Washington Supreme Court Denies Reconsideration of Its Decision to Apply the Efficient Proximate Cause Rule to a Third-Party Liability Policy

We previously reported the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., 188 Wn.2d 171, 393 P.3d 748 (2017), in which the Court applied the efficient proximate cause rule to a third-party liability policy to find a duty to defend.

To recap, Washington law requires insurers to assess and investigate coverage under first-party insurance policies by applying the efficient proximate cause analysis. Until Xia, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But the Washington Supreme Court’s decision in Xia changed that by holding that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy.

The issue in Xia was whether the pollution exclusion applied to relieve ProBuilders of its duty to defend a claim against the insured alleging that carbon monoxide was released into the claimant’s house through a defectively installed vent. ProBuilders denied coverage to the insured contractor, in part, under the pollution exclusion. The Washington Supreme Court held that while ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

Soon after the Washington Supreme Court’s decision, ProBuilders filed a motion asking the Court to reconsider its decision. However, on August 17, 2017, the Washington Supreme Court denied the motion, leaving in place the holding that insurers must take the efficient proximate cause rule when analyzing coverage under third-party policies.

As discussed in our earlier post, the efficient proximate cause rule applies “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012). “If the initial event, the ‘efficient proximate cause,’ is a covered peril, then there is coverage under the policy regardless of whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994).

Insurers must be extremely cautious when assessing the duty to defend and an exclusion that could potentially preclude coverage. Under Xia, liability insurers must examine the underlying complaint very carefully to determine whether there could potentially be multiple causes of a loss, and if so, which cause is the initiating cause. If the initiating cause is potentially a covered event, then there may be coverage and the insurer must provide a defense under reservation of rights in order to minimize bad faith exposure.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim (sallykim@grsm.com or 206-695-5147) or Stephanie Ries (sries@grsm.com or 206-695-5123).

Washington Supreme Court Applies the Efficient Proximate Cause Rule to Third Party Liability Policy to Find a Duty to Defend

The efficient proximate cause rule is one of the more confusing analyses that an insurance company must undertake when investigating certain coverage issues under first party insurance policies. And until now, the efficient proximate cause rule has only been applied to first party insurance policies in Washington. But that has now changed with the Washington Supreme Court’s decision in Xia, et al. v. ProBuilders Specialty Insurance Company, et al., Case No. 92436-8 (April 27, 2017). In Xia, the Washington Supreme Court not only ruled that an insurer must consider the efficient proximate cause rule in determining its duty to defend under a CGL policy, but that ProBuilders acted in bad faith by failing to do so, despite no prior precedent for application of the rule in a CGL coverage analysis.

In Xia, the claimant purchased a new home constructed by Issaquah Highlands 48 LLC (“Issaquah”), which was insured under a CGL policy issued by ProBuilders. The claimant fell ill soon after moving in due to inhalation of carbon monoxide, caused by improper installation of an exhaust vent.

The claimant notified Issaquah about the issue, and Issaquah notified ProBuilders. ProBuilders denied coverage under the pollution exclusion and a townhouse exclusion. The claimant filed a lawsuit, which Issaquah then settled by a stipulated judgment of $2 million with a covenant not to execute and an assignment of rights against ProBuilders. The claimant filed a declaratory judgment action against ProBuilders for breach of contract, bad faith, violation of the Consumer Protection Act and the Insurance Fair Conduct Act.

At the trial court level, ProBuilders won summary judgment on the townhouse exclusion. Division One of the Washington Court of Appeals reversed in part, finding that the pollution exclusion applied, but not the townhouse exclusion.

The Washington Supreme Court accepted review to determine whether the pollution exclusion applied to relieve ProBuilders of its duty to defend. The Court held that even though ProBuilders did not err in determining that the plain language of its pollution exclusion applied to the release of carbon monoxide into Xia’s home, “under the ‘eight corners rule’ of reviewing the complaint and the insurance policy, ProBuilders should have noted that a potential issue of efficient proximate cause existed,” as Xia alleged negligence in her original complaint, i.e. failure to properly install venting for the hot water heater and failure to properly discover the disconnected venting.

