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Xia v. Probuilders Specialty Insurance Co. RRG

Supreme Court of Washington, En Banc

April 27, 2017

ZHAOYUN XIA, a single person; ISSAQUAH HIGHLANDS 48, LLC, a Washington limited liability company; ISSAQUAH HIGHLANDS 50, LLC, a Washington limited liability company; GOTTLIEB ISSAQUAH HIGHLANDS 48, LLC, a Washington limited liability company; and GOTTLIEB ISSAQUAH HIGHLANDS 50, LLC, a Washington limited liability company, Petitioners,
PROBUILDERS SPECIALTY INSURANCE COMPANY RRG, a foreign insurance company authorized to conduct business within the State of Washington; OLYMPIC ADVANTAGE, INC., a Washington corporation; TREACY DUERFELDT and JANE DOE DUERFELDT, husband and wife, and the marital community composed thereof; LAMBIN INSURANCE SERVICES, INC., a Nevada corporation doing business in the State of Washington; FL YING EAGLE INSURANCE SERVICES INC., a Nevada Corporation licensed to do business in the State of Washington; and DA YID W. LAMBIN and JANE DOE LAMBIN, husband and wife, and the marital community composed thereof, Respondents.

          YU, J.

         This case asks us to clarify the applicability of a broad, absolute insurance pollution exclusion clause to a claim based on negligent installation of a hot water heater that led to the release of toxic levels of carbon monoxide in a residential home. The primary questions are: Does the specific pollution exclusion include the carbon monoxide in this case, and does the exclusion preclude coverage when the cause of the loss was a covered occurrence under a different provision? Answering these questions requires that we reaffirm the importance of examining and understanding the causal chain of events leading to the claimed injury and damage.

         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. Allstate Ins. Co. v. Raynor, 143 Wn.2d 469, 479, 21 P.3d 707 (2001). Under these facts, ProBuilders Specialty Insurance Co. correctly identified the existence of an excluded polluting occurrence under the unambiguous language of its policy. However, it ignored the existence of a covered occurrence- negligent installation-'that was the efficient proximate cause of the claimed loss. Accordingly, coverage for this loss existed under the policy, and ProBuilders's refusal to defend its insured was in bad faith. We therefore reverse the decision of the Court of Appeals with regard to the duty to defend and remand the case for further proceedings.

         Factual and Procedural History

         In May 2006, Zhaoyun "Julia" Xia purchased a new home constructed by Issaquah Highlands 48 LLC. Issaquah Highlands carried a policy of commercial general liability insurance through ProBuilders. Soon after moving into her home, Xia began to feel ill. By December 8, a service technician from Puget Sound Energy investigated Xia's home and discovered that an exhaust vent attached to the hot water heater had not been installed correctly and was discharging carbon monoxide directly into the confines of the basement room.

         On June 26, 2007, Xia notified Issaquah Highlands of her injuries and provided details as to how the hot water heater exhaust vent had been discovered. On June 12, 2008, the claims administrator for ProBuilders, NationsBuilders Insurance Services Inc. (NBIS), mailed a letter to Xia indicating that coverage was not available under the Issaquah Highlands policy. As a basis for its declination of coverage, NBIS rested on two exclusions under the policy: a pollution exclusion and a townhouse exclusion. NBIS refused to either defend or indemnify Issaquah Highlands for Xia's loss.

         Xia commenced a lawsuit against Issaquah Highlands and provided a courtesy copy of the summons and complaint to NBIS. ProBuilders (through NBIS) continued to rely on its original denial of coverage and refused to indemnify Issaquah Highlands. Ultimately, Xia entered into a settlement agreement with Issaquah Highlands for stipulated damages in the amount of $2 million. In exchange for a covenant not to execute or enforce the judgment, Issaquah Highlands assigned to Xia all first-party rights, privileges, claims, and causes of action against its insurer, ProBuilders. On June 8, 2011, Xia filed suit against ProBuilders, seeking declaratory judgment with regard to coverage and alleging breach of contract, bad faith, and violations of both the Consumer Protection Act (CPA), chapter 19.86 RCW, and the Insurance Fair Conduct Act (IFCA), RCW 48.30.010-.015.

