We are venturing a little afield from the Pacific Northwest today to acknowledge a big win for policyholders in Nevada. The Nevada Supreme Court in CENTURY SURETY COMPANY v. CASINO WEST INC, answering questions certified to it in 2012 by the Ninth Circuit (after oral argument was held back in 2011), held that the so-called “absolute” pollution exclusion is not in fact “absolute” when it comes to non-“traditional” pollutants.
The facts of this case are very sad: four people died in a hotel room situated over a pool heater room when carbon monoxide filled the room, due to a blocked fresh-air intake. The carrier denied coverage based on the pollution exclusion and an “indoor air quality” exclusion. (That “indoor-air” exclusion is not typical, and therefore I won’t discuss it here). The federal trial court denied the carrier’s motion for summary judgment, finding that both exclusions were ambiguous. However, the trial court (and then the Ninth Circuit) noted that there is a considerable split among the states on whether the modern pollution exclusion applies only to traditional pollutants or covers all substances arguably within the broad scope of its wording, but that the courts could not determine how the Nevada courts would come down in that debate.
The Nevada Supreme Court put itself firmly in the pro-policyholder camp, using an analysis that could have been lifted from some of the best Oregon case law on policy interpretation. The court first emphasized that insurance policies are interpreted from the perspective of the ordinary purchaser of insurance, not a lawyer or insurance professional. Second, the court emphasized that any ambiguity in a policy — whether on its face or when applied to a factual situation — is resolved against the drafter (the insurer) and that exclusions are read very narrowly, with the burden on the insurer to establish application.
With that, the court observed that although it would be reasonable to read the pollution exclusion as broadly applying, and including carbon monoxide, it would also be reasonable to take the policyholder’s view that it only covers “traditional,” outdoor, pollutants. The court noted that the exclusion is worded so broadly (using, for example, the term “irritants”) that it could potentially apply to any substance including soap or shampoo, barring coverage for any accident involving such common, and usually innocuous, items. The court also noted that dictionary definitions of “pollutant” are narrower than the exclusion and implicitly refer only to “traditional” pollution. Finally, the court looked to the exclusion’s drafting history, noting that it was put in place largely in reaction to the proliferation of environmental contamination statutes (like CERCLA). The court therefore found the exclusion ambiguous and adopted the policyholder’s proposed interpretation, meaning that the carrier cannot rely on the exclusion.
The Nevada court’s decision is similar in many ways to the seminal Oregon case on the subject, A-1 Sandblasting & Steamcleaning Co., Inc. v. Baiden, 53 Or. App. 890, 894, 632 P.2d 1377 (1981), aff’d, 643 P.2d 1260 (Or. 1982), in which the Oregon Court of Appeals held that paint was not within the ambit of the exclusion, and found the exclusion ambiguous. Nevertheless, insurers in Oregon continue to deny indemnity coverage — and sometimes even a defense — based on a broad interpretation of the pollution exclusion, perhaps because the exclusion is written so broadly and because so many other courts have applied the exclusion broadly. (Which again points to the need for additional disincentives in Oregon law for carriers to deny claims first to see if the insured will complain.) This new decision will make it more dangerous for carriers to take that approach, at least in Nevada.