Ultimately, the Court concluded that the efficient proximate cause of the claimant’s loss was a covered peril – the negligent installation of a hot water heater. Even though ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide into the house, the Court ruled that ProBuilders breached its duty to defend as it failed to consider an alleged covered occurrence that was the efficient proximate cause of the loss. The Court granted judgment as a matter of law to the claimant with regard to her breach of contract and bad faith claims.

The application of the efficient proximate cause rule to CGL policies in Washington is troublesome for insurers. The Washington courts have long held in cases involving first party policies that under the efficient proximate cause rule, “[i]f 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.” Key Tronic Corp., Inc. v. Aetna (CIGNA) Fire Underwriters Insurance Co., 124 Wn.2d 618, 881 P.2d 210 (1994). Also, the efficient proximate cause rule applies only “when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.” Vision One, LLC v. Philadelphia Indemnity Insurance Co., 174 Wn.2d 501, 276 P.3d 300 (2012).

In Xia, the Court noted that like any other covered peril under a general liability 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.” Xia at *14. The Court stated:

…it is clear that a polluting occurrence happened when the hot water heater spewed forth toxic levels of carbon monoxide into Xia’s home. However, by applying the efficient proximate cause rule, it becomes equally clear that the ProBuilders policy provided coverage for this loss. The polluting occurrence here happened only after an initial covered occurrence, which was the negligent installation of a hot water heater that typically does not pollute when used as intended.

Xia at *17.

Justice Madsen took issue with the majority decision in a dissenting opinion, specifically with respect to a finding of bad faith when no other case prior to this decision had ever applied the efficient proximate cause rule to CGL policies. Justice Madsen also disagreed with the majority in extending the application of the efficient proximate cause rule to CGL policies when this Court specifically declined to do so in the earlier case of Quadrant Corp. v. American States Insurance Co., 154 Wn.2d 165, 110 P.3d 733 (2005).

The State of Washington unfortunately has been historically unkind to insurers on the duty to defend, and the Xia decision only further cements that reputation.

If you would like more information on the efficient proximate cause rule in Washington, please feel free to contact Sally S. Kim at sallykim@gordonrees.com or (206) 695-5147.

District Court Holds That Pollution Exclusion Bars Coverage For Carbon Monoxide Poisoning

On March 9, 2017, the U.S. District Court for the District of Oregon issued its opinion and order in Colony Ins. Co. v. Victory Constr. LLC, et al., holding that carbon monoxide is a “pollutant” and, therefore, the pollution exclusion unambiguously bars coverage for harm caused by carbon monoxide. 2017 U.S. Dist. LEXIS 34368 (D. Or. Mar. 9, 2017).

In Victory, the underlying plaintiffs brought two lawsuits against Victory Construction (“Victory”) after carbon monoxide from a natural gas swimming pool heater filled their home, resulting in carbon monoxide poisoning. The plaintiffs alleged that Victory was negligent in the installation and ventilation of the heater and negligent in failing to warn of the risks of carbon monoxide poisoning associated with operating the heater in an insufficiently ventilated area.

The policy contained a “Hazardous Materials Exclusion,” barring coverage for “’[b]odily injury,’ … which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘hazardous materials’ at any time.” The policy’s definition of “hazardous materials” included “pollutants,” which was defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

The parties brought cross-motions for summary judgment on the issue of whether Colony Insurance (“Colony”) had a duty to defend and indemnify Victory in the personal injury lawsuits. In granting Colony’s motion and denying Victory’s motion, the Court found that “the only plausible interpretation of the Policy’s terms results in the conclusion that carbon monoxide is a pollutant.”

The Court recognized the wide array of conflicting judicial decisions throughout the country regarding the scope of the pollution exclusion, but found that most decisions fall into “one of two broad camps.” Quoting the Ninth Circuit, the Court noted that some courts apply the pollution exclusion literally because they find the terms to be clear and unambiguous, but other courts have limited the exclusion to situations involving “traditional environmental pollution.” Since the parties did not cite, and the Court did not find, any Oregon case law providing guidance on the scope of the pollution exclusion or its application to carbon monoxide, the Court attempted to predict whether the Oregon Supreme Court would conclude that carbon monoxide is an “irritant” or “contaminant,” and, thus, a “pollutant” under the policy.

