Century Sur. Co. v. Casino W., Inc. ( 2014 )

130 Nev., Advance Opinion 42
IN THE SUPREME COURT OF THE STATE OF NEVADA
CENTURY SURETY COMPANY,
Appellant,
No. 6062f !LED
vs. MAY 2 9 2014
CASINO WEST, INC., ACVE K. LINDEMAN
CLE
Respondent.
BY
CHIEF LER
Certified questions, in accordance with NRAP 5, regarding the
interpretation of exclusionary provisions in an insurance policy. United
States Court of Appeals for the Ninth Circuit; Carlos F. Lucero, Consuelo
M. Callahan, and N. Randy Smith, Judges.
Questions answered.
McDonald Carano Wilson LLP and James W. Bradshaw and Debbie A.
Leonard, Reno; Woolls & Peer and H. Douglas Galt, Los Angeles,
California,
for Appellant.
Burton Bartlett & Glogovac and Scott A. Glogovac, Reno,
for Respondent.
Armstrong Teasdale LLP and Kevin R. Stolworthy and Conor P. Flynn,
Las Vegas,
for Amicus Curiae Complex Insurance Claims Litigation Association.
BEFORE THE COURT EN BANC.
OPINION
By the Court, DOUGLAS, J.:
The United States Court of Appeals for the Ninth Circuit has
certified questions of law to this court regarding the interpretation of two
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exclusionary provisions in a motel's insurance policy issued by appellant
Century Surety Company: the absolute pollution exclusion and the indoor
air quality exclusion. The certified questions ask:
(1) Does the pollution exclusion in Century's
insurance policy exclude coverage of claims arising
from carbon monoxide exposure?
(2) Does the indoor air quality exclusion in
Century's insurance policy exclude coverage of
claims arising from carbon monoxide exposure?
We determine that, when applied to the facts of this case, both exclusions
are ambiguous because they are subject to multiple reasonable
interpretations; therefore, under the circumstances presented, we answer
these questions in the negative.
BACKGROUND
Four people died from carbon monoxide poisoning while
sleeping in a room directly above a pool heater in the Casino West Motel,
the respondent here. Casino West sought coverage for the deaths from its
insurer, Century Surety Company, but Century denied the claims based
on two provisions of Casino West's general liability policy: the absolute
pollution exclusion, which excludes coverage for "'[b]odily injury' or
'property damage' arising out of the actual, alleged or threatened
discharge, dispersal, seepage, migration, release or escape of 'pollutants,'
and the indoor air quality exclusion, which excludes coverage for "Th]odily
injury,' property damage,' or 'personal and advertising injury' arising out
of, caused by, or alleging to be contributed to in any way by any toxic,
hazardous, noxious, irritating, pathogenic or allergen qualities or
characteristics of indoor air regardless of cause." After Century denied
coverage, it brought a declaratory relief claim in the federal district court.
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411
In response, Casino West filed a counterclaim. Century then moved for
summary judgment on both its claim and Casino West's counterclaim
The federal district court denied Century's motion. The court
determined that the policy exclusions were ambiguous and interpreted the
ambiguity in Casino West's favor. With permission from the federal
district court to appeal the interlocutory decision, Century sought review
in the Ninth Circuit Court of Appeals, which certified the aforementioned
questions to this court after determining that existing Nevada law did not
clearly resolve the issue. We subsequently accepted the questions and
directed briefing.'
DISCUSSION
The purpose of contract interpretation is to determine the
parties' intent when they entered into the contract. See Sheehan &
Sheehan v. Nelson Malley & Co., 121 Nev. 481, 488, 117 P.3d 219, 224
(2005). We interpret an insurance policy "from the perspective of one not
trained in law or in insurance, with the terms of the contract viewed in
their plain, ordinary and popular sense." Siggelkow v. Phoenix Ins. Co.,
109 Nev. 42, 44, 846 P.2d 303, 304 (1993). And we consider the policy as a
whole "to give reasonable and harmonious meaning to the entire policy."
Id. Further, an insurance policy's interpretation should not lead to an
absurd or unreasonable result. Reno Club, Inc. v. Young Inv. Co., 64 Nev.
312, 325, 182 P.2d 1011, 1017 (1947).
'The Complex Insurance Claims Litigation Association filed an
amicus curiae brief supporting Century's interpretation of the provisions
at issue.
