Insurers have recently added novel endorsements to commercial general liability, or CGL, policies, both of which may impact a policyholder’s coverage. We have analyzed two that may create serious roadblocks to coverage for Washington policyholders: the “Washington – Limited Coverage for Bodily Injury, Property Damage or Personal and Advertising Injury Involving Efficient Proximate Cause (Defense Within Limits)” (what we’ll call the “Limited Coverage” endorsement) and the “Washington Changes – Defense Costs” endorsements. In this two-part blog post we’ll unpack what these endorsements really do. First up is the “Limited Coverage” endorsement.
The “Limited Coverage” Endorsement Can Reduce Your Limits to Almost Nothing Based on an Obscure Rule of Coverage Law: “Efficient Proximate Cause”
Washington State is widely known as one of the most policyholder-friendly states in the country. Washington’s appellate courts, apply rules of interpretation favoring the “average purchaser of insurance,” and punishing insurers for ambiguous language.
Washington also applies the “efficient proximate cause” rule, a principle of contract interpretation that applies when two or more distinct causes together cause a loss, but one of the causes is excluded under the policy. Sunbreaker Condo. Ass’n v. Travelers Ins. Co., 79 Wn. App. 368, 374–75, 901 P.2d 1079, 1082–83 (1995). If the initial or the “incepting” cause of loss is covered, “then there is coverage under the policy regardless whether subsequent events within the chain, which may be causes-in-fact of the loss, are excluded by the policy.” Safeco Ins. Co. of Am. v. Hirschmann, 112 Wash.2d 621, 628, 773 P.2d 413 (1989). For example, if a fire (a covered cause) erupts, triggering sprinklers and causing water damage to the floors, an insurer cannot deny coverage based on a “water damage” exclusion, because the first link in the causal chain—fire—is a covered cause of loss. Moreover, Washington courts have rejected insurers’ attempts to circumvent the efficient proximate cause rule through exclusionary language that purports to deny coverage when an excluded peril, no matter how insignificant, appears in the causal chain. Hirshmann, 112 Wn.2d at 627, 629.
In 2017, the Washington Supreme Court held that the efficient proximate cause rule applies to liability policies. Xia v. ProBuilders Specialty Ins. Co., 188 Wn.2d 171, 182–83, 400 P.3d 1234, 1240 (2017). (We have written about Xia before). In Xia, a contractor negligently installed an exhaust vent system in a new home, causing carbon monoxide to seep into the home, sickening the homeowner. Id. The insurer argued that the pollution exclusion precluded coverage, but the court held that the efficient proximate cause of the homeowners’ bodily injury was the negligent installation, and the pollutant. Id.
In response to Xia, and Washington courts’ continued rejection of attempts to circumvent the efficient proximate cause rule, the Insurance Services Office (“ISO”), which drafts most standard commercial policy forms, released form CGL endorsements that impose low monetary limits on losses involving "efficient proximate cause.” In Washington the endorsement is called “Washington – Limited Coverage for Bodily Injury, Property Damage or Personal and Advertising Injury Involving Efficient Proximate Cause (Defense Within Limits).” The endorsement sets a sub-limit of $100,000 when the efficient proximate cause rule results in coverage. That’s a very low sublimit in a policy that usually provides upwards of $2,000,000 in coverage. Adding insult to injury, the Limited Coverage endorsement includes defense costs in the sub-limit—meaning that once $100,000 is incurred to defend the insured, no money remains to indemnify the insured.
The Limited Coverage endorsement could exacerbate conflicts between the insurer’s and the insured’s best interests. What motivation does an insurer have to provide a competent and vigorous defense when the maximum amount it is liable for both defense and indemnity is already established?
The Limited Coverage endorsement could also complicate litigation over an insurer’s duty to defend. When deciding whether an insurer has a duty to defend, a Washington court looks to the only the complaint and the policy. Woo v. Fireman's Fund Ins. Co., 161 Wash. 2d 42, 52–53 (2007). An insurer must defend if the “policy conceivably covers allegations in the complaint.” Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 404, 229 P.3d 693, 696 (2010). Until the insurer’s obligations are clear, it must defend. Id at 405.
However, courts routinely deny summary judgment on the duty to defend where the efficient proximate cause rule is involved. See, e.g., Country Mut. Ins. Co. v. Evergreen Landing LLC, 2020 WL 6044505, at *3 (W.D. Wash. Oct. 13, 2020) (denying summary judgment regarding the duty to defend when the “eight-corners” did not make it clear that the EPC was an excluded cause of loss and ordering the insurer to continue defending). In that scenario, the insured will be left wondering whether defense costs being incurred while the case is pending will erode the Limited Coverage endorsement’s sub-limits until the court determines the efficient proximate cause of the loss, putting the policyholder in a quandary about how vigorously to defend.
Even if a court does determine that the efficient proximate cause was a covered cause of loss, for how long would an insurer have to defend? Only until it had incurred the Limited Coverage endorsement’s sub-limited amount in defense costs? And if different claims in the same suit have different causes, will the defense costs be allocated, and if so how?
No Washington appellate court has had the chance to weigh in on the Limited Coverage endorsement but we will be monitoring the case law, so check back here for updates.