January 18, 2016 by Canadian Underwriter
The Supreme Court of Canada will not hear an appeal from a Vancouver-area electroplating business that was unsuccessful it getting its insurer to defend it against lawsuits arising from a fire under a commercial general liability (CGL) policy with a pollution exclusion.
Court records indicate that in April, 2011 a fire occurred in Surrey, British Columbia – about 35 kilometres southeast of downtown Vancouver – at a commercial strata premises where Precision Plating Ltd. was located. Precision Plating is an electroplating business whose CGL policy was written by Axa Pacific Insurance Company. Intact Financial Corp. acquired the Canadian operations of AXA in 2011.
In the course of its business, Precision Plating “maintains and uses vats filled with toxic chemical solutions that could contaminate and pollute the surrounding property if not properly stored,” wrote Mr. Justice Murray Blok in a ruling released April 8, 2014.
The fire in 2011 “activated the sprinkler system, but the water released from the sprinklers caused the chemical vats to overflow,” Justice Blok wrote. “The overflowing chemical vats, in turn, caused partially diluted chemical solutions to allegedly run into neighbouring businesses within the strata complex, contaminating the surrounding property used by neighbouring businesses.”
Axa’s policy excluded “Bodily Injury, Personal Injury or Property Damage caused by, contributed to by or arising out of the actual, alleged or threatened discharge, emission, dispersal, seepage, leakage, migration, release or escape at any time of Pollutants…”
Essentially the courts have ruled that AXA’s exclusion wording bars coverage for liability if pollution is a concurrent cause of liability.
Initially, Justice Blok ruled in 2014 that AXA must defend Precision Plating and its owners against four separate lawsuits. That ruling was overturned on appeal, in a decision released June 18, 2015.
“Precision reasonably expected that it would be indemnified against any liability for damage to neighbouring properties from a fire on its property,” wrote Madam Justice Nicole Garson of the B.C. Court of Appeal. “But it could have no reasonable expectation that it would be indemnified against liability for the escape of chemicals from the vats. Therefore, applying both the literal wording of the policy or a contextual approach leads to the same result: the policy excludes coverage for the risk of the insured being found liable for the escape of chemicals from vats.”
In August, 2015, Precision Plating filed for leave to appeal to the Supreme Court of Canada.
On Jan. 14, 2016, Canada’s highest court announced it dismissed Precision Plating’s leave application, with costs.
Related: The Exclusion Migration
In 2012, Precision Plating – along with owners Mico Stankovic and Miroslav Stankovic – faced four separate lawsuits from neighbouring businesses arising from the fire.
For example, Morden Doors Ltd. alleged that the fire “activated the sprinklers and caused vats of chromic acid to overflow and contaminate” Morden Doors’ premises.
AXA had argued, among other things, that the “true nature and substance of each of the actions brought by third parties is a claim for remediation of contamination caused by the escape of chemicals from the Insureds’ premises.”
In ruling against AXA in 2014, Justice Blok noted that the GCL policy defined pollution “very widely” to include smoke, soot, or any liquid or thermal irritant or contaminant.
“Literally construed, smoke damage from a fire would be excluded, as would water damage (“liquid…contaminant”), or soot or heat (“thermal”) damage,” Justice Blok wrote. “These things are part and parcel of most fires.”
He added that the third-party claims “as they have been pleaded…are at least in part claims for damage caused by a fire.”
But Justice Blok “erred in framing his analysis as a question of causation of the damage, rather than causation of the liability,” Justice Garson wrote.
Justice Blok cited a Court of Appeal for Ontario ruling, released in 2002, against Zurich Insurance, which had written a CGL policy – with a pollution exclusion – for 686234 Ontario Ltd. Justice Blok described Zurich as “the leading case on pollution exclusion clauses.”
686234 Ontario, the owner of an apartment building, faced class action lawsuits arising from a carbon dioxide leak from a furnace. Zurich wrote a CGL policy with a pollution exclusion.
