Duty To Defend And Concurrent Causes Of Damages

In Precision Plating Ltd. v. Axa Pacific Insurance Company, 2015 BCCA 277, the British Columbia Court of Appeal interpreted a pollution exclusion clause in a Commercial General Liability (“CGL”) insurance policy. The Court of Appeal held that the insurer had no duty to defend the insured for claims alleging property loss arising from the escape of toxic chemicals.

The insured leased a space within a multi-tenanted commercial strata building and stored vats filled with toxic chemicals in the course of its electroplating business. In 2011, a fire broke out on the insured’s premises, causing the sprinkler system to activate. The water caused the toxic chemicals to overflow and seep into neighbouring units. Four separate Supreme Court actions were commenced by tenants within the strata complex (the “Third Party” actions).

The insured applied for a declaration that the insurer had a duty to defend these claims. At issue was the interpretation of the pollution exclusion clause in the CGL policy:

4. This insurance does not apply to:

(b)(i) Bodily Injury, Personal Injury or Property Damage caused by, contributed to by or arising out of the actual, alleged or threatened discharge, emission, dispersal, seepage, leakage, migration, release or escape at any time of Pollutants.

Applying the principles in Zurich Insurance Co. v. 686234 Ontario Ltd., (2002) 62 OR (3d) 447 (ON CA), the trial judge determined that a literal interpretation of the pollution exclusion clause lead to a result that was inconsistent with the insured’s reasonable expectations of coverage and the main purpose of the insurance coverage: to indemnify against liability for property loss caused by fire damage. The insurer therefore had a duty to defend the insured against the Third Party actions.

This decision was appealed and reversed by the British Columbia Court of Appeal. Writing for the unanimous court, The Honourable Madam Justice Garson reviewed the principles respecting pollution exclusion clauses in CGL policies:

(a) An insurer has a duty to defend its insured where the facts alleged in pleadings, if proven to be true, would require the insurer to indemnify the insured for the claim. The duty to defend arises when there is a “mere possibility” of coverage under the insurance policy. This principle was stated by the Supreme Court of Canada in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, where the issue was whether there was a duty to defend an insured general contractor for property damage caused by water leaking into a building.

(b) A pollution exclusion clause is to be interpreted by examining the context of the clause when the literal interpretation of the clause leads to a result that is inconsistent with the insured’s reasonable expectations or the main purpose of the insurance coverage. Factors to be considered include the history of the exclusion clause, the environmental context, the purpose of the CGL policy, and the objectively reasonable expectations of the parties. This approach was adopted by the Ontario Court of Appeal in Zurich to determine whether a pollution exclusion clause barred coverage for damage caused by the escape of carbon monoxide.

(c) There is no duty to defend where two distinct perils are alleged in pleadings to have caused the loss but the policy excludes coverage for any liability “contributed to by” an excluded cause. This “concurrent causes” principle was stated by the Supreme Court of Canada in Derksen v. 539938 Ontario Ltd., 2001 SCC 72, where the issue was whether an exclusion clause that only excluded one of the two concurrent sources of liability barred coverage for damage alleged to have been caused by the negligent clean-up of a work site and the negligent use and operation of a motor vehicle.

The Court of Appeal held that there was no duty to defend because the pollution exclusion clause utilized the recommended language in Derksen and excluded property damage “caused by, contributed to by or arising out of the…release or escape at any time of Pollutants”. The Third Party pleadings alleged that one of the sources of liability was the escape of toxic chemicals. Coverage for property damage contributed to by the escape of toxic chemicals is clearly excluded by the pollution exclusion clause.

The Court of Appeal further held that the trial judge erred in applying the contextual approach used in Zurich because his analysis was based on whether the pollution exclusion clause barred coverage for the original or proximate cause of the property damage: a fire. A literal interpretation of the CGL policy excludes coverage for liability arising out the escape of toxic chemicals. This interpretation was not inconsistent with the insured’s reasonable expectations because the insured could have no reasonable expectation that it would be indemnified against liability for the escape of toxic chemicals.

This decision clarifies the approach to be used when considering whether there is a duty to defend when pleadings allege concurrent causes of damage. The question to be asked is whether the pollution exclusion clause bars coverage for the alleged source of liability in the pleadings, not the true cause of the damage. If there is a “mere possibility” that the insurer will be obligated to indemnify the insured for the sources of liability alleged in the pleadings, there is a duty to defend.

*Case update: On January 14, 2016, the Supreme Court of Canada dismissed, with costs, the application for leave to appeal the decision of the BC Court of Appeal.