In ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liquidate), 2011 ONCA 321, the Ontario Court of Appeal held that a “Pollution Liability” exclusion clause in a Commercial General Liability (CGL) insurance policy will apply where the insured participated in an activity that posed a known risk of pollution and environmental damage. This decision clarifies – and perhaps extends – its prior reasons in Zurich Insurance Company v. 686234 Ontario Ltd. (2002), 62 O.R. (3d) 447 (C.A.).
The insured party, Andrew Miracle o/a Mohawk Imperial Sales and Mohawk Liquidate (Miracle) was insured under a CGL insurance policy with ING Insurance Company of Canada (ING). Under a “Pollution Liability” exclusion clause, the CGL insurance policy excluded coverage for losses “arising out of the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants” from the lands or premises of Miracle. When gasoline escaped from an underground storage tank on Miracle’s property and caused damage to adjacent land owned by Canada, Miracle sought indemnification from ING under the CGL insurance policy. ING applied for a declaration that it had no duty to defend or indemnify Miracle based on the Pollution Exclusion clause, and Miracle failed to respond to the application. Relying on section 132 of the Insurance Act, R.S.O. 1990, c. I.8 (which allows a claimant with an unsatisfied judgment against an insured defendant to recover the amount of the judgment against the defendant’s insurer, if coverage exists), Canada and a co-defendant of the insured responded to ING’s application.
In Zurich, the owner of an apartment building was sued by its tenants for damages caused by carbon monoxide poisoning caused by a defective furnace. The owner was insured and claimed indemnification from the insurer. The Court held that a “Pollution Liability” exclusion clause virtually identical to the one in issue in this case did not apply to protect the insurer from having to indemnify the owner. In holding that the parties in Zurich would not reasonably have expected to exclude “carbon monoxide poisoning” from coverage under an exclusion clause dealing with “environmental pollution,” the Court relied on the Court’s determination that the insured party’s regular business activities did not “place it in the category of an active industrial polluter of the natural environment.” The Court suggested that “active industrial polluters” would be in the nature of a manufacturer that discharges “effluent, overheated water, spent fuel and the like into the environment” in the normal course of its business.
The application judge in this case, relying on Zurich, dismissed ING’s application and relied on the judge’s determination that Miracle was not an “active industrial polluter.”
The Court of Appeal allowed ING’s appeal. Sharpe J.A. (Gillese and Karakatsanis JJ.A. concurring) relied on a “commercially sensible interpretation” of the CGL insurance policy, based on the reasonable expectations of the parties, and indicated that:
Unlike Zurich, in this case, the insured was engaged in an activity that carries an obvious and well-known risk of pollution and environmental damage: running a gas station. Indeed, the statement of claim is framed as a claim for damage to the natural environment caused by a form of pollution. (para. 22)
Sharpe J.A. held that the Court of Appeal’s statement that the insured party in Zurich was not an “active industrial polluter” must be read in the context of that case, and that the phrase should not be read as restrictively as the application judge appeared to read it:
Liability insurance is purchased to cover risks, not outcomes that are certain or inevitable. There is a general principle of insurance law that only fortuitous or contingent losses are covered by liability policies [citation omitted]. Accepting the argument that the pollution liability exclusion only applies to “active” industrial polluters – those who are already excluded from ordinary liability insurance coverage by virtue of the fortuity principle – would effectively denude the clause of any meaning. In my view, the exclusion clearly extends to activities, such as storing gasoline in the ground for resale at a gas bar, that carry a known risk of pollution and environmental harm. (para. 23, emphasis added)
Sharpe J.A. went on to hold that applying the Pollution Liability exclusion clause to the present circumstances did not nullify the coverage sought by Miracle in the first place:
I see no merit in the submission that giving effect to the exclusion would effectively nullify the policy in this case. [. . .] [T]he operator of a convenience store and gas bar faces the risk of a wide range of liability claims for bodily injury and damage to property that the CGL will cover. By denying coverage for pollution liability, the court does not deprive the policy of a very significant measure of protection for the myriad other risks that the policy does cover. [. . .] [T]he pollution exclusion in this case is animated by a unique purpose: to preclude coverage for expensive government-mandated environmental cleanup required by legislation that makes polluters strictly liable. (para. 33)
The Court of Appeal’s holding in this case clarifies its prior holding in Zurich to the effect that a pollution liability exclusion clause does not only exclude coverage for the activities of “active industrial polluters.” It also excludes coverage for activities that carry “a known risk of pollution and environmental harm” engaged in by businesses that are not active industrial polluters, but the application of the exclusion continues to be highly fact-dependent. It also seems clear that if the underlying event giving rise to the claim against the insured is founded on a discharge into the natural environment (Zurich was not – it concerned a discharge into the air in an apartment building, which under the Environmental Protection Act, R.S.O. 1990, c. E.19, is excluded from the definitions of “air” and “natural environment” since it was enclosed in a building), the courts will be more inclined to find that the exclusion applies.