“By 1986 the absolute pollution exclusion became the insurance industry standard and is found in virtually every CGL policy issued since that time,” Mr. Justice Stephen Borins wrote in the Court of Appeal for Ontario’s unanimous decision upholding a lower court ruling that Zurich must defend 686234 Ontario.
“The historical context of the exclusion suggests that its purpose is to bar coverage for damages arising from environmental pollution, and not the circumstances of this case in which a faulty furnace resulted in a leak of carbon monoxide,” Justice Borins added. “Based on the coverage provided by a CGL policy, a reasonable policyholder would expect that the policy insured the very risk that occurred in this case. A reasonable policyholder would, therefore, have understood the clause to exclude coverage for damage caused by certain forms of industrial pollution, but not damages caused by the leakage of carbon monoxide from a faulty furnace.”
Related: Pollution Liability
Concurring with Justice Borins were Madam Justice Rosalie Silberman Abella and Mr. Justice Michael J. Moldaver, both of whom have since been appointed to the Supreme Court of Canada.
In Precision Plating, Justice Blok wrote that he adopted a “similar approach” to that of the Court of Appeal for Ontario in Zurich.
“Pollution that is caused by a fire fails the common sense notion of ‘pollution in its ordinary sense,” Justice Blok wrote.
To apply the pollution exclusion to a fire “is to deny the history of the exclusion, the purpose of CGL insurance, and the reasonable expectations of policyholders in acquiring the insurance,” Justice Blok added.
But the B.C. Court of Appeal, noted that AXA’s pollution exclusion “operates so as to exclude coverage for ‘all sums…to pay by reason of the liability…for compensatory damages…because of…property damage ….caused by, contributed to by or arising out of the . . . release . . . of Pollutants.'”
The policy “does not cover a claim where liability associated with the release of pollutants is alleged, whether as a sole or concurrent cause,” Justice Garson wrote. The other two judges hearing AXA’s appeal – Madam Justice Pamela Kirkpatrick and Mr. Justice David Harris – agreed.
Justice Garson added that the pollution exclusion clause, in the CGL policy that AXA wrote for Precision Plating, uses “the type of language recommended” by the Supreme Court of Canada in its 2001 ruling in Derksen v. 539938 Ontario Ltd.
539938 Ontario, as operating Roy’s Electric, was laying cable in December, 1994 for Bell Canada near Fort Frances, Ontario. Roy’s Electric firm owned a supply truck which was covered by $1-million auto policy.
Related: Fire, Pollution and Exclusion
During cleanup, Dec. 4. 1994, court records indicate an employee of Roy’s (who is also a shareholder and foreman), named as a co-defendant, “removed a sign assembly from the ditch,” placing the steel base plate of the assembly “unsecured on a cross-member of the tow bar for a compressor unit attached to the rear of the supply truck.”
While driving the truck along a highway, “the steel base plate flew off the tow bar and through the windshield of an oncoming school bus, killing one child and seriously injuring three others.”
539938 Ontario was sued by plaintiffs “for pecuniary loss caused by negligence of its employees.” 539938 Ontario argued that the accident “resulted from a single auto-related cause,” meaning it falls within an auto exclusion under the firm’s CGL policy.
Roy’s had a $1-million primary CGL policy and a $4-million excess policy.
The matter before the Supreme Court of Canada was an appeal of a decision on coverage. In 1998, the Ontario Court (General Division) ruled that the accident resulted from concurrent causes, so both the auto and CGL policies applied. That ruling was upheld both by the Court of Appeal for Ontario and the Supreme Court of Canada.
“Insurers have language available to them that would remove all ambiguity from the meaning of an exclusion clause in the event of concurrent causes,” wrote Mr. Justice Jack Major in 2001, for the Supreme Court of Canada, in its unanimous decision in Dersken. “This can be accomplished by the insurer clearly specifying that if a loss is produced by an excluded peril, all coverage is ousted despite the fact that the loss may also have been caused by another, covered peril.”
In Derksen, Canada’s highest court “suggested that a policy that excluded coverage for any liability ‘contributed to by’ an excluded cause would also bar coverage if the excluded cause was a concurrent cause,” Justice Garson wrote in Precision Plating.