The Court strictly adhered to the rules of policy interpretation as set forth in Hoffman Constr. Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or. 464 (1992). The intention of the parties is determined by the terms and conditions of the policy, beginning with the wording of the policy, applying policy definitions and otherwise presuming that words have their plain and ordinary meaning. If the court finds only one plausible interpretation of the disputed terms, that interpretation controls.

Since the policy did not define “irritant” or “contaminant,” the Court ascertained their plain and ordinary meanings, relying on dictionary definitions. Based on its plain meaning analysis, the Court concluded that carbon monoxide is either an “irritant” (substance that irritates or stimulates an organ) or “contaminant” (undesirable element whose introduction makes an environment unfit for use) and, therefore, is a “pollutant” under the policy.

The Court declined to address Victory’s contentions that the pollution exclusion should apply only to “traditional environmental pollution,” or that the Court should consider the reasonable expectations of the policyholder. “The Policy, as written, does not create any ambiguity that would lead this Court to believe that the Oregon Supreme Court would look outside the plain meaning of the Policy’s terms.”

This is the first reported decision to predict whether the Oregon Supreme Court would apply the absolute pollution exclusion outside the context of “traditional environmental pollution.” It remains to be seen whether Oregon state courts will follow the District Court’s lead.

No Insurance Coverage Stinks: South Carolina Court of Appeals Denies Coverage for Sewage Odor Lawsuit

The South Carolina Court of Appeals recently held that a state-run insurance company owed no defense to a county public service district for offensive odors emanating from a sewage valve based on the policy’s pollution exclusion. The decision in S.C. Ins. Reserve Fund v. E. Richland Cty. Pub. Serv., No. 5393, 2016 S.C. App. LEXIS 32 (S.C. Ct. App. Mar. 23, 2016) is significant for insurers since it rejects the notion that odors must be regulated or harmful to be considered pollutants, and instead, following several other jurisdictions, applies the plain language interpretation in finding that foul odors – comprised of irritating and offensive gases – are encompassed by the pollution exclusion.

The facts are straightforward. In 2010, East Richland resident Coley Brown (“Brown”) filed a complaint against the East Richland County Public Service District (“District”) for inverse condemnation, trespass, and negligence in connection with the District’s installation of a sewage force main and air relief valve on Brown’s street that released offensive odors on Brown’s property multiple times per day. The stench ultimately caused Brown to leave the property, and he was unable to find a buyer. The District tendered the complaint to the state-run South Carolina Insurance Reserve Fund (“Fund”), which denied coverage.

The Fund initiated a declaratory judgment action seeking a declaration that it had no duty to defend or indemnify the District in the Brown matter. The Fund denied coverage based on the pollution exclusion, which barred coverage for personal injury or property damage “arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritant, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release or escape is sudden and accidental[.]” The Fund also denied coverage based on its position that the damages alleged by Brown did not qualify as “property damage” caused by an “occurrence.”

During trial, the District’s executive director and former maintenance superintendent testified that the sewage odor was the result of naturally occurring hydrogen sulfide and methane, that the District was not required by the Department of Health and Environmental Control to control these gases, and that in response to odor complaints, the District employed several novel corrective measures to mask or eliminate the odors.

The trial court found that the policy’s pollution exclusion barred coverage for the inverse condemnation claim. As to the negligence and trespass claims, the court determined that the pollution exclusion’s reference to gases and fumes encompassed the offensive odors delineated in Brown’s complaint. The court also found that the discharge of offensive odors were a part of the District’s ordinary operations such that the pollution exclusion’s “sudden and accidental” exception was inapplicable. Finally, the court found that there was no ambiguity between the policy’s definition of “occurrence” and the pollution exclusion. Consequently, the court determined that the Fund owed no duty to defend or indemnify the District.

