Intact must help defend pollution lawsuit due to exception in exclusion for “sudden and accidental” release

Intact Insurance must participate in the defence of a lessee of commercial property – on a Grimsby, Ont. site formerly occupied by a gas station – which is being sued by a neighbouring property owner alleging that contaminants migrated to its property. This is due to an exception – for sudden and accidental release – in a pollution exclusion in a commercial liability policy written during the 1980s by an insurer that Intact inherited through an acquisition.

There are “divergent authorities” in court decisions in Canada and the United States on the meaning of “sudden” in exceptions to exclusions for sudden and accidental pollution, Mr. Justice Peter Cavanagh of the Ontario Superior Court of Justice suggested in a decision released Jan. 20.

In April, 2012, Crombie Property Holdings Limited completed the purchase of 22 properties in Grimsby, wrote Madam Justice Katherine van Rensburg, of the Court of Appeal for Ontario, in a separate ruling released Jan. 17.

One property was found, by Stantec Consulting Ltd., to have “petroleum hydrocarbons in certain soil and groundwater samples” that exceeded the Ministry of the Environment’s site condition standards. Stantec was contracted by Crombie to provide environmental site assessments.

In early 2012, Stantec had informed Crombie that a gas station had been located at a neighborouring property, at 146 Main Street East in Grimsby, near the shore of Lake Ontario about halfway between Hamilton and St. Catharines. The owner of that neighbouring property was Dimtsis Dentistry Professional Corporation.

Court records indicate that the service station was initially constructed in the late 1950s and was closed between 2003 and 2007.

In 2014, Crombie filed a lawsuit against Dimtsis and several other defendants, including two oil companies and Avondale Stores Limited, a former lessee. Crombie alleged that contaminants from 146 Main St. migrated on to the 150 Main St. property that Crombie bought. Avondale Stores made claims to its liability insurers, including Aviva and Intact. Crombie alleged the defendents, among other things, “failed to take adequate precautions” to prevent a spill or leak and either knew or ought to have known that storing contaminants in underground tanks created a “substantial” risk.

Crombie’s allegations have not been proven in court.

“All of the liability insurers with the exception of Aviva denied coverage to Avondale,” Justice Cavanagh noted in his ruling Jan. 20, 2017. “Aviva acknowledges that, with the exception of Intact, the other Avondale liability insurers were entitled to take a denial position based upon the language of the pollution exclusions in their respective policies.”

Justice Cavanagh made an order declaring that Intact must “participate in the defence of Avondale with respect to the allegations made against it” by Crombie, based on his finding that a policy written by Cornhill Insurance, effective 1983 through 1986, is triggered by Crombie’s allegations.

He also ordered Aviva and Intact to share equally in the costs of defending Avondale.

The Jan. 17 ruling, by the Court of Appeal for Ontario, was in Crombie’s lawsuit, not in Aviva’s request that the court order Intact to participate in the defence. The Court of Appeal for Ontario over-ruled a 2012 finding, by the Ontario Superior Court of Justice, that Crombie’s lawsuit was barred by the Limitations Act.

“Aviva’s predecessor, General Accident, provided liability coverage to Avondale starting on January 15, 1993,” Justice Cavanagh wrote. “This included $1 million of primary liability insurance and $6 million of umbrella liability insurance from January 15, 1993 to January 15, 1994. Aviva remained on coverage for Avondale, with a similar insurance structure, from 1993 to 1999, comprising six years of coverage.”

Cornhill, a predecessor to Intact Insurance, “provided liability coverage to Avondale from 1983 through to December 31, 1991 pursuant to three comprehensive general liability policies,” Judge Cavanagh added.

In 1993, Cornhill Insurance Company of Canada amalgamated its P&C business in Canada with Allianz Insurance Company of Canada, which in turn was acquired in 2004 by ING Canada, which was renamed Intact in 2009.

A $6-million Aviva umbrella policy, which covered Avondale from Jan. 15, 1993 until Jan. 15, 1997, had a qualified pollution exclusion. It excluded “personal injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapours, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water of any description no matter where located or how contained, or into any watercourse, drainage or sewerage system.”

However, the exclusion “does not apply if such discharge, dispersal, release or escape is sudden and accidental.”

Other Aviva policies had an absolute pollution exclusion. Those included umbrella policies in place after Jan. 15, 1997 as well as the Aviva primary policies.

The Cornhill policy effective 1983 through 1986 stipulated:

“It is agreed that this policy does not apply to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapours, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water of any description no matter where located or how contained, or into any watercourse, drainage or sewerage system, but this exclusion does not apply if such discharge, dispersal or escape is sudden and accidental.”

Relying on that exclusion, “Intact advised Avondale that, accordingly, it will not provide a defence on behalf of Avondale as it has no duty to defend or indemnify Avondale,” Justice Cavanagh wrote.

Intact had argued that Crombie, in its statement of claim, “uses the term ‘migrate’ repeatedly and that the meaning of this term is equivalent to the meanings of the words ‘drift’, ‘wander’ or ‘roam’, all of which stand in contrast to terms such as ‘burst’, ‘rupture’, ‘torrent’, ‘surge’ or ‘rush’, none of which is used in the Statement of Claim,” Justice Cavanagh noted. “Intact submits that the true nature and substance of Crombie’s claim, as shown by its repeated use of the term ‘migrate’, is that there was a gradual movement of pollutants over the Source Property and eventually onto the Contaminated Property. Intact submits that these are the precise circumstances in which the environmental liability exclusion clause is meant to apply.”

Citing case history, Justice Cavanagh noted there are “divergent authorities in both Canada and the United States concerning whether the word ‘sudden’ as it is used in the exception to the applicable environmental liability exclusion clause in relation to the discharge, dispersal, release or escape of the contaminants means only ‘unexpectedly’ or ‘without warning’, or whether there is also a temporal component of ‘briefness’.”

Crombie’s lawsuit “does not allege facts that would allow one to know whether it is alleged that the escape of Contaminants onto the Source Property was caused by something such as, for example, an accidental puncture or rupture of the underground fuel oil tank during construction, or an accidental spill of fuel oil from a delivery truck, which would have resulted in the escape of Contaminants onto the Source Property over a short period of time, or by another cause that would have resulted in a slow and gradual escape of Contaminants over an extended period of time,” Justice Cavanagh added.

Citing the 1990 Supreme Court of Canada ruling in Nichols v. American Home Assurance Co., Justice Cavanagh found that it is “possible, based upon the evidence to be adduced and the findings to be made at the trial of the Underlying Action, that the exception to the environmental liability exclusion clause will be held to apply.”

Alan Nichols was sued in the 1980s by the Bank of Montreal which alleged fraud. He was insured by American Home Assurance Co. and the policy excluded “any dishonest, fraudulent, criminal or malicious act or omission.” American Home denied his claim. Nichols sought coverage through the courts and was initially successful, but the Supreme Court of Canada ruled in favour of the insurer.

“Considerations related to insurance law and practice, as well as the authorities, overwhelmingly support the view that the duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims which may be argued to fall under the policy,” Madam Justice Beverley McLachlin (who has since been appointed Chief Justice of Canada) wrote in Nichols v. American Home in 1990.  “That said, the widest latitude should be given to the allegations in the pleadings in determining whether they raise a claim within the policy.”

She added it is not necessary for an insured “to prove that the obligation to indemnify will in fact arise in order to trigger the duty to defend” but rather “the mere possibility that a claim within the policy may succeed suffices.”