Virtually every modern CGL policy contains some variation of the “absolute pollution exclusion”, which eliminates or severely restricts coverage for environmental damages. In recent years, the courts in British Columbia and elsewhere have consistently upheld such exclusions in relation to chemical spills, leaks from underground storage tanks, and other losses involving environmental remediation. In 2014, however, the BC Supreme Court departed from this trend, in a decision that could have an impact on any fire loss claim involving environmental damage.
In Precision Plating Ltd. v. Axa Pacific Insurance Company, 2014 BCSC 602, the insured business owners purchased a CGL policy from the defendant insurer, with the expectation that it would cover losses caused by fire.
In April 2011, a fire occurred at the insureds’ unit in a commercial building, triggering the building’s sprinkler system and causing chemical vats on site to overflow. Four actions were commenced by neighbouring unit owners for fire damage, including environmental damage caused by chemicals and fumes emanating from the insureds’ premises.
The original policy form contained a pollution exclusion that was subject to an exception for damage caused by “heat, smoke, or fumes” from an uncontrollable fire. However, by way of endorsement, the insurer had deleted the exception and inserted a new exclusion that purported to apply, without exception, to damages “caused by, contributed to by or arising out of” the escape of “Pollutants”, including thermal irritants or contaminants, smoke and fumes. The insurer denied coverage on the basis of the endorsement, and the insureds sued, alleging that the insurer had a duty to defend.
The insureds argued that the exclusion should be interpreted narrowly to apply to traditional environmental risks such as leakage from oil tanks, and not to spills caused by fire or other fortuitous circumstances. They also relied on statutory provisions allowing a court to refuse to enforce an unjust or unreasonable provision, on the basis that the pollution exclusion was so broad as to negate coverage for nearly all the damages usually caused by fire.
The insurer took the position that the true nature of the claim was for remediation of contamination caused by the escape of chemicals, and that there was no ambiguity that would justify the application of the "reasonable expectations" doctrine. Further, they argued that the clause was not unfair, as it did not deprive the insured of substantial other forms of coverage.
The court reviewed the general principles of policy interpretation, and relied heavily on the leading Ontario decision of Zurich Insurance Co. v. 686234 Ontario Limited, in which the Ontario court of Appeal had held that a pollution exclusion did not apply to damages caused by the escape of carbon monoxide fumes from a faulty furnace. The court’s rationale was that the exclusion was intended to apply to active industrial polluters, and to hold that the fumes from the furnace constituted pollution would fail "the common sense test for determining what is ‘pollution’ ”.
The insured in Precision Plating argued that, as in the Zurich case, a literal interpretation of the pollution exclusion would result in damage from smoke, heat or contaminated water being excluded, even though such damages form part of all fire claims and are typically covered by CGL policies. In response, the insurer stated that if the claim had been for fire damage alone, it would not have raised the pollution exclusion, and that the real issue was environmental damage. This suggestion turned out to be fatal to the insurer’s position, prompting the court to comment, the defence and indemnity of an insured in a case involving a fire may depend on the Insurer relenting from the application of the literal meaning of the pollution exclusion. This raises an ambiguity in coverage.
As a result, the court applied the well known principles requiring the ambiguity to be resolved in favour of the insured, in a way that meets the parties' reasonable expectations, and is not inconsistent with the main purpose of the policy. The court concluded that:
a. pollution caused by fire fails the common sense notion of “pollution” in its ordinary sense;
b. to apply a pollution exclusion to the escape of substances caused by a fire would deny the history of the exclusion, the purpose of CGL insurance, and the reasonable expectations of policyholders; and
c. the Insured was not an “active industrial polluter of the natural environment”, and to apply the exclusion would produce an unfair and unintended result in the context of a CGL policy.
In the result, the court ordered the insurer to defend the claims.
This case appears to represent a departure from recent decisions in which pollution exclusion clauses have been upheld. However, the key to the court's reasoning appears to lie in the insurer's inconsistent application of the exclusion to fire losses depending on the existence of “traditional” environmental contamination, rather than in the words of the exclusion itself.
Had the insurer not deleted the exception to the exclusion for heat and smoke caused by fire, the insurer’s duty to defend the claim would have been beyond dispute. However, in that circumstance, the insurer might have been in a position to reserve rights and later deny coverage for clearly excluded environmental damages, in accordance with other recent cases upholding the absolute nature of modern pollution exclusions. Unfortunately for the insurer, the finding of ambiguity in respect of fire claims and the court's pronouncement concerning the "common sense" definition of "pollution" make it likely that after these claims run their course, the insurer will be forced to indemnify the insured not only for the traditional heads of damage in the fire claims, but for the environmental contamination as well.
As a result, this case has significant implications for insurers involved in, for example, warehouse fire claims involving the rupture of chemical containers, and it underscores the importance of considering how the interpretation of policy wordings may be impacted by claims handling policies.
A link to the decision can be found at http://courts.gov.bc.ca/jdb-txt/SC/14/06/2014BCSC0602cor1.htm.