The Applicability of a Pollution Exclusion in Determining the Duty to Defend
In Construction Distribution & Supply Company Inc. v. Continental Casualty Company (CNA Insurance), 2024 ONCA 405, the Court of Appeal analyzed the applicability of an exclusion clause in an insurance policy in relation to pollution liability.
The appellant, Continental Casualty Company (“Continental”), appealed the decision of the application judge who determined that Continental had a duty to defend the respondent, Construction Distribution & Supply Company Inc., in an action brought by Highland Furniture. In that action, Highland Furniture sought damages caused to its property by a leak of liquid chlorine from the respondent’s premises.
The only issue on appeal was whether the application judge erred in concluding that a pollution exclusion clause in the commercial general liability policy issued by Continental to the respondent did not apply.
The exclusion clause stated:
Pollution Liability
(1) Bodily injury or property damage arising out of the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants:
(a) At or from any premises, site or location which is or was at any time, owned or occupied by, or rented or loaned to you;
At or from any premises, site or location which is or was at any time used by or for you or others for the handling, storage, dispersal, processing or treatment of waste;
Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for you or any person or organization for whom you may be legally responsible; or
At or from any premises, site or location on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations:
(1) if the pollutants are brought on to the premises, site or location in connection with such operations by you, a contractor or subcontractor; or
(2) if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify, decontaminate, stabilize, remediate or neutralize, or in any way respond to, or assess the effect of pollutants.
Any loss, cost or expense arising out of any government direction or request, demand, or that you or others test for, monitor, clean up, remove, contain, treat, detoxify, decontaminate, stabilize, remediate or neutralize or in any way respond to, or asses the effect of pollutants. Sub-paragraphs (a) and (d)(1) of paragraph 1 of this exclusion do not apply to bodily injury or property damage caused by heat, smoke or fumes from a fire which becomes uncontrollable or breaks out from where it was intended to be.
As used in this exclusion, pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
[emphasis in original]
The Application Judge found that the commonly understood definition of pollution is: “the escape of an irritant or contaminant into the natural environment that causes damages related to the clean-up of the contamination, and the costs of investigating, testing and monitoring the contamination”. His Honour stated that an irritant or contaminant does not become pollution unless the substance enters the natural environment, and there is a requirement to investigate, test and clean-up the substance.
Continental argued that the Application Judge construed the exclusion too narrowly when applying it only where an irritant or contaminant is released into the natural environment. Continental stated that the pollution exclusion does not capture damage caused by a negligent act or omission in the course of regular business activities that incidentally involves pollution if the insured’s business does not normally involve a pollution risk.
However, Continental argued that the exclusion clause applied in this case, as the respondents were storing a large volume of liquid chlorine (a pollutant), and that the damage caused by the liquid chlorine to the adjoining business was a form of pollution. Further, Continental argued that the pollution was not incidental to the respondent’s business because it arose from a known risk of pollution associated with the storage of liquid chlorine.
Therefore, Continental agued, the true nature of the claim was damages arising from a form of pollution.
The Court of Appeal disagreed with Continental’s position. The finding that the exclusion did not apply was supported by the purpose of the insurance and the respondent’s reasonable expectations. Essentially, the claim for damages arose out of the respondent’s alleged negligence in the course of conducting their regular business. This was exactly the sort of claim that the respondents were entitled to expect would be covered by the Continental policy (unless their regular business activities included an inherent risk of pollution).
The Court opined that, while liquid chlorine can cause damage if spilled, its storage for the purpose of resale does not constitute an inherent risk of pollution. Further, Highland Furniture’s claim upon which the coverage assessment must be based, did not plead the existence of such a risk.
The Court went on to state that this was not a case where the respondent engaged in an activity that carried a well-known risk of pollution. Highland Furniture’s claim related to damage to property, not damage to the natural environment, contamination of the soil or costs of rectifying lands.
As such, the Court of Appeal determined that the application judge correctly found that there was at least a “mere possibility” that the claim against the respondents would be covered by Continental’s policy. Continental’s appeal was accordingly dismissed.
As a takeaway, when determining the applicability of an exclusion clause in an insurance policy on an application for a duty to defend, it is important to assess the regular business activities of the insured, and consider whether the type of claim is one which the insured would reasonably assume would be covered by the insurance policy. Further, the framework of the pleading in the claim in which a defence is sought is crucial in determining whether there is a mere possibility that coverage would be afforded under the subject policy.