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Vol. 7 - Issue 8
November 7, 2018

 

ISO Files Endorsements To Address Xia Decision - Washington’s Adoption Of “Efficient Proximate Cause” For Liability Policies

In April 2017 the Washington Supreme Court shook up the coverage world, especially Washington, when it issued its decision in Xia v. ProBuilders Specialty Insurance Company. On one hand, the Washington high court held that carbon monoxide, released from a negligently installed vent, attached to a hot water heater, was a “pollutant.” At issue were claims for bodily injury by a homeowner against a home builder. So far this is routine. Lots of courts – those that apply the pollution exclusion broadly (and not simply to traditional environmental pollution) – would likely have reached that same determination.

However, the Xia court still held that the pollution exclusion did not apply. The court got to this result by adopting the “efficient proximate cause” rule, which provides that coverage is owed if a covered peril sets in motion a causal chain, the last link of which is an uncovered peril. This is usually seen in property coverage cases. However, the court noted that there was nothing to say it couldn’t apply to any type of policy.

Applying the “efficient proximate cause” rule, the court held that the pollution exclusion did not apply. The court determined that the efficient proximate cause of the injuries was the negligent installation of the hot water heater. Because this was a covered occurrence, that set in motion a causal chain, that led to discharging toxic levels of carbon monoxide, being an excluded peril, the pollution exclusion was not applicable. In other words, the pollution exclusion did not apply because two or more perils combined in sequence to cause a loss – one covered and one not -- and a covered peril was the predominant or efficient cause of the loss.

ISO not long ago responded to the Xia decision with the filing of endorsements designed to address it. While I do not know the status of the filing, a July 18, 2018 ISO Circular states that the new forms would be applicable to all policies issued on or after January 1, 2019.

The ISO response does not attempt to “contract around” the Xia decision, which the Washington Supreme Court suggested could be done. In other words, the endorsement does not state something to this effect – this exclusion still applies even if the efficient proximate cause of the injury or damages is a covered occurrence. Instead ISO addressed the decision through the adoption of an “Efficient Proximate Cause Aggregate Limit.”

There are several similar endorsements, each for different policies, contained in the ISO Circular. The commercial general liability endorsement states as follows:

A. The following is added to Paragraph 2. Exclusions of Section I – Coverage A – Bodily Injury And Property Damage Liability, Paragraph 2. Exclusions of Section I – Coverage B – Personal And Advertising Injury Liability and Paragraph 2. Exclusions of Section I – Coverage C – Medical Payments:

1. If an exclusion under the terms of this Policy applies with respect to “bodily injury”, “property damage” or “personal and advertising injury”;
and
2. The efficient proximate cause, in accordance with the law of the State of Washington, of such “bodily injury”, “property damage” or “personal and advertising injury” is not also excluded under the terms of this Policy;
then:
a. The exclusion referenced in Paragraph A.1. above does not apply to such “bodily injury”, “property damage” or “personal and advertising injury”; and
b. Coverage provided under this Policy for such “bodily injury”, “property damage” or “personal and advertising injury” is subject to the Efficient Proximate Cause Aggregate Limit as described in Paragraph B. of this endorsement.

Essentially, the endorsement provides that, if an exclusion would have precluded coverage, but the exclusion is rendered inapplicable, on account of the efficient proximate cause rule from Xia, then the exclusion does not apply. In other words, the endorsements accepts that Xia may preclude the applicability of an exclusion. However, in such case, while the claim may now be covered, it is subject to the newly created “Efficient Proximate Cause Aggregate Limit.” The amount of this limit – which in subject to the general aggregate and products-completed operations aggregate limits – is listed on the endorsement. The Circular does not address what the “Efficient Proximate Cause Aggregate Limit” may be. Presumably this is an amount to be determined by each insurer based on its concern for the potential loss of exclusions via Xia.

This aspect of the endorsement seems workable. In the end, the impact of the endorsement will be tied to the amount of the Efficient Proximate Cause Aggregate Limit and how it affects exhaustion of other aggregate limits.

But where the endorsement may prove problematic is with respect to defense costs associated with a claim that comes within the “Efficient Proximate Cause Aggregate Limit.” The endorsement is designed to include such defense costs within the “Efficient Proximate Cause Aggregate Limit.” In other words, such claims are not treated as defense costs supplemental. However, only defense costs allocable to a claim, within the “Efficient Proximate Cause Aggregate Limit,” are subject to this new aggregate limit.

Allocation of defense costs, between different claims in the same suit, is not always easy to accomplish. Some courts recognize that tasks performed by counsel, in defending a suit, often overlap between the covered and uncovered claims. Defense counsel’s work cannot always be pigeon-holed to specific claims. Even California, which is favorable to insurers in permitting allocation of defense costs between covered and uncovered claims, recognizes the practical challenges of achieving it. Insurers using an “Efficient Proximate Cause Aggregate Limit” endorsement may be up against this issue when it comes to attempting to include defense costs within the aggregate.

There is also likely to be a question of determining to which claims the “Efficient Proximate Cause Aggregate Limit” endorsement applies. The endorsement simply states “Washington” in the title. On one hand, since the endorsement is based on the treatment of claims under Xia, its applicability is intended for claims governed by Washington law. If a policy is issued to a Washington insured, and the claim arises in Washington, then it’s clear-cut. Less clear may be a policy issued to an insured outside of Washington and the claim arises in Washington. Or if a policy is issued to an insured in Washington and the claim arises outside of Washington. In some cases, the endorsement is likely to introduce a choice of law issue into the equation.

 

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