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If an insurance policy is unambiguous, we interpret it
according to the plain meaning of its terms. Powell v. Liberty Mitt. Fire
Ins. Co., 127 Nev. „ 252 P.3d 668, 672 (2011). An insurance policy
is considered ambiguous if "it creates [multiple] reasonable expectations of
coverage as drafted." Id. A seemingly clear policy can be rendered
ambiguous when applying the policy to the facts leads to multiple
reasonable interpretations. See Rubin v. State Farm Mitt. Auto. Ins. Co.,
118 Nev. 299, 303-04, 43 P.3d 1018, 1021 (2002). We interpret
ambiguities in an insurance contract against the drafter, which is typically
the insurer. Powell, 127 Nev. at ,252 P.3d at 672. So, if an insurance
policy has any ambiguous terms, this court will interpret the policy to
effectuate the insured's reasonable expectations. Id.; see also Farmers Ins.
Exch. v. Young, 108 Nev. 328, 330, 832 P.2d 376, 377 (1992).
Clauses providing coverage are broadly interpreted "so as to
afford the greatest possible coverage to the insured, [and] clauses
excluding coverage are interpreted narrowly against the insurer." Nat'l
Union Fire Ins. Co. of the State of Pa., Inc. v. Reno's Exec. Air, Inc., 100
Nev. 360, 365, 682 P.2d 1380, 1383 (1984). Any exclusion must be
narrowly tailored so that it "clearly and distinctly communicates to the
insured the nature of the limitation, and specifically delineates what is
and is not covered." Griffin v. Old Republic Ins. Co., 122 Nev. 479, 485,
133 P.3d 251, 255 (2006) (internal quotation marks omitted). To preclude
coverage under an insurance policy's exclusion provision, an insurer must
(1) draft the exclusion in "obvious and unambiguous language," (2)
demonstrate that the interpretation excluding coverage is the only
reasonable interpretation of the exclusionary provision, and (3) establish
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that the exclusion plainly applies to the particular case before the court.
Powell, 127 Nev. at , 252 P.3d at 674 (2011).
The absolute pollution exclusion
The absolute pollution exclusion in Casino West's insurance
policy provides that the policy does not apply to
(1) "Bodily injury" or "property damage" arising
out of the actual, alleged or threatened discharge,
dispersal, seepage, migration, release or escape of
"pollutants":
(a) At or from any premises, site or location
which is or was at any time owned or occupied by,
or rented or loaned to, any insured. However, this
subparagraph does not apply to:
(i) [Building-heater exception:] "[b]odily
injury" if sustained within a building caused by
smoke, fumes, vapor or soot from equipment used
to heat that building.
The policy defines a pollutant as "any solid, liquid, gaseous or thermal
irritant or contaminant, including smoke, vapor, soot, fumes, acids,
alkalis, chemicals, and waste."
The parties have competing interpretations of the absolute
pollution exclusion. Casino West argues that the absolute pollution
exclusion only applies to traditional environmental pollution because the
exclusion contains environmental terms of art. Casino West notes that
other courts have interpreted similar exclusions to apply only to
traditional forms of pollution. Casino West also contends that the fact
that it and Century disagree on the exclusion's applicability demonstrates
the policy's ambiguity. To the contrary, Century asserts that the absolute
pollution exclusion applies to this case to exclude coverage because carbon
monoxide is a "pollutant" under the policy's terms Further, Century
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contends that the building-heater exception demonstrates that the
drafters intended the absolute pollution exclusion to apply to both indoor
and outdoor pollution. Specifically, Century asserts that, if the absolute
pollution exclusion applied only to traditional environmental pollution, the
building-heater exception would be unnecessary, as harm from a
building's heating system would not fall within the absolute pollution
exclusion.
The absolute pollution exclusion is a standard provision in
general commercial liability policies. See Apana v. TIG Ins. Co., 574 F.3d
679, 680 (9th Cir. 2009). Its scope is a matter of first impression in
Nevada, but it has been heavily litigated in numerous other jurisdictions,
resulting in conflicting outcomes. See id. at 682 (collecting cases). Some
courts have found that the exclusion is unambiguous and applies to all
types of pollution. Id. But others have concluded that its application is
limited to situations involving traditional environmental pollution, either
because they find that the exclusion's terms are ambiguous or because the
application of the exclusion to nontraditional forms of pollution would
contradict the policyholders' reasonable expectations. Id.
