The Washington State Supreme Court has refused to reconsider a ruling in which it held that the “efficient proximate cause” doctrine could be applied to a liability insurance dispute in a pollution case involving carbon monoxide poisoning in a home.

The original April ruling in the case also held that a risk retention group’s refusal to defend its insured in the case was in bad faith.

Zhaoyun Xia purchased a new home in May 2006, according to the ruling by the Washington Supreme Court in Zhaoyun Xia v. ProBuilders Specialty Insurance Co. RRG, which was widely commented upon when it was first issued.

Soon after moving in her home, Ms. Xia began to feel ill. A service technician for the local utility investigated and discovered an exhaust vent attached to the hot water heater had not been installed correctly and was discharging carbon monoxide directly into the confines of a basement room, according to the ruling.

In June 2008, the claims administrator for the builder’s insurer, risk retention group ProBuilders Specialty Insurance Co. RRG, which is based in Atlanta, denied coverage in the matter, refusing to either defend or indemnify the builder, according to the ruling.

Ms. Xia filed suit against the builder and eventually entered into a $2 million settlement agreement with it. The builder, which is now inactive, then assigned Ms. Xia all first-party rights in the case.

Ms. Xia filed suit against ProBuilders in June 2011, seeking a declaratory judgment with regard to coverage and alleging breach of contract, bad faith and violations of the Consumer Protection Act and the Insurance Fair Conduct Act.

The ruling said ProBuilders “correctly identified the existence of an excluded polluting occurrence under the unambiguous language of its policy.”

However, it “ignored the existence of a covered occurrence — negligent installation — that was the efficient proximate cause of the claimed loss.

“Accordingly, coverage for this loss existed under the policy and ProBuilders’ refusal to defend its insured was in bad faith,” said the ruling, which remanded the case for further proceedings.

The court refused to reconsider the opinion in a ruling issued Thursday.

The ruling in the case was “very significant,” said Laura Foggan, a partner with Crowell & Moring L.L.P. in Washington, D.C., who supported the insurer’s petition for rehearing on behalf of the Washington D.C.-based Complex Insurance Claims Litigation Association Inc.

The court’s conclusion there was coverage under the efficient proximate cause doctrine was a “pretty dramatic conclusion,” she said. “It really throws into doubt” many policy exclusions.

Moreover, the court found that because the court had not considered this doctrine, “it’s denial of coverage was in bad faith,” she said. Both parts of the decision, are “very troubling for insurers,” she said.

Last week, a federal appeals court held a Travelers Cos. Inc. unit was not obligated to provide coverage in an incident in which carbon monoxide that emanated from a recreational fishing boat’s engine killed two men and injured a third, because of its policy’s pollution exclusion.