On appeal, the District first argued that the pollution exclusion was void because it conflicted with provisions of the South Carolina Tort Claims Act (“Act”), which required the Fund to provide coverage for all risks for which immunity has been waived under the Act. Further, the District argued that because its decision to purchase insurance from the Fund precluded it from purchasing additional insurance from other sources, it was improperly exposed to liability for any excluded risks.

The Appellate Court rejected these arguments, finding that neither the Act nor the Act’s insurance provision expressly stated whether a pollution exclusion was a proper addition to a tort liability policy issued through the Fund. Moreover, because other state regulations mentioned pollution exclusions for general liability policies, the Appellate Court found that the inclusion of such pollution exclusions is strong evidence that the legislature did not intend to preclude the use of such exclusions in policies issued under the Act. Accordingly, the Appellate Court held that the pollution exclusion at issue was valid.

The District next argued that the pollution exclusion was inapplicable because it did not mention offensive odors or explain why such odors should be considered pollution when they are not harmful and not regulated. The Appellate Court rejected these arguments, finding the pollution exclusion applicable because the odors at issue could properly be classified as “fumes” or “gases,” both of which were listed in the exclusion. Giving these words their plain and ordinary dictionary meaning, the Appellate Court found that the word “gas” is defined as “a substance that can be used to produce poisonous, asphyxiating, or irritant atmosphere” and “fume” is defined as “a smoke, vapor, or gas esp[ecially] when irritating or offensive.” Although the District argued that the odors must be harmful in some way to be considered pollutants, the Appellate Court declined to impose such a limitation on the plain language of the policy, finding that the fact that the odors were comprised of irritating and offensive gases satisfied the ordinary meaning of the pollution exclusion’s terminology. The Appellate Court also noted that its decision comported with several other jurisdictions holding that foul odors (e.g., compost facility, animal rendering plant, pig farm manure, and treatment plant) are encompassed by such pollution exclusions.

The District lastly argued that even if the pollution exclusion applied, the exception to the exclusion created coverage because the circumstances surrounding the release of the odors were unique and unexpected. The Appellate Court dismissed this argument, holding that the release of the odors were not accidental and unexpected. Based on the testimony, the Appellate Court found that the District’s knowledge that the pumps would turn on occasionally was sufficient to demonstrate that the releasing of the odors was not only expected, but a necessary, routine and expected function of the system.

Georgia Supreme Court Denies Coverage for Lead-Based Paint Injuries Based on the Pollution Exclusion

In a matter of first impression, the Georgia Supreme Court recently held that personal injury claims arising from lead poisoning due to lead-based paint ingestion were excluded from coverage under an absolute pollution exclusion in a commercial general liability insurance policy covering residential rental property. The decision in Ga. Farm Bureau Mut. Ins. Co. v. Smith, S15G1177, 2016 Ga. LEXIS 245 (Ga. Mar. 21, 2016) is significant for insurers since it expressly rejects the notion that a pollution exclusion clause is limited to traditional environmental pollution.

The facts are straightforward.  Amy Smith (“Smith”), individually and as next friend of her daughter Tyasia Brown (“Brown”), sued her landlord, Bobby Chupp (“Chupp”), for injuries Brown allegedly sustained as a result of ingesting lead from deteriorating lead-based paint at the house Smith rented from Chupp. Georgia Farm Bureau Mutual Insurance Company (“GFB”) insured the house under a CGL policy issued to Chupp. Chupp tendered Smith’s claims to GFB, and the insurer filed a declaratory judgment action against Smith and Chupp seeking a determination that Brown’s injuries were not covered under the policy and that it had no duty do defend Chupp against Smith’s claims.

GFB contended, among other things, that Brown’s injuries from lead poisoning were excepted from coverage by the policy’s pollution exclusion, which defined “Pollution” as “‘[b]odily injury’ or ‘property damage’ arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ . . . .” The policy defined “pollutant” as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.”

