The Supreme Court of Canada’s decision in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33, which was rendered on September 23, 2010, has important consequences for the interpretation of the scope of commercial general liability (“CGL”) insurance policies and the duty to defend claims for environmental liabilities.
In pollution related cases, insurers may attempt to rely on pollution liability exclusion clauses to deny that they owe insureds a duty to defend.
The SCC’s discussion in Progressive Homes of the circumstances giving rise to the duty to defend and of the principles of interpretation that apply to construing insurance contracts will inform the assessment of if and when insurers owe insureds a duty to defend claims involving liability for damage caused by pollution.
Progressive Homes, the insured, was engaged as a general contractor to construct several housing complexes. Four related claims were brought against Progressive for breach of contract and negligence. The pleadings alleged that the condos were inadequately constructed. The faulty construction was alleged to have resulted in significant water damage that caused rot, infestation, and deterioration of four buildings. Progressive was covered under several CGL insurance policies by the insurer, Lombard. The policies required Lombard to defend and indemnify Progressive when it was under a legal obligation to pay damages because of property damage caused by an occurrence or accident. Lombard claimed that it did not have a duty to defend Progressive because the claims were not covered under the insurance policies.
The SCC held that Lombard owed a duty to defend the claims against Progressive.
The Duty to Defend
The SCC revisited the long-established principles that regulate the duty to defend. The Court held that an insurer owes an insured a duty to defend a claim where the facts alleged in the pleadings, if proven to be true, fall within the scope of coverage provided by the policy (i.e. when the policy would require the insurer to indemnify the insured for the claim). The mere possibility that a claim falls within the insurance policy is sufficient to trigger the duty. In assessing whether a claim falls within the policy, the true nature or substance of the claim rather than the labels selected by the plaintiff will be determinative. The pleadings and the insurance policy must therefore be examined to determine if the duty to defend applies.
The onus is on the insured to establish that the pleadings fall within the initial grant of coverage. Once the insured has done so, the onus shifts to the insurer to show that coverage is precluded by an exclusion clause.
Interpreting the Scope of Liability Insurance
The SCC set out the principles that apply to interpreting insurance contracts. The primary interpretive principle is that courts should read the contract as a whole and give effect to clear language. When ambiguities arise, courts should prefer interpretations that are consistent with the reasonable expectations of the parties. When the rules of construction fail to resolve ambiguities, courts should apply the contra proferentem rule, which provides that the policy should be construed against the insurer. One important corollary of the contra proferentem rule is that insurance coverage provisions should be interpreted broadly and exclusion clauses narrowly.
The SCC also interpreted the meaning of “Accident” as defined in the policy. The first policy defined “Accident” to include:
continuous or repeated exposure to conditions which result in property damage neither expected nor intended from the standpoint of the Insured.
The Court held that the term “Accident” should be given the plain meaning defined in the policy, which should apply “when an event causes property damage neither expected nor intended by the insured.” This includes an accident that results from “continuous or repeated exposure to conditions”.
Application of the SCC’s analysis in Progressive Homes in the context of environmental liability
The Court’s discussion of the principles that apply to interpreting insurance contracts suggests that future courts will turn to the expectations of the parties to resolve ambiguities in the scope of pollution liability exclusion clauses. This is consistent with the judicial trend since 1986 (following the introduction of absolute pollution exclusion clauses to CGL insurance policies) to narrow the range of claims that are excluded from coverage based on the “connotative contextual approach”. That approach assesses the parties’ expectations to determine the extent of coverage. In the face of continued ambiguity, courts will construe the policy against the insurer by interpreting the initial grant of coverage broadly and by narrowly construing pollution liability exclusion clauses.
The scope of even broadly worded absolute pollution exclusion clauses may, therefore, be substantially narrowed by judicial interpretation.
The Court’s interpretation of the meaning of the term “Accident” also has important ramifications for policies which contain environmental exclusion clauses covering “sudden and accidental” discharges. Such clauses were commonly used from 1976-1985 to clarify that CGL policies only provided coverage if the discharge, dispersal, release or escape was “sudden and accidental”. In the absence of a clear definition to the contrary, the terms “sudden and accidental” may be construed broadly to include damage that results from continuous or repeated exposure to conditions that resulted from conduct that was not intended or expected to cause the alleged damage. This interpretation is consistent with the “pro-coverage line of cases” where coverage has been extended to instances of gradual pollution and contamination, and where the phrase “sudden and accidental” is often equated with “unintended and unexpected”.
Claims alleging that the insured’s unintentional (i.e. negligent) conduct polluted the environment and caused the plaintiff damage may therefore be sufficient to trigger a duty to defend when CGL policies contain “sudden and accidental” exclusion clauses.