In May 2014, Nevada became the latest state to interpret the breadth and applicability of the pollution exclusion contained within a third-party general liability policy. Although many states have considered this question, those courts have reached diametrically opposite conclusions, leading to confusion and uncertainly, particularly with respect to states that have yet to address the issue. These cases in the liability insurance context sometimes have a collateral effect on property insurance litigation. This is because property insurance policies include pollution and/or contamination exclusions which, although they have a different history and serve a different purpose under a different type of insurance policy, are sometimes worded similarly to the exclusions in general liability policies. Courts, not being insurance experts, have not always perceived the important differences between property and liability, and sometimes applied these liability insurance cases in construing property policies.

In Century Surety Co. v. Casino West, Inc., 2014 Nev. LEXIS 50 (May 29, 2014), the insurer brought a declaratory judgment action in federal court, seeking a ruling that it was not required to provide coverage to its insured, a motel, in connection with the deaths of four people at the motel caused when carbon monoxide from a pool heater was released into the room in which they were sleeping. The federal district court denied the insurer’s motion for summary judgment, and granted permission for the insurer to seek interlocutory review at the Ninth Circuit. Because the issue had not been previously litigated in Nevada, the Ninth Circuit certified the case to the Nevada Supreme Court, asking, in part, for the Nevada Supreme Court to answer: Does the pollution exclusion in Century’s insurance policy exclude coverage of claims arising from carbon monoxide exposure?[1]

The Nevada Supreme Court answered the certified question in the negative, finding the pollution exclusion, which excluded bodily injury or property damage “arising out of the actual, alleged or threatened, discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’” ambiguous. The Court began by noting that the parties advanced two competing interpretations of the absolute pollution exclusion – the insured argued that the exclusion only should apply to instances of traditional environmental pollution because the exclusion contained environmental terms of art, while the insurer argued that the exclusion was intended to encompass both indoor and outdoor pollution. While noting that the pollution exclusion “has been heavily litigated in numerous other jurisdictions, resulting in conflicting outcomes,” the Court conducted its own analysis.

First the Court noted that, read literally, the exclusion could be interpreted to exclude accidents or injury arising out of common household products, such as soap, shampoo, or bleach. Such a result, the Court found, would “undoubtedly be absurd and contrary to any reasonable policyholder’s expectations.” Second, the Court found that the history of the pollution exclusion in liability policies, specifically, the fact that it was designed to avoid the cost resulting from environmental contamination, and subsequent litigation, suggested that the exclusion would not apply to instances of indoor, non-environmental pollution. The Court dismissed the insurer’s argument that a building heater exception to the pollution exclusion indicated that the exclusion was meant to apply to both indoor and outdoor pollution, holding that the exception simply clarified that the exclusion did not apply to a particular situation, and that it did not serve to expand the scope of the exclusion.

While finding that the pollution exclusion did not apply in this instance, the Court did provide some helpful guidance to insurers looking to amend their policy forms, stating: “To demonstrate that the absolute pollution exclusion applies to nontraditional indoor pollutants, and insurer must plainly state that the exclusion is not limited to traditional environmental pollution.” Until that happens, it appears that conflicting holdings at the state level concerning the appropriate scope of the pollution exclusion in liability policies will continue to create confusion and uncertainty. The split of authority in the liability insurance context may have some collateral impact on property insurance litigation.

[1] The Ninth Circuit also asked the Nevada Supreme Court to consider the applicability of an indoor air quality exclusion. The Nevada Supreme Court found that exclusion to be ambiguous, and therefore inapplicable, as well.