         Following discovery, both Xia and ProBuilders brought cross motions for summary judgment. The trial court entered summary judgment in favor of ProBuilders and dismissed Xia's claims on the basis that the townhouse exclusion applied. Division One of the Court of Appeals reversed in part, finding that although the townhouse exclusion did not apply, the pollution exclusion did. ZhaoyunXia v. ProBuilders Specialty Ins. Co., No. 71951-3-1, slip op. at 17-18 (Wash.Ct.App. Aug. 24, 2015) (unpublished), opinions/pdf/719513.pdf. Accordingly, the Court of Appeals held that ProBuilders did not breach its duty to defend. Id. at 34.

         We accepted discretionary review to determine whether the pollution exclusion relieved ProBuilders of its duty to defend Issaquah Highlands against Xia's claims and whether this court's opinion in Quadrant Corp. v. American States Insurance Co., 54 Wn.2d 165');">154 Wn.2d 165, 110 P.3d 733 (2005), conflicts with its opinion in Kent Farms, Inc. v. Zurich Insurance Co., 140 Wn.2d 396, 998 P.2d 292 (2000). ZhaoyunXia v. ProBuilders Specialty Ins. Co., 185 Wn.2d 1024, 369 P.3d 502 (2016).


         A. Does an insurer breach its duty of good faith by refusing to defend its insured when an alleged prior act of negligence may be the efficient proximate cause of a loss?

         B. Does this court's opinion in Quadrant conflict with its opinion in Kent Farms'?


         When reviewing a trial court's decision on a motion for summary judgment, we engage in the same inquiry as the trial court. Int'l Bhd. of Elec. Workers, Local Union No. 46v. Trig Elec. Constr. Co., 142 Wn.2d 431, 434-35, 13 P.3d 622 (2000), abrogated on other grounds by W.G. Clark Constr. Co. v. Pac. Nw. Reg'l Council of Carpenters, 180 Wn.2d 54, 64, 322 P.3d 1207 (2014). Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. CR 56(c); Trig Elec, 142 Wn.2d at 435. Interpretation of an insurance contract is a question of law subject to de novo review. See Overton v. Consol. Ins. Co., 145 Wn.2d 417, 424, 38 P.3d 322 (2002).

         A. Pollution exclusion clauses

         The first step in this court's analysis is to review our history of applying pollution exclusion clauses. We have sought to strike a balance between the application of the policy's plain language, the underlying purpose of pollution exclusion clauses, and the expectations of the consumer purchasing insurance. Ultimately, what matters most is whether the occurrence triggering coverage originates from a pollutant acting as a pollutant. Quadrant, 154 Wn.2d at 179.

         The first notable example is Cook v. Evanson, 83 Wn.App. 149, 920 P.2d 1223 (1996). In Cook, a contractor applied toxic commercial sealant to the outside of a building yet negligently failed to seal off a fresh air intake, which drew air into the building. Id. at 151. As a result, a number of occupants suffered serious respiratory damage when the fumes entered their work spaces. Id. The building occupants filed suit against the contractor and building owners, alleging that defendants "'negligently allowed toxic vapors from the [sealant to] enter the HVAC [(heating, ventilation, and air conditioning)] system.'" Id. at 152. After obtaining default judgments, the occupants attempted to enforce the judgments against the insurer. Id. In response, the insurer defended on the grounds that its pollution exclusion clause barred coverage under the policy. Id. The Court of Appeals held that the pollution exclusion of the contractor's insurance policy applied under the policy's plain language. Id. at 154. The commercial sealant clearly fit the definition of a pollutant because the sealant itself was described as a '"[r]espiratory irritant'" and the manufacturer's information expressly warned that use of the product may cause respiratory irritation. Id. at 151 (alteration in original).

         Two years later, Division Two upheld the Cook analytical framework in determining that noxious odors emanating from a toxic waste plant constituted "pollution" under an insurance policy's plain language. City of Bremerton v. Harbor Ins. Co., 92 Wn.App. 17, 963 P.2d 194 (1998). In Harbor Insurance, residents filed a complaint against the city of Bremerton for damages when the city's toxic waste plant emitted "'noxious and toxic fumes.'" Id. at 19. When the city's insurance carrier denied coverage as a result of its pollution exclusion, the city filed suit for declaratory judgment. Id. at 20. The Court of Appeals held that the policy language was unambiguous and that vapors, fumes, and gases released by the waste plant fell squarely within the insurance policy's pollution exclusion. Id. at 22-23. In reaching this decision, the court applied the same plain language analysis as Division One in Cook. Id. at 23.