In granting summary judgment to GFB, the trial court relied on the Georgia Supreme Court’s decision in Reed v. Auto-Owners Ins. Co., 284 Ga. 286 (2008), which addressed the proper construction of an identical pollution exclusion in a CGL policy insuring residential rental property wherein a tenant sued her landlord for carbon monoxide poisoning. Although not explicitly listed in the policy as a pollutant, the Reed Court held that carbon monoxide gas fell within the policy’s definition of a pollutant and concluded that all of the plaintiff’s injuries arising therefrom were excluded from coverage under the pollution exclusion.

On appeal, the Georgia Court of Appeals reversed the trial court’s grant of summary judgment to GFB.  The Court of Appeals observed that the specific issue of whether lead-based paint should be considered a “pollutant” under the pollution exclusion clause was one of first impression in Georgia, and noted that a conflict existed among other jurisdictions on this issue. The Court of Appeals sided with those foreign courts holding that a pollution exclusion similar to the instant one did not bar coverage for injuries arising out of the ingestion or inhalation of lead-based paint. The Court of Appeals rejected the trial court’s interpretation of Reed, finding that while a straightforward reading of the pollution exclusion in Reed compelled the conclusion that carbon monoxide gas was a pollutant, it was unclear whether identical language in the instant policy was expansive enough to unambiguously include lead, lead-based paint or paint as a pollutant.

In its analysis, the Georgia Supreme Court found that GFB’s CGL policy contained an absolute pollution exclusion that precludes recovery for bodily injury or property damage resulting from exposure to any pollutants. Overviewing the genesis and development of the absolute pollution exclusion, the Court highlighted the litany of Georgia decisions, including Reed, that have repeatedly applied such clauses outside the context of traditional environmental pollution. Further, the Court rejected the notion that the pollutant at issue must be explicitly named in the policy to be enforceable.

In reversing the Court of Appeals, the Georgia Supreme Court followed Reed and found that GFB’s CGL policy unambiguously governed the factual scenario. Simply put, the Court of Appeals failed to apply the plain language of the contract. Accordingly, the Georgia Supreme Court held that lead present in paint unambiguously qualifies as a pollutant and that the plain language of the policy’s pollution exclusion excluded Smith’s claims against Chupp from coverage.

*** On March 9, 2016, this author published a related blog article on a recent Vermont Supreme Court decision holding that the plain language interpretation of a pollution exclusion in a homeowner policy barred coverage for property damage to a home rendered uninhabitable by an over-application of a bed bug pesticide.

Exterminating Coverage Under a Pes[t]y Pollution Exclusion: Vermont Supreme Court Denies Coverage for Pesticide Contamination

The Vermont Supreme Court recently held that the plain language interpretation of a pollution exclusion in a homeowner policy barred coverage for property damage to a home rendered uninhabitable by an over-application of a bed bug pesticide. The decision in Whitney v. Vt. Mut. Ins. Co., 2015 VT 140 (2015) is significant for insurance carriers because it restates the principle that pollution exclusions are not limited to traditional environmental pollution.

The facts are straightforward. A pest control company sprayed plaintiffs’ home, “corner to corner” and “wall to wall” with the pesticide chlorpyrifos to eradicate bed bugs. Notably, and very much relevant to the court’s analysis of the pollution exclusion, chlorpyrifos is not labelled for residential use and the spraying of the plaintiffs’ home with chlorpyrifos violated federal and state law. The homeowners complained to a state agency that the amount of chemicals sprayed in their home, which included walls and surfaces visibly dripping with the pesticide, was grossly excessive. After testing confirmed elevated pesticide levels, the plaintiffs were evacuated from the home for safety reasons.

Shortly after the testing was performed, the plaintiffs filed a claim with the defendant-insurer. Coverage A of the policy insured against a “physical loss to property.” Among the exclusions to coverage in Coverage A was a pollution exclusion, which stated that the policy did not insure loss caused by:

Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against under Coverage C of this policy. Pollutants means any solid, liquid, gaseous, or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The defendant-insurer denied the plaintiffs’ claim under the absolute pollution exclusion. Plaintiffs thereafter filed suit seeking a declaratory judgment that the losses incurred by the spraying of chlorpyrifos within their home were covered by the homeowners policy. On cross motions for summary judgment, the trial court ruled in plaintiffs’ favor, reasoning that the terms “pollution” and “discharge, dispersal, release, and escape” were ambiguous and therefore must be construed in favor of coverage. The trial court relied on the California Supreme Court decision of McKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (Cal. 2003), which held that pollution exclusion clauses are generally ambiguous and therefore apply only to traditional environmental contamination.

