pollution exclusion

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The Pollution Exclusion – Focus On Causation

By Samantha Ip with assistance by Daniel Paperny

Introduction

The pollution exclusion clause is found in most commercial general liability (“CGL”) policies. Typically, the pollution exclusion can eliminate an insurer’s duty to defend and indemnify its insured in cases where the insured’s liability to a third party arises due to the release or escape of ‘pollutants’.

In the past, many coverage decisions on this exclusion focused on whether the loss was “sudden and accidental”. Today, the focus of most coverage decisions on this exclusion is on whether a substance released falls within the definition of “pollutant”.

In its recent ruling in Precision Plating Ltd v Axa Pacific Insurance Co. (“Precision Plating”), the BC Court of Appeal considered when a pollution in a CGL policy would operate to release an insurer from its duty to defend its insured in a third party lawsuit. Interestingly, the focus of the decision was not on the definition of a “pollutant”, but rather on the concept of causation in the context of exclusion clauses.

Background Facts

The insured company (“Precision”) operated an electroplating business in a multi‐tenanted commercial building in Surrey, BC. In April 2011, a fire broke out at Precision’s premises (the “Fire”), triggering a sprinkler system. The water from the sprinkler caused vats of chemicals to overflow. The overflowing chemicals escaped Precision’s premises and damaged the premises of the neighboring businesses within the building.

The owners of four neighboring businesses (the “Claimants”) sued Precision, alleging property damage caused by the chemicals that had leaked during the Fire (the “Lawsuits”).

Precision applied to the courts seeking a judicial declaration that its insurer (“AXA”) was obligated to defend Precision in the Lawsuits under a CGL insurance policy issued by AXA to Precision (the “Policy”). AXA argued that it was not under a duty to defend Precision, due to the applicability of a pollution exclusion clause within the Policy, which excluded coverage for liability caused by ‘pollutants’.

At trial, the BC Supreme Court ruled that the damage to the Claimant’s property was caused by the Fire (not pollutants) and AXA was thus obligated to defend Precision in the Lawsuits as the pollution exclusion did not operate to exclude coverage. AXA appealed.

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The Pollution Exclusion Clause

The relevant provisions of the Policy issued by AXA read as follows:

Coverage: To pay on behalf of the Insured all sums … that the Insured shall become obligated to pay by reason of liability imposed by law upon the Insured … for compensatory damages because of:

(a) bodily injury sustained by any person or persons;

(b) personal injury;

(c) property damage due to an accident or occurrence.

… subject to the limits of liability, exclusions … in the Policy.

Exclusions: Coverage provided by this Policy does not apply to …:

(b)(i) Bodily Injury, Personal Injury or Property Damage caused by … or arising out of the … discharge, emission, dispersal, seepage, leakage, migration, release or escape … of Pollutants:

(1) at or from any premises, site or location owned, rented or occupied at any time by an Insured

The pollution exclusion wording in this decision is fairly typical of what has been termed the “absolute pollution exclusion” which insurers developed in the 1980s in an attempt to further restrict coverage for ever growing environmental claims.

Focus of Analysis – Causation Of Alleged Liability

The claim in question clearly fell within the grant of coverage. The issue at hand was whether the exclusion pollution applied to relieve AXA of its duty to defend.

AXA refused to defend Precision in the Lawsuits, claiming that Precision’s alleged liability to the Claimants arose because of the discharge or escape of ‘pollutants’, and that the pollution exclusion applied in these circumstances and coverage was thus excluded under the Policy.

Precision argued that it had purchased the Policy from AXA to cover itself specifically for damages caused by fire, and that any liability which Precision may owe to the Claimants actually arose because of the Fire (covered by the Policy), which subsequently caused the chemicals to escape. Precision’s focus was on the immediate cause of the damage, ie., the Fire.

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The main issue for the Court of Appeal was whether AXA was under a duty to defend Precision in these circumstances, or alternatively, whether the pollution exclusion operated to relieve AXA from this duty. In coming to its ruling, the Court of Appeal had to determine whether Precision’s liability to the Claimants was by caused ‘pollutants’ or not.

The Court’s Ruling

In Precision Plating the Court of adopted a broad approach to its interpretation of the pollution exclusion. It ruled that in interpreting the pollution exclusion, what matters is the true cause of the insured’s liability, as opposed to the cause of the damage or potential damage from the event. The Court of Appeal also found that, where the insured’s alleged liability was caused by an excluded (or uncovered) loss, the insurer is not under a duty to defend, even if the liability was concurrently caused by an event that would be covered by the subject policy.

Our Court of Appeal ruled in favor of AXA, finding that the pollution exclusion operated to exclude coverage in the circumstances because Precision’s liability, as alleged by the claimants, arose due to the escape of pollutants.

