In 2014, the British Columbia Supreme Court, in Precision Plating Ltd. v. Axa Pacific Insurance Company, 2014 BCSC 602, held that a purportedly “absolute” pollution exclusion was ambiguous in the context of a fire loss. This decision resulted in significant uncertainty as to the effectiveness of pollution exclusions in CGL policies.
The facts in Precision Plating were straightforward. A fire had occurred at the insureds’ unit in a commercial building, triggering the building’s sprinkler system and causing chemical vats on site to overflow. A series of lawsuits ensued, in which the owners of neighbouring units claimed damages as a result of the fire. Each of the actions included claims for environmental damage caused by chemicals and fumes emanating from the insureds’ premises.
The insurance policy in question contained a form of absolute pollution exclusion, which purported to apply 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 relied on the exclusion to deny coverage. The insureds sued, alleging that the insurer had a duty to defend.
At trial, the court concluded that the insureds were not an “active industrial polluter of the natural environment”, and that contamination caused by fire “fails the common sense notion of “pollution” in its ordinary sense”, and ordered the insurer to defend the actions.
The insurer appealed, and the BC Court of Appeal reversed the lower court’s decision [Precision Plating Ltd. v. Axa Pacific Insurance Company, 2015 BCCA 277].
The Court of Appeal first considered the standard grant of coverage under the CGL policy, and emphasized that the insurer’s obligation was to indemnify the insureds for sums payable by reason of their legal liability, rather than for certain types of damage, as would be the case with a property policy. The pollution exclusion therefore applied to exclude liability arising out of the release of pollutants, rather than damages caused by the escape of pollutants (conversely, the trial judge had framed the analysis as a question of causation of damage, rather than of the source of the insured’s liability).
Several causes of action were alleged in the pleadings of the various proceedings, including strict liability and negligence respecting the storage and release of chemicals, as well as negligence in causing the fire. The insurer had conceded that the claim would have been covered if it had been solely for liability arising out of the fire, not liability for environmental contamination. This raised the issue of concurrent causation. In that regard, the Court of Appeal considered the Supreme Court of Canada’s 2001 decision in Derksen v. 539938 Ontario Ltd., in which it had been held that losses concurrently caused by covered and uncovered perils would be covered unless the insurer used language specifically excluding such losses.
The Supreme Court had recommended a form of language that would achieve this result, and that language had been used in the pollution exclusion at issue in Precision Plating. As a result, the Court of Appeal in Precision Plating concluded that losses concurrently caused by pollution and non-pollution related liability would be excluded.
The Court of Appeal then went on to consider the issue of ambiguity and the reasonable expectations of the parties, which had been discussed by the trial judge, holding that the insureds would have had a reasonable expectation of coverage for damage caused by fire, but not for liability caused by the escape of chemicals from its premises.
The pleadings in each of the actions alleged some form of liability attributable to the release of pollutants. In fact, only one of the actions alleged fire damage as a concurrent cause of liability. In the result, the Court of Appeal held that “if the pleadings allege liability for the escape of pollutants, there is no duty to defend because there is no possibility that the insurer will be obligated to indemnify.”
A fundamental concern of the insureds in Precision Plating was that the pollution exclusion, as worded, would exclude all fire claims because smoke damage is a consequence of nearly every fire. The Court of Appeal addressed that concern by focusing on the alleged cause of liability, rather than on the cause of the damage. While the escape of pollutants into the environment is an independent source of liability under various statutory and common law causes of action, liability for smoke damage generally depends on the fault of the insured in causing the fire. Thus, smoke damage, while included in the pollution exclusion, would not be excluded as a source of liability unless it was accompanied by some additional pollution-related cause of action, independent of the fire.
The appellate decision in Precision Plating reconciles the interests of the insured with the purpose of the pollution exclusion, and restores the law concerning absolute pollution exclusions to a more predictable state. Many situations arising out of industrial fires involve some sort of environmental pollution claim, which can increase the damages exponentially, and pollution liability policies exist to cover that risk. In the context of a CGL policy, however, the decision demonstrates how a well-worded pollution exclusion can achieve its intended effect.
A link to the decision can be found at http://courts.gov.bc.ca/jdb-txt/CA/15/02/2015BCCA0277.htm.