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Vol. 6, Iss. 7
September 13, 2017

Pollution Exclusion: Washington: Insurers See Red, Policyholders See Delicious
On August 17th, the Washington Supreme Court denied the insurer’s motion for reconsideration in Xia v. ProBuilders Specialty Insurance Company. This is that unusual decision from April where the Washington high court held that, based on the “efficient proximate cause” rule, the pollution exclusion did not apply. The court determined that the efficient proximate cause of injuries was the negligent installation of a 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.

Despite some strong amicus support from insurer groups, the court let the decision stand. The biggest open question now (in addition to whether other states adopt Xia) is whether the other shoe drops – a Washington court applies the rule from Xia as a basis to preclude applicability of another type of exclusion.

Xia will always be a pollution exclusion case. But its real legacy may be that, while the Washington Supreme Court had never applied the “efficient proximate cause” rule to the facts at issue, the insured should have known that it might adopt the rule. Therefore, the insurer breached the duty to defend -- and did so in bad faith. Sometimes a case’s legacy turns out to be different from its headline.

WSJ: Courtroom Surprise: Fewer Tort Lawsuits
The front page of the July 25th Wall Street Journal had a very lengthy article with the above title. In general, according to the story, tort lawsuits are not being filed at the same pace as in the past. The article states that, in 1993, tort cases accounted for 16% of filings in state courts. In 2015 it was 4%. During this period, contract cases grew from 18% of the civil docket to 51%. In 1993, 10 in 1,000 Americas filed a tort lawsuit. In 2015 it was fewer than 2 in 1,000. The article is awash in more statistics, their sources, and reasons for the decline. The article’s message -- the public’s perception, that the nation is drowning is tort suits, is not supported by the numbers.

Court Says Insurer Could “Dump And Run”
It is generally agreed that an insurer, confronted with a loss that it believes will exceed its limits of liability, cannot simply tender its limits of liability to the insured or underlying plaintiff, declare its policy exhausted and then, viola, assert that it no longer has a duty to defend.

But the court in Mt. Hawley Ins. Co. v. Mesa Medical Group, No. 16-325 (E.D. Ky. July 19, 2017) permitted the insurer, in a medical malpractice case, to tender its limits to its insureds and cease providing a defense. Of course, it helped that the insurer’s Professional Liability policy contained an endorsement that afforded the insurer such right. The endorsement stated: “In consideration of the premium charged, [Plaintiff] hereby agrees to pay Claims Expenses in addition to the limits of liability as specified on the DECLARATIONS page.” The endorsement also stated that “[n]othing contained in this endorsement shall operate to prevent the Company from tendering its limits of liability hereunder as provided under the policy to which this endorsements is attached . . . and by such action eliminating its responsibility for future Claims Expenses.”

The insureds argued that permitting the insurer to take this action amounted to an impermissible so-called “dump and run.” They maintained that, on account of other provisions in the policy, the insurer could not do so. But the court was not convinced – not even close: “[The insureds] are correct that, if the Court agrees with [the insurer’s] reading of the contractual language, it could have the effect of significantly reducing the value of the policy’s liability limit, but that is acceptable if the language of the policy, as amended, provides for it. Whether agreeing to reduce the value of the policy’s liability limit is sensible or a bad idea or even something that the insured would have wanted with twenty-twenty hindsight is of no matter to this Court in the absence of coercion or the violation of a public policy that would render the agreement unenforceable. The parties agreed to it. Clearly, Plaintiff felt it was important to set a cap on its possible obligation under the Agreement and, presumably, bargained for that. . . . Mt. Hawley’s duty to pay any claim or judgment or to continue to defend in the lawsuit filed by Haley Clontz (currently pending in Pulaski Circuit Court) terminated at the time Mt. Hawley tendered its policy limit to [the insureds].”

Risk Retention Group Not Subject To New York’s Timely Disclaimer Statute
A recent addition to the unlikely-to-be-cited-too-often-in-the-future category of coverage decisions is Travelers Indemnity Co. v. Preferred Contractors Insurance Co., No. 153919 (N.Y. Sup. Ct. July 21, 2017), where the New York trial court held that, despite the fact that a disclaimer was not timely, under New York Insurance Law 3420(d)(2), it was of no consequence, as the non-compliant party was a foreign risk retention group, and not bound by the statute.


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