The Court ruled that the Policy (and CGL policies in general for that matter) provided coverage for the insured’s liability or potential liability to another party, and not necessarily coverage for damage or potential damage. Reading the coverage and exclusion provisions in the Policy, it was clear to the Court that the Policy was meant to cover Precision’s liability, not damages. The Court of Appeal stated that “it is not the true cause of the damage that is relevant, but the true cause of [Precision’s] liability” that is relevant in determining whether the Policy provides coverage or an exclusion clause applies. This was a crucial distinction in Precision Plating because the Court ruled that, while the damage in this case may have been caused by the Fire, Precision’s liability to the claimants arose specifically because of the escape of ‘pollutants’ from Precision’s property.

In addition, our Court of Appeal held that when applying an exclusion clause contained within an insurance policy, coverage was to be excluded under the policy where the damage or liability arose from an excluded event, regardless of whether the excluded event was the sole or concurrent cause. This meant that, even if the release of pollutants was a concurrent cause (along with the Fire) of Precision’s liability, coverage would be excluded by operation of the Pollution Exclusion. The Court held that so long as the liability was “caused by, resulting from, contributed by, or aggravated by” an excluded event, then coverage was excluded under the policy.

Our Court of Appeal concluded that the pleadings of the claimants specifically alleged liability for the release of pollutants, and that this type of liability was explicitly excluded by Pollution Exclusion. Thus, AXA was not under a duty to defend or indemnify Precision for its losses.

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Not The First Decision To Consider Causation In This Context

Precision Plating reminds of the importance of pleadings in coverage analysis. This decision stands primarily for the principal that in interpreting the pollution exclusion, one must look at the cause of the insured’s alleged liability, rather than the cause of the damage at issue, to determine whether the exclusion applies. This is so even when the causes being considered are sequential.

There are not too many pollution exclusion cases in Canada which focus on the issue of causation. One such decision is the 2001 decision of the Ontario Court of Appeal in Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd. (2001), 57 O.R. (3d) 425 (C.A.) (“Trafalgar Insurance”), which considered whether there was an intervening act which broke the chain of causation. In that decision, a contractor was hired by a responding insurer to clean up property damage which included an oil spill. The plaintiffs sued this contractor for the remediation, alleging that the contractor failed to carry out the remedial work properly resulting in exacerbation of personal injuries perpetuated by the original contamination event. The contractor’s CGL insurer denied coverage to the contractor on the basis of the pollution exclusion. The Ontario Court of Appeal held:

Hope [the contracator] was neither an active nor a passive polluter in respect of the original spill, for which it had no responsibility. Hope’s alleged failure to remediate the situation in a timely manner constitutes an independent act, which occurred after the original discharge and therefore constituted an independent cause of the plaintiffs’ loss. There is no claim made against Hope for damage caused by the original escape, nor could there be. The claim against Hope does not arise out of the original escape of the oil but out of its later action in failing to clean up the oil and prevent future damage beyond the time when the situation should have been remediated. Therefore the damage allegedly caused by Hope’s negligence does not arise out of the escape, discharge, dispersal or release of a pollutant as prescribed in the clause (at para. 72).

The Ontario Court of Appeal found that the pollution exclusion did not apply in that case to exclude coverage because the pollution exclusion did not apply to contamination which pre‐existed the insured’s work on site. The contractor’s work was an “independent act” which was not a part of the causative chain of events that led to that plaintiff’s loss.

Applying the logic of our Court of Appeal in Precision Plating to Trafalgar Insurance, one could say that the exclusion clause did not operate because the insured’s liability related to negligent workmanship in the remedial work as opposed to escape of “pollutants”.

The Court of Appeal’s ruling in Precision Plating is of importance to both insurers and insureds when entering into and enforcing Commercial General Liability policies which have exclusion clauses. By concluding that CGLs provide coverage for an insured’s liability (rather than for damages) the Court in Precision Plating placed an emphasis on the “true cause” of the alleged liability of the insured in determining whether coverage is provided or excluded under a policy.

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It is the cause of the insured’s liability to third parties which determines whether coverage is provided under a CGL, not the cause of the damage.

While many courts have adopted a more restrictive approach to the interpretation of exclusion clauses, the Court of Appeal in Precision Plating adopted a broad approach to interpreting and applying exclusion clauses incorporated in insurance policies. This Court ruled that, if the damage or liability is caused by both a covered event and an excluded event concurrently, coverage is still excluded under the policy. This aspect of the ruling is especially advantageous for insurers seeking to rely on the application of exclusion clauses in order to avoid their duty to indemnify or defend its insured. Where an event contemplated in an exclusion clause, such as the release of pollutants, is even a concurrent, aggravating or contributing cause (among other causes which may be covered) of the liability or damage, the exclusion clause will operate to exclude coverage under the policy.

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