Betts Patterson Mines

Xia – Maybe or maybe not Henny Penny

In the recent aftermath of the Washington Supreme Court’s 2017 decision in Xia v. Probuilders, many feared the end of the application of CGL exclusions in Washington. But the most recent decision to apply Xia on the application of the absolute pollution exclusion (“APE”) should somewhat ease those fears, as it upholds in favor of insurers based only on slight factual differences. 

Dolsen v. Bedivere Ins. Co., f/k/a One Beacon, et al __ F. Supp. __, No. 1:16–CV–3141–TOR, 2017 WL 3996440  (E.D. Wash. September 11, 2017), addresses whether three insurance companies properly denied the duty to defend and indemnify claims asserted against their insured for liability associated with operating a concentrated animal farm operation. A byproduct of the operations is millions of gallons of liquid manure that Dolsen stored and also spread on its crops as fertilizer.  Over 1.6 million gallons of untreated manure leaked into the groundwater annually.  

The underlying complaint by a non-profit environmental group and a non-profit food safety corporation alleged that Dolsen over-applied manure and allowed a holding pond to leak, causing significant environmental contamination. All three insurers denied coverage based on their policies APE’s.  As is often the case, coverage litigation ensued, which included claims for coverage, bad faith, and violations of Washington’s Insurance Fair Conduct Act and Consumer Protect Act.

The coverage action proceeded before Judge Rice in the U.S. District Court for the Eastern District of Washington. As analyzed by the court, the initial ruling is that manure is a pollutant when introduced to water, and the very attributes that make it a pollutant caused the harm at issue. Thus, the court held the APE applied as written in the policies.

Turning to Xia, the court then analyzed this liability claim under the “efficient proximate cause” rule.  The court noted there are two lines of relevant cases: those where the initial event is the polluting act and those where the initial peril was some other act that incidentally led to polluting harm.  This subtle difference lead it to conclude the initial act here, spreading too much manure on the ground, was tied to manure being a pollutant and so the initial peril was a polluting act.   The court also found that seepage from the holding pond due to inadequate storage was an excluded peril because the APEs expressly exclude the seepage of pollutants stored or processed as waste.

NOTE: Although the Court granted judgment to the insurers on all claims, it dismissed one important argument from the insurers based on prior Washington case law:  that the term “arising out of” as a precursor to the APE meant that the “efficient proximate case rule” is inapplicable.  This could be problematic to the extent this decision is persuasive to other courts.  Overall, Dolsen demonstrates that all is not lost yet – although it also shows how the Xia decision will be perilous for insurers going forward. – Larry Gottlieb