As drafted here, the absolute pollution exclusion permits
multiple reasonable interpretations of coverage. As relevant here, the
exclusion's language can be read to support Century's interpretation.
Initially, it is reasonable to categorize carbon monoxide as a pollutant
because it is a gaseous element that contaminates the air, making it
dangerous and sometimes deadly to breathe. See Midwest Family Mut.
Ins. Co. v. Wolters, 831 N.W.2d 628, 637 (Minn. 2013) (noting that both the
federal Clean Air Act and the Minnesota Pollution Control Agency treat
carbon monoxide as a pollutant). And the exclusion precludes coverage for
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any injury resulting from a pollutant. Therefore, it is reasonable to
conclude that the policy would not cover any damage that carbon
monoxide caused. But Casino West's interpretation that the exclusion's
applicability is limited only to claims for traditional environmental
pollution is also reasonable. Taken at face value, the policy's definition of
a pollutant is broad enough that it could be read to include items such as
soap, shampoo, rubbing alcohol, and bleach insofar as these items are
capable of reasonably being classified as contaminants or irritants. So, if
no limitations are applicable, the pollution exclusion would seem to
preclude coverage for any accident stemming from such items, including a
person slipping on a puddle of bleach or developing a skin rash from using
a bar of soap. Such results would undoubtedly be absurd and contrary to
any reasonable policyholder's expectations. See Reno Club, 64 Nev. at 325,
182 P.2d at 1017 (explaining that insurance contracts should not be
interpreted to require an absurd or unreasonable result). The dictionary
definition of "pollutant" supports Casino West's proposed limitation on the
absolute pollution exclusion. See Merriam-Webster's Collegiate Dictionary
961 (11th ed. 2012) (defining "pollute" as "to contaminate (an
environment) esp[ecially] with man-made waste" and a "pollutant" as
"something that pollutes"). Therefore, a reasonable policyholder could
construe the absolute pollution exclusion to only apply to traditional
environmental pollution.
The absolute pollution exclusion's drafting history further
supports the conclusion that the exclusion was designed to apply only to
outdoor, environmental pollution. Cf. J.E. Dunn Nw., Inc. v. Corus
Constr. Venture, L.L.C., 127 Nev. „ 249 P.3d 501, 505 (2011)
(providing that, when interpreting statutes, we look to the statute's
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legislative history for guidance to determine the law's proper scope).
Other courts have recognized that the pollution exclusion was
traditionally included in insurance policies to avoid the potentially grand
expense resulting from environmental litigation. Am. States Inc. v.
Koloms, 687 N.E.2d 72, 81 (Ill. 1997). The theory underlying such
exclusions appears to be that, if an insured knows that his or her policy
covers any type of pollution, he or she may take fewer precautions to
ensure that such environmental contaminations do not occur. Waste
Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 340 S.E.2d 374, 381 (N.C.
1986). Thus, in the absence of an exclusion covering environmental
pollution, an insurer could incur huge financial costs for litigation
stemming from such pollution. Id. In light of these principles, courts have
determined that—from the insurers' standpoint—the exclusion was
designed to protect against the "yawning extent of potential liability
arising from the gradual or repeated discharge of hazardous substances
into the environment." Id. (emphasis added).
Moreover, while Century's argument that the building-heater
exception demonstrates that the exclusion applies to both external and
internal contamination is reasonable, the building-heater exception does
not necessarily preclude this court from concluding that Casino West's
interpretation is equally reasonable. In particular, one reasonable
explanation for the inclusion of the building-heater exception is that it was
meant to clarify that the absolute pollution exclusion does not apply to a
particular situation, rather than to expand the absolute pollution
exclusion's scope beyond the parameters of how that exclusion has
previously been interpreted. See Wolters, 831 N.W.2d at 635 n.2
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(recognizing that courts have limited the absolute pollution exclusion to
"situations involving traditional environmental pollution").
In light of the exclusion's ambiguity, we must interpret the
provision to effectuate Casino West's reasonable expectations. See Powell,
127 Nev. at 252 P.3d at 672. When considering the significant
amount of authority interpreting the absolute pollution exclusion to apply
only to traditional environmental pollution, see id., one cannot rely on an
exception to prove that the exclusion also applies to indoor pollution. To
demonstrate that the absolute pollution exclusion applies to
nontraditional indoor pollutants, an insurer must plainly state that the
exclusion is not limited to traditional environmental pollution. See id. at
, 252 P.3d at 674 (providing that to preclude coverage under an
insurance policy, an insurer must draft the exclusion in "obvious and
unambiguous language"). Accordingly, we determine that the absolute
pollution exclusion does not bar coverage for the injuries caused by carbon
monoxide in this case.
