The Washington State Supreme Court handed down more bad news to liability insurers, in holding that an insurer committed bad faith by denying coverage in a third-party liability carbon monoxide poisoning case, basing its coverage denial on a pollution exclusion. In Xia v. ProBuilders Specialty Inc. Co., at issue was coverage for a builder who defectively installed a hot water heater exhaust vent, which allowed carbon monoxide into Xia’s home. The Court applied the efficient proximate cause rule to determine whether a pollution exclusion in the builder’s policy excluded coverage. Washington law provides that, when a “covered peril” sets in motion a causal chain, the last link of which is an “uncovered peril,” there is coverage under the policy. This is the first time the Court applied the efficient proximate cause rule to a third-party liability coverage dispute.
The Court said that, where a covered occurrence under a general liability policy gives rise to a loss that might otherwise be excluded, the efficient proximate cause analysis applies. It made clear that the 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.” The decision was explained as follows:
Pollution exclusion clauses are an important tool for insurers to avoid liability stemming from loss caused by pollutants where the insured has paid no premiums for such coverage. However, emphasis must be given to the phrase “caused by.” The efficient proximate cause rule continues to serve the underlying purpose of insurance policies and applied just as effectively to these facts as it has in prior cases. We hold that the efficient proximate cause of Xia’s loss was a covered peril: the negligent installation of a hot water heater. Although ProBuilders correctly applied the language of its pollution exclusion to the release of carbon monoxide in Xia’s home, ProBuilders breached its duty to defend in the face of an alleged covered occurrence that was the efficient proximate cause of the loss.
Not only did ProBuilders improperly deny coverage, said the Court, it did so in bad faith as a matter of law, as the insurer performed no investigation into Washington law and the efficient proximate cause rule’s potential application to the pollution provision.