In its recent decision in Siloam Springs Hotel v. Century Sur. Co., 2017 Okla. LEXIS 15 (Okl. Feb. 22, 2017), the Supreme Court of Oklahoma, on certified question from the United States District Court for the Western District of Oklahoma, had occasion to consider the enforceability of an indoor air exclusion in a general liability policy.
Century insured Siloam Springs Hotel under a general liability policy with an exclusion applicable to:
“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.
Siloam sought coverage under its policy for with claims brought by hotel guests claiming to have suffered injury as a result of carbon monoxide poisoning. Century denied coverage for the suit on the basis of the indoor air exclusion. In the ensuing coverage litigation, the United States Western District for the District of Oklahoma granted summary judgment in Century’s favor, holding that the exclusion unambiguously applied. On appeal, the Tenth Circuit remanded the case based on a potential jurisdictional defect, but in doing so concluded that the lower court should consider whether the indoor air exclusion ran afoul of Oklahoma public policy. The district court subsequently certified the following question to the Supreme Court of Oklahoma:
Does the public policy of the State of Oklahoma prohibit enforcement of the Indoor Air Exclusion, which provides that the insurance afforded by the policy does not apply to “‘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”?
In considering this question, the Supreme Court of Oklahoma observed that the freedom of contract is not absolute and is limited by the public policy of the State of Oklahoma, which can only be articulated by the Oklahoma legislature. The Court also observed that Oklahoma statutory law evidences that “a contract violations public policy only if it clearly tends to injure public health, morals or confidence in the administration of law, or if it undermines the security of individual rights with respect to either personal liability or private property.” An example of this in the insurance context, noted the Court, was a loaned vehicle exclusion contained in an auto policy, which the Court previously had found violative of Oklahoma’s statutory compulsory liability insurance law.
Siloam argued that the indoor air exclusion violated Oklahoma public policy, at least in the context of a carbon monoxide claim, by negating compensation to victims for loss that a reasonable person would expect to be insured under a general liability policy. The Court rejected this argument, finding no public policy articulated by Oklahoma’s legislature that would preclude such an exclusion in the context of a general liability policy, unlike the case with auto insurance where the legislature expressed a public policy in favor of extremely broad coverage. In the absence of such a public policy, explained the Court, it would be improper to disallow the exclusion, regardless of Siloam’s reasonable expectations of coverage. As the Court explained:
Siloam would have us greatly circumscribe the freedom of contract principles articulated above by finding a coverage exclusion violates public policy if there is no public policy justification for its existence, and if it excludes coverage under circumstances where a responsible person would expect that liability insurance would be available to compensate for an injury. There is no precedent for such an encroachment into parties’ freedom to contract for liability coverage …
The Court, therefore, held that Siloam and Century were free to have negotiated the contract “as they saw fit,” and that Century, therefore, could apply the exclusion without running afoul of Oklahoma public policy.