The indoor air quality exclusion
The indoor air quality exclusion has not been as heavily
litigated as the absolute pollution exclusion, so we do not have the benefit
of other courts' interpretations of similar provisions. Under the indoor air
quality exclusion, Casino West's insurance policy does not apply to
b. "Bodily injury[,]" "property damage[,]" or
"personal and advertising injury" arising out of,
caused by, or alleging to be contributed to in any
way by any toxic, hazardous, noxious, irritating,
pathogenic or allergen qualities or characteristics
of indoor air regardless of cause ...
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Century contends that the indoor air quality exclusion is
unambiguous and that the "regardless of cause" policy language precludes
liability for any injury suffered from indoor air quality issues, without
limitation. Casino West argues that Century's interpretation is overly
broad and that the air quality exclusion should be limited to preclude only
injuries arising from inherent and continuous air quality issues.
Like the pollution exclusion, the indoor air quality exclusion is
subject to multiple reasonable interpretations. In line with Century's
interpretation, one could read the exclusion's language to exclude coverage
for any injury caused by any condition of the air, regardless of whether the
condition is permanent or temporary. Specifically, the policy states that it
excludes coverage of any bodily injury resulting from hazardous air
quality, and the "regardless of cause" language indicates that no
limitations restrict the exclusion's applicability. On the other hand,
Casino West's interpretation—limiting the exclusion's applicability only to
inherent and continuous air quality issues—is also reasonable. As with
the pollution exclusion, the indoor air quality provision is drafted so
broadly that, if no limitations are applied to it, its applicability could
stretch well beyond a reasonable policyholder's expectations and lead to
absurd results. For instance, read to exclude coverage for any condition of
the air, the policy would not cover any injury resulting from a guest's
inhalation of smoke from a fire inside the motel, but would cover any burn
injuries caused by that same fire. Such potentially absurd results
illustrate the need for some limitations on the exclusion's applicability.
See Reno Club, 64 Nev. at 325, 182 P.2d at 1017 (insurance contracts
should not be interpreted to require an absurd or unreasonable result).
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The indoor air quality exclusion's ambiguity requires us
interpret the provision to effectuate Casino West's reasonable expectation
that the exclusion only applies to inherent and continuous conditions. The
indoor air quality provision excludes coverage for certain types of air
"qualities or characteristics." As relevant here, a "quality" refers to the
"peculiar and essential character" or "an inherent feature" of something.
See Merriam-Webster's Collegiate Dictionary 1017 (11th ed. 2012). And a
"characteristic" is "a distinguishing trait, quality, or property." Id. at 207.
These definitions evoke the idea of something that is permanently present
in the air, rather than a temporary condition. Thus, a policyholder could
reasonably expect that the indoor air quality exclusion applies only to
continuously present substances that render the air harmful, and that the
policy allows recovery for an unexpected condition that temporarily affects
the air quality inside of a building. See id. at 207, 1017. Accordingly, we
conclude that the indoor air quality exclusion does not bar coverage for the
injuries at issue in this case. 2
2 To the extent that the parties disagree over whether the carbon
monoxide in this case was temporarily or continuously present in the air,
that question presents a factual issue, which is outside our province in
answering the certified questions. See In re Fontainebleau Las Vegas
Holdings, L.L. C., 127 Nev. „ 267 P.3d 786, 795 (2011) (adopting the
majority view "that this court is bound by the facts as stated in the
certification order and its attachment Es] and that this court cannot make
findings of fact in responding to a certified question"). Thus, for the
purpose of answering this certified question, we accept the Ninth Circuit's
factual conclusion that carbon monoxide entered the decedents' room from
Casino West's pool heater room "because the air intake openings had been
blocked," which seems to indicate that the condition was temporary and
unexpected, rather than a permanent air quality issue.
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CONCLUSION
For the reasons discussed herein, we conclude that neither the
absolute pollution exclusion nor the indoor air quality exclusion clearly
excludes coverage for carbon monoxide exposure under this case's
circumstances. Therefore, we answer the certified questions in the
negative.
Douglas
C.J.
J.
Pickering
fre.t.42\ J.
Hardesty
Parraguirre
, J.
J.
Saitta
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