The British Columbia Court of Appeal recently considered the applicability of a pollution exclusion clause contained in a commercial general liability insurance policy. The policyholder, Precision Plating Ltd., operated a metal plating business in which chemicals used in the plating process were stored in large, open vats.
When a fire occurred on the premises the automatic sprinkler system was activated, causing water to enter the tanks containing the chemicals. The sprinklers continued to run for a period of time until the fire department was able to control the fire. In the meantime, the water from the sprinklers caused the chemical tanks to overflow, sending chemicals into the premises as well as neighbouring businesses. Precision sustained damage to their own property and claims were brought against them by neighbouring businesses, which likewise suffered damage.
When Precision presented the claim, its insurer denied coverage arguing that the policy excluded damages caused by the release of pollutants. The policy defined pollutants to include, amongst other things, “acids and chemicals” but also “thermal irritants, smoke, soot, and fumes”.
Precision challenged the denial of coverage in the Supreme Court of British Columbia. They argued that the exclusion for pollution- related damages should not be given effect because it was ambiguous. As well, they said that the policy clearly covered damages arising from fire, and fire was, indeed, the originating cause of the loss in this instance.
Precision also pointed to the fact that the pollution exclusion clause purported to exclude damages arising from “thermal irritants”, including “smoke” and “soot”, which are typically associated with fire. How could it be, they argued, that the policy could, on the one hand, cover fire losses but exclude the very things that fire causes such as thermal irritants, soot and smoke?
The trial judge agreed and found that the clause was ambiguous in that the policyholder could reasonably expect to have coverage for fire losses in these circumstances notwithstanding the fact there was also damage due to the release of pollutants. The trial judge held that the pollution exclusion could not exclude coverage for the escape of pollutants caused by a fire.
The insurer did not accept this decision and brought an appeal to the B.C. Court of Appeal. The Court of Appeal firstly observed that the claims brought against Precision by all but one of the neighbours alleged that it was the release of chemicals from Precision’s premises that caused their damages. Only one alleged that, in addition to the escape of the chemicals, Precision was also liable to them for damages resulting from a “hostile fire”.
The Appeal Court was asked whether Precision’s liability for the release of pollutants, which was not a covered peril under the policy, could nonetheless still result in coverage if a concurrent cause of the damage was a covered peril. The Court held that since the pollution exclusion clause specifically referred to property damage “caused by, or contributed to” by the release of pollutants, it meant that the policy would not cover liability associated with such a release, regardless of whether it was the sole or concurrent cause of the loss.
The Court of Appeal also dealt with the issue of ambiguity that had motivated the trial judge to conclude the pollution exclusