Can an Exclusion Clause Always Remove an Insurer’s Duty to Defend?
In a recent decision of the Ontario Court of Appeal, Thunder Bay (City) v. Great American Insurance Company, 2024 ONCA 837, the Court of Appeal considered the circumstances in which an exclusion clause may not remove an insurer’s duty to defend.
Background
Various legal proceedings were pursued against the City of Thunder Bay (the “City”) regarding allegations that the City caused the spread of sodium hydroxide into the City’s water supply, causing property damage. From 2017 – 2020 the City was insured under a general liability insurance policy, issued by the Lloyd’s Underwriters. Following the expiry of that policy in 2020, the City obtained coverage under a new general liability insurance policy issued by Great American Insurance Company (GAIC). Various claims were issued against the City, alleging that the City’s introduction of sodium hydroxide into the water supply has caused widespread property damage and other losses.
GAIC denied the City coverage for these actions based on an exclusion clause in the Policy which stated that coverage does not extend to damages arising from lead. GAIC relied on the exclusion clause and argued that the sodium hydroxide was introduced into the City’s water supply for the purpose of mitigating the effects of lead contamination, thereby triggering the exclusion clause.
The exclusion in its entirety, reads:
This insurance does not apply to:
LEAD
a. All liability or expense arising out of, resulting from, or in any way caused by or related to any actual, alleged or threatened ingestion, inhalation, absorption, or exposure to lead, in any form from any sources; or
b. All liability or expense or other type of obligation arising out of or resulting from, or in any way related to, any:
i. Claim, suit, request, demand, directive, or order by or on behalf of any person, entity, or governmental authority that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify, neutralize, or in any way respond to or assess the effects of lead in any form from any source; or
ii. Claim or suit by or on behalf of any person, entity, or governmental authority for damages or any other relief or remedy because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to or assessing the effects of lead in any form.
Two separate applications were pursued for similar relief. The City sought a declaration stating that GAIC had a duty to defend the City in these court actions. Lloyd’s Underwriters sought a declaration that GAIC contribute to the costs of defending the litigation against the City on a “time on risk” basis. In both applications GAIC denied its duty to defend and relied on the lead exclusion clause within the Policy.
The Application Judge’s Decision
The application judge found that GAIC did have a duty to defend the City in these various actions.
In her decision, the judge relied on Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, which established that the threshold to triggering a duty to defend is low, and just the mere possibility that a claim could fall within coverage under a policy is sufficient to require a duty to defend. An insurer must show that an exclusion clearly and unambiguously excludes coverage.
The judge held that that at least one part of the lead exclusion (Branch (b)(ii)) was ambiguous and did not clearly exclude claims for property damage incurred incidental to the treatment for lead, in circumstances when lead was not the cause of the damage. As such, the application judge held that a duty to defend was triggered.
Court of Appeal Analysis
On appeal, GAIC maintained that it did not have a duty to defend and relied on the lead exclusion clause.
However, the Court of Appeal agreed with the findings of the application judge and held that the lead exclusion provision was ambiguous. As such, the principles of Progressive Homes applied and GAIC was required to defend the City with respect to the various proceedings against them. The Court of Appeal also held that GAIC failed to show any error in the application judge’s analysis and conclusion on appeal.
The Court of Appeal dismissed the appeal and upheld the application judge’s decision that GAIC had a duty to defend. Costs were awarded to the City on a fixed substantial indemnity basis in the amount of $30,000. Costs were also awarded to Lloyd’s Underwriters on a partial indemnity basis in the amount of $16,500.
Takeaways
This decision reinforces that an insurer cannot always escape their duty to defend through an exclusion clause in an insurance policy. The low threshold established in Progressive Homes means that even a ‘mere possibility’ that an exclusion may not apply is enough to trigger an insurer’s duty to defend. Therefore, insurers should be cautious and include clear and unambiguous language in their insurance policies wherever possible.