Zhaoyun Xia v. Probuilders Specialty Ins. Co. RRG

Decision Date27 April 2017
Docket NumberNo. 92436-8,92436-8
Citation400 P.3d 1234,188 Wash.2d 171
CourtWashington Supreme Court
Parties 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, v. 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; Flying Eagle Insurance Services Inc., a Nevada Corporation licensed to do business in the State of Washington; and David W. Lambin and Jane Doe Lambin, husband and wife, and the marital community composed thereof, Respondents.

YU, J.

¶1 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.

¶2 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 Wash.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

¶3 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.

¶4 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.

¶5 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.

¶6 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.

Zhaoyun Xia v. ProBuilders Specialty Ins. Co. , No. 71951-3-I, slip op. at 17-18, 2015 WL 5011474 (Wash. Ct. App. Aug. 24, 2015) (unpublished), http://www.courts.wa.gov/opinions/pdf/719513.pdf. Accordingly, the Court of Appeals held that ProBuilders did not breach its duty to defend. Id. at 34.

¶7 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. , 154 Wash.2d 165, 110 P.3d 733 (2005), conflicts with its opinion in Kent Farms, Inc. v. Zurich Insurance Co. , 140 Wash.2d 396, 998 P.2d 292 (2000). Zhaoyun Xia v . ProBuilders Specialty Ins. Co. , 185 Wash.2d 1024, 369 P.3d 502 (2016).

ISSUES

¶8 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?

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

ANALYSIS

¶10 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. 46 v. Trig Elec. Constr. Co. , 142 Wash.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 Wash.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 Wash.2d at 435, 13 P.3d 622. Interpretation of an insurance contract is a question of law subject to de novo review. See Overton v. Consol. Ins. Co. , 145 Wash.2d 417, 424, 38 P.3d 322 (2002).

A. POLLUTION EXCLUSION CLAUSES

¶11 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 Wash.2d at 179, 110 P.3d 733.

¶12 The first notable example is Cook v . Evanson , 83 Wash.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, 920 P.2d 1223. 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, 920 P.2d 1223. 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, 920 P.2d 1223. 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, 920 P.2d 1223 (alteration in original).

¶13 Two years later,...

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