On appeal, the issue was whether the pollution exclusion barred coverage for the loss of their home due to the spraying of chlorpyrifos inside the dwelling. The court began its analysis by relying on its then recently filed Cincinnati decision, wherein it enforced an unambiguous pollution exclusion in a commercial general liability policy. In Cincinnati, the court reviewed the evolution of the pollution exclusion clauses in the insurance industry and discussed the leading cases construing those clauses. The court considered two divergent lines of cases construing these clauses. In one, following the California Supreme Court in MacKinnon, courts have construed pollution exclusions very narrowly, concluding that they are inherently ambiguous, and that the purpose of the exclusions was to address liability arising from traditional environmental pollution, and not ordinary acts of negligence involving harmful substances. In the other, courts have concluded that by their plain language, pollution exclusion clauses exclude all injuries caused by pollutants.

The court stated that the “main lesson of Cincinnati . . . is that pollution exclusions are not presumed, as a class, to be ambiguous or to be limited in their application to traditional environmental pollution. They should be construed in the same as any other insurance contract provisions” to ascertain and carry out the parties’ intentions by looking at the plain language of the policy. Examining the policy language, the Vermont Supreme Court determined that the pollution exclusion excluded coverage for the pesticide contamination insofar as the spraying of chlorpyrifos constituted a “discharge, dispersal, seepage, immigration, release, or escape” of the pesticide.

The key issue was whether chlorpyrifos qualified as a “contaminant” or “irritant” to fall within the definition of “pollutant.”  The court quickly answered the question, relying on the undisputed facts that chlorpyrifos may be toxic to humans, can cause nausea, dizziness, confusion, and at very high exposures, respiratory paralysis and death, and is banned for residential use. The pesticide applicator’s use of chlorpyrifos in plaintiffs’ home violated EPA regulations, and federal and state law. The concentration levels in the plaintiffs’ home were consistently higher than EPA action levels, thereby preventing plaintiffs from inhabiting their house. Accordingly, the court concluded, in reversing the trial court, that the terms “irritant,” “contaminant,” and “pollutant” plainly and unambiguously encompassed the chlorpyrifos sprayed “corner to corner” and “wall to wall” throughout the plaintiffs’ home.

Hello, Kitty! Can You Smell That Smell? It’s a Covered Loss!

*Republished with permission of the Insurance Coverage Law Bulletin and Connecticut Law Tribune.

The New Hampshire Supreme Court’s recent decision in Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 2015 N.H. LEXIS 32 (N.H. 2015), is getting some attention, and not just because it’s fun to talk about cat pee. The case sets a very important precedent regarding the definition of the term “physical loss” and the construction of pollution exclusions in New Hampshire property insurance policies. It is a decision that is likely going to create uncertainty and increased risk for insurers going forward. The scent-illuminating subject matter is just an added bonus.

1-26The facts started out simply enough. The plaintiffs owned a condominium unit, and their downstairs neighbor had two feline cohabitants. The plaintiffs leased their unit to a tenant in 2009 and 2010, and that tenant was the first person to notice that something didn’t smell right. In November 2010, the tenant decided that he would rather find a new place to live than continue to put up with the noxious odors emanating from below. Undeterred, the plaintiffs moved in themselves and promptly filed an insurance claim under their homeowner’s policy. That claim was denied.