         In 2000, this court decided Kent Farms. In Kent Farms, a fuel delivery driver had just filled a storage tank with diesel fuel and started to remove the delivery hose when a defect in the intake valve caused fuel to backflow over him. 140 Wn.2d at 397-98. While the delivery driver struggled to replace the hose and prevent thousands of gallons of diesel fuel from spilling, the fuel engulfed him and was driven into his eyes, his lungs, and his stomach. Id. When the delivery driver sued, Kent Farms sought a declaratory judgment against its insurer, which in turn defended on the basis of a pollution exclusion. Id. at 398. The trial court entered summary judgment in favor of the insured, and the Court of Appeals upheld the decision, finding that diesel fuel '"is not a pollutant when used as intended'" and thus the policy's pollution exclusion did not apply. Id. (quoting Kent Farms, Inc. v. Zurich Ins. Co., 93 Wn.App. 414, 419-20, 969 P.2d 109 (1998)). This court granted review to determine whether the exclusion applied to a claim not based on environmental damage but on personal injury rooted in negligence. Id.

         We began our analysis by considering the intent of the parties, which necessarily required an examination of the historical context of pollution exclusions in general. Id. at 400. We held that the original intent of pollution exclusions in the insurance context, as well as the intent of the exclusion in the case of Kent Farms, was to specifically address those situations in which injury was caused by environmental damage. Id. at 401. Further, we noted that the exclusion applied "to 'occurrences' involving the pollutant as a pollutant.'" Id. at 402. Under the facts of Kent Farms, the diesel fuel acted not as a pollutant but as a high-pressure jet of liquid that struck, engulfed, and choked the victim-but it did not pollute him. Id. at 401.

         Five years later, this court decided Quadrant. In facts notably similar to those in Cook, a tenant in an apartment building became ill from fumes after a restoration company applied sealant to a nearby deck. Quadrant, 154 Wn.2d at 167. After settling the claims with the tenants, the owners of the deck sought to apply the coverage of their business liability insurance to the loss. Id. The owners argued that the insurer's pollution exclusion applied only to '"traditional environmental harms.'" Id. After the trial court granted summary judgment in favor of the insurers and the Court of Appeals affirmed, we granted discretionary review. Id. at 170.

         Relying extensively on the language of Kent Farms, we held that the exclusion was designed to preclude coverage in the case of traditional environmental harms or where the pollutant acted as a pollutant. Id. at 178. With this in mind, we determined that the facts in Kent Farms were distinguishable. Id. at 184. Unlike the diesel fuel in Kent Farms, the chemical sealant in Quadrant was clearly a pollutant acting as a pollutant when, as part of its normal use, it created fumes capable of irritating the respiratory tract and, in high concentrations, causing central nervous system depression. Id. at 168, 179 (noting that the sealant was "a substance whose toxicity could cause injury even when used as intended"). The plain language of the pollution exclusion in Quadrant anticipated harm from this type of pollutant, stating that liability coverage did not apply to bodily injuries "arising out of the dispersal, seepage, migration, release, or escape of a gaseous irritant, including vapors, fumes and chemicals." Id. at 180 (emphasis omitted). Thus, we "distinguished between cases in which the substance at issue was polluting at the time of the injury and cases in which the offending substance's toxic character was not central to the injury." Id. at 182.

         Xia argues that the opinions in Kent Farms and Quadrant are in conflict and should be reconciled with a new rule. We disagree. As discussed in Quadrant, the facts in Kent Farms did not result in a pollutant acting as a pollutant in such a way that would trigger the pollution exclusion. If the diesel fuel in Kent Farms had been replaced with water, for example, the liquid would still have struck, choked, and engulfed the victim just as surely as the diesel fuel-albeit with less severe consequences. As this court noted, the toxic nature of the pollutant was not central to the event that triggered coverage under the insurance policy. Id. at 176.

         Additionally, Kent Farms neither explicitly nor implicitly rejected the reasoning of Cook and Harbor Insurance as they relate to pollutants acting as pollutants-a fact identified by this court in Quadrant, Id. at 182. Thus, the choice of analysis under Kent Farms versus Quadrant and the antecedent "fumes" cases, Cook and Harbor Insurance, necessarily turns on a determination of whether an occurrence, as defined under the policy, stems from either a traditional environmental harm or a pollutant acting as a pollutant.[1] If the answer to this inquiry is yes, barring any ambiguities in the policy language, courts must apply the plain language of the pollution exclusion to determine whether the exclusion applies to the facts at hand.

         Yet even if the court applies the exclusionary language correctly to the facts at hand, the analysis does not end. Courts must next consider whether, pursuant to established Washington insurance law, the excluded ...

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