty to defend its insured. The court concluded the insurer’s “refusal to defend its insured was in bad faith,” despite the fact that no court previously had applied the efficient proximate cause rule to exclusions in the third-party liability context.

It is unclear at this point whether the Xia opinion is the beginning of an emerging trend or simply an outlier. If it is the former, the Xia case may have a profound impact on how insurers approach liability coverage questions.

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