In a continued attempt to take control of the odiferous situation, the plaintiffs contacted the local building and health inspector. After examining the unit, the inspector advised, by way of a letter dated Dec. 22, 2010, that the plaintiffs had “a health problem existing,” and the odor was such that they needed “to move out of the apartment temporarily and have a company terminate the odor.” Unfortunately, remediation efforts were no match for the persistent and pervasive smell of cat urine. The plaintiffs apparently steeled themselves, presumably invested in some scented candles or at least a large can of air freshener, and moved back into the condo until Feb. 1, 2011. At that point, the plaintiffs sold the unit after determining that they could no longer lease it to tenants. Unsurprisingly, they asserted that “the sale price for the unit was significantly less than that for a comparable condominium in the area which was unaffected by cat urine odor.”

In light of this loss and the denial of their claim by the homeowner’s insurer, Northern Security Insurance Company, Inc. (“Northern Security”), the plaintiffs ultimately brought suit, seeking a declaration that they were entitled to coverage for a “direct physical loss” to the unit, namely odor from cat urine. Northern Security moved for summary judgment on the grounds that the smell did not constitute a “physical loss,” and that the claim was barred by the policy’s pollution exclusion.

The trial court ruled in the insurer’s favor, and the plaintiffs appealed. The Supreme Court of New Hampshire began by reciting familiar principles of insurance contract construction: terms shall be accorded their plain meaning; the burden of proof rests with the insurer in a declaratory judgment action; and ambiguities must be construed in favor of coverage.

Are Noxious Odors a ‘Physical Loss’?

The first issue on appeal was whether the trial court erred in holding that the term “physical loss” required a “tangible physical alteration” of the unit, and that the continuous and noxious wafting of cat urine odor did not constitute such a tangible ­physical ­alteration. In addressing this issue, the court noted that the term “physical loss” was undefined in the plaintiffs’ policy, and cited the sixth edition of the Shorter Oxford English Dictionary for the definition of “physical”: “[o]f or pertaining to matter, or the world as perceived by the senses; material as [opposed] to mental or spiritual.” Based on that definition, the court concluded that the term “physical loss” need not be read to include only tangible changes to the property that can be seen or touched, but can also encompass changes that are perceived by the sense of smell.

Turning to case law, the court first recognized that some jurisdictions, like Michigan, have adopted a definition of “physical loss” that is, in fact, restricted to “tangible” changes. In support of its conclusion, however, the court went on to note “a substantial body of case law in which a variety of contaminating conditions, including odors, have been held to constitute a physical loss to property.” Here, the court cited cases from several jurisdictions that, in its view, support a more liberal interpretation of “physical loss.” Among those cases, the court cited decisions from Connecticut (asbestos and lead contamination was physical loss), New Jersey (ammonia release), and Colorado (gasoline vapors).

While the insurer urged the court to follow its own prior definition of the term “physical injury,” the court refused because the case relied upon by Northern Security, Webster v. Acadia Insurance Company, 156 N.H. 317 (2007), turned on the interpretation of the term “property damage” contained in Coverage E, pertaining to personal liability. While the Mellins’ homeowner’s policy contained that same definition, the personal liability coverage part of that policy was not at issue. Simply put, the Mellins’ claim was one for first-party, not third-party, coverage, and was thus distinguishable from Webster.

In ultimately rejecting the trial court’s holding that “physical loss” required “tangible changes,” the New Hampshire Supreme Court articulated the standard that “physical loss” ­requires only a “distinct and demonstrable alteration to the unit” not limited to structural changes and including changes perceived by smell. Interestingly, the trial court’s holding gave effect to the “physical” component of the term “physical loss” by including an ostensible synonym — “tangible” — in its standard of interpretation, while the court did not. Rather than deciding the coverage issue however, the court instead remanded the case to the trial court to apply the newly articulated standard for “physical loss.”

Is the Noxious Odor of Cat Urine Excluded By the ‘Pollution’ Exclusion?

The court next considered the issue of whether the policy’s pollution exclusion would allow Northern Security to relieve itself of its coverage obligation. The operative exclusion disclaimed coverage for “pollutants,” which were defined, in pertinent part, as: “any … irritant or contaminant, including … vapor … [and] fumes.” You may have read that definition, looked at the legal standard above that states that terms must be accorded their plain meaning, and assumed that this second issue would be easily resolved in the insurer’s favor. If so, you would be wrong.

