The Court of Appeal for Ontario’s recent ruling in ING v. Miracle1 clarifies the interpretation to be given to pollution liability exclusion clauses contained in commercial general liability insurance policies (commonly referred to as CGL policies) by clearly asserting that the principle of interpretation developed by a body of American case law whereby exclusion is limited to “active polluters” does not apply in Canada.
The insured, Andrew Miracle, operated a self-service gas bar under the name Mohawk Imperial Sales and Mohawk Liquidate (Miracle). The federal government brought an action against Miracle after gasoline escaped from an underground storage tank on Miracle’s property. The action, based on federal and provincial environmental legislation, alleged strict liability, nuisance and negligence against Miracle. The claim was for $1.8 million in damages to cover the loss in value of the federal government’s property, the cost of conducting an environmental assessment, and the cost of remediating the property.
Miracle’s insurer, ING, sought a declaration that it had no duty to defend or indemnify the insured on the ground that the plaintiff’s claim was excluded from the coverage in the CGL policy. The pollution exclusion clause excluded losses “arising out of the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants” from Miracle’s property.
The decision of the application judge
The application judge dismissed ING’s application on the ground that Miracle was not an “active polluter,” i.e., an entity that, through its business activities, mainly contaminates the natural environment for prolonged periods (as opposed to a “passive polluter,” defined as a polluter that, unintentionally in the course of its business activities, allows pollutants to be released into the environment). According to the court, the pollution exclusion clause could not be applied to the negligence claim against Miracle, since a reasonable insured would expect the exclusion clause to apply to industrial pollution and not to a gas leak. The decision was overturned by the Court of Appeal for Ontario, which held that the pollution exclusion clause should apply in this instance.
The decision of the Court of Appeal
First, the Court of Appeal recapped the general principles of insurance policy interpretation set out by the Supreme Court in Reid Crowther & Partners Ltd,2 namely (1) the contra proferentem rule, which states that in interpreting documents, ambiguity must be construed unfavourably to the drafter; (2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and (3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
ING claimed that a common-sense understanding of the word “pollution” and the parties’ reasonable expectations demonstrated that the pollution exclusion clause applied to exclude all losses resulting from pollution of the natural environment by the gasoline leaked from Miracle’s premises. In contrast, the federal government argued that applying the literal meaning of the pollution exclusion clause in the context of Miracle’s gas bar business would substantially nullify Miracle’s coverage. To support its argument, the federal government relied on the decision of the Court of Appeal for Ontario in Zurich Insurance Co. v. 686234 Ontario Ltd.3 (discussed below), which, in its opinion, should be construed as restricting the reach of pollution exclusion clauses to “active polluters” and preventing its application in any case where personal injury or property damage was alleged to have been caused by the insured’s negligence.
The Court of Appeal rejected the federal government’s argument. In the case at issue, the insured was engaged in an activity that carried an obvious and well-known risk of pollution: running a gas station. Such a claim fit entirely within the historical purpose of the pollution exclusion, which was to preclude coverage for the cost of government-mandated environmental cleanups under legislation making polluters responsible for damage to the natural environment. According to the Court of Appeal, accepting the argument that the pollution liability exclusion clause only applied to “active polluters” would effectively denude the clause of any meaning. The Court of Appeal therefore found that the federal government’s claim fell squarely and unambiguously within the language of the exclusion clause, and that the clause, in the circumstances, was neither ambiguous nor contrary to the parties’ reasonable expectations. The Court of Appeal also rejected the submission that giving effect to the exclusion would effectively nullify the coverage sought by Miracle in purchasing the policy, since the policy covered a myriad of other risks.
The court therefore ruled that ING was not required to defend or indemnify the insured against the federal government’s claim.
Since the early 1970s, when the exclusion clause was initially included in American and Canadian CGL policies, the language of the clause has evolved on occasion in reaction to, among other things, environmental legislative amendments, including the passage in the United States of the federal Comprehensive Environmental Response, Compensation and Liability Act, which, like other legislation in certain American states, imposes joint and several liability without regard to fault for pollution. This legislative change led to the inclusion of a specific provision to exclude cleanup costs, the insurers’ purpose being to propose the most comprehensive pollution exclusion clause possible.
American and Canadian case law has ruled several times on the interpretation to give to the various versions of the pollution exclusion clause, especially south of the border, with sometimes conflicting results.
Among the principles of interpretation developed by American case law to restrict the application of the pollution exclusion clause is a tendency to apply the exclusion only when the polluter is considered an “active polluter” as opposed to a “passive polluter.” This distinction has, however, received a lukewarm response from US courts.
In Canada, the courts have also had occasion to rule on the distinction between an “active polluter” and a “passive polluter” and its application in Canadian law. However, a certain ambiguity existed prior to the Court of Appeal’s decision in ING v. Miracle. Whereas, in 1994, the Court of Appeal for Ontario appeared to have rejected the distinction in Ontario v. Kansa General Insurance Co.,4 its subsequent decision in Zurich Insurance Co. v. 686234 Ontario Ltd.5 muddied the waters by implying that the exclusion clause only applied to active polluters.
After a few years of uncertainty, the Court of Appeal took care to establish that application of the decision in Zurich Insurance Co. v. 686234 Ontario Ltd. should be confined to the particular circumstances of that case.