On April 26, 2011, the Ontario Court of Appeal rendered its decision in ING Insurance Company of Canada vs. Miracle, overturning the lower court and adopting a contextual approach to its interpretation of the application of the absolute pollution exclusion.
In Miracle, ING appealed the application judge’s decision finding that its Commercial General Liability (CGL) policy was liable to respond to a claim for damages from the migration of gasoline from a retail fuel service station, as reported in our Spring, 2011 newsletter. The neighbouring property owner had brought a claim for $1.85 million against the insured, the party that installed the fuel facilities and the fuel supplier. In the Statement of Claim, the plaintiffs alleged that the escape of petroleum hydrocarbons in and onto its land required it to incur expenses in investigating, testing, monitoring and rectifying the contamination. The claims were brought in strict liability, nuisance and negligence.
The application judge interpreted the Court of Appeal’s earlier decision in Zurich v. 686234 Ontario Limited (2002) as standing for the principle that the absolute pollution exclusion did not apply to cases where negligence was pleaded and the insured was not in the business of active industrial pollution. The application judge further held that a reasonable insured would expect the exclusion to apply to industrial pollution and not to a gas leak from a retail service station.
The Zurich decision pertained to a leak of carbon monoxide from a malfunctioning furnace in a residential apartment building. Although the Court of Appeal in that case had cautioned against an overly literal approach to coverage, its comments that the absolute pollution exclusion applied only to active industrial polluters had been applied literally by counsel and courts.
The Court of Appeal in Miracle clarified that the Zurich decision had to be read in its context. In Miracle, the insured was engaged in an activity that carried an obvious and well-known risk of pollution and environmental damage. Regardless of the allegations of negligence, the damages claimed were based on harm to the natural environment due to contamination of soil. The court explained that the claim fit entirely within the historical purpose of the pollution exclusion which was to preclude coverage for the cost of government mandated environmental clean up.
Significantly, the court did not accept that “active industrial polluter of the natural environment” should be read to apply only to activities that necessarily result in pollution as those insureds would already be excluded from coverage because of the fortuity principle. The court reasoned that such an interpretation, if correct, would render the absolute pollution exclusion without meaning.
The court further rejected the distinction between active versus passive polluters of the environment. It was noted that a majority of courts in the U.S. have held that claims against gas stations for damages caused by leaking gasoline are unambiguously excluded by the standard “absolute pollution exclusion.”
Finally, the court rejected the argument that applying the exclusion would effectively nullify coverage since there were a variety of risks that would still be covered by the CGL policy.
While the court’s decision requires a fact based approach to the activity in question, it provides direction for a more sensible approach to application of the absolute pollution exclusion.