The court began by stating that this definition did not render the term “pollutant” unambiguous. The terms “irritant” and “contaminant” were impugned as “virtually boundless, for there is no substance or chemical in existence that would not irritate or damage some person or property.” As such the definitional phrase “any … irritant or contaminant” was held to be too broad to meaningfully define “pollutant.” Further, the court was persuaded that because other courts have construed similarly worded pollution exclusions in different ways, this meant that the exclusion was ambiguous.

Curiously, nowhere in the court’s analysis did it consider the Oxford definition of the word “fumes”: “Gas, smoke or vapor that smells strongly or is dangerous to inhale; a pungent odor of a particular thing or substance.” It would appear that the latter portion of this definition would end the inquiry, since the smell of cat urine is quite plainly “a pungent odor of a particular thing or substance.” Yet, the court did not engage in this analysis.

Instead, the court held that the policy’s invocation of “vapor” and “fumes,” among other terms, “brings to mind products or byproducts of industrial production that may cause environmental pollution or contamination.” As such, the court held that a reasonable policyholder would not expect these terms to exclude damage resulting from everyday activities gone awry. The court concluded its analysis by construing the ambiguous term “pollutants” in favor of coverage, and holding that the exclusion did not serve to preclude coverage.

In a stinging dissent, Justice Robert J. Lynn harshly criticized the majority’s holding that the pollution exclusion did not apply. Justice Lynn reasoned that “[t]he cat urine at issue in this case fits squarely within the plain and ordinary meaning of contaminant, and is thus a pollutant as defined in the pollution exclusion clause.” He pointed out that the breadth of the exclusion does not mean that it eluded definition and was rendered ambiguous, and further urged that it is ambiguity, not over-breadth, that provides the court with a license to look beyond the plain meaning of the policy. He went so far as to call the majority’s approach “dubious” in following a case that was focused on the historical genesis of environmental pollution exclusions rather than focusing on the plain meanings of the terms at issue. Justice Lynn pointed out that “when a policy’s meaning and intent are clear, it is not the prerogative of the courts to create ambiguities where none exist or rewrite the contract in attempting to avoid harsh results.” He concluded by stating that if the pollution exclusion was overly broad, the remedy must be provided by the open market or the legislature, and not through “creative judicial construction of clear policy language.”

Looking Ahead

All kittens aside, the Mellin decision is bound to leave a physical mark on first-party coverage suits involving “property damage” claims. New Hampshire insurers are going to have a hard time figuring out what isn’t covered as a “physical loss.” The new standard that any “distinct and demonstrable alteration of the unit” could constitute a “physical loss” exposes insurers to endless possibilities of property damage. Since the irremediable stench of cat urine emanating from an adjacent property can satisfy this standard, there is no telling what other odors may satisfy the standard as well. The smell of garbage, sewage, fertilizer, or farm animals kept at a nearby property could potentially trigger coverage, not just for homeowners, but for businesses as well. Likewise, a restaurant moving into the neighborhood and filling the air with the fragrance of faraway spices and fry-a-lator oil might be a covered loss, not otherwise excluded by the pollution exclusion. Looking beyond smells, it stands to reason that an increase or decrease in the amount of sunlight an insured property receives could cause a “distinct and demonstrable change.” Now that there is no requirement of a “tangible” loss, the barn door seems to be wide open for new and creative claims.

Second, it is not clear what language insurers could include in their policies, short of adding increasingly specific language, which would persuasively exclude claims of this type. On its face, it would seem that an exclusion referring to “fumes” would serve to exclude a claim based on urine smells. Yet this is obviously not the case, at least in New Hampshire, and potentially not in any state recognizing the reasonable expectation of the insured over the plain language of the policy. For insureds, on the other hand, it may be viewed as the cat’s whiskers — at least until premiums catch up to the risk.

Conclusion

In sum, the facts of the Mellin case may seem trivial, but the holding is significant as it has far-ranging repercussions for property insurance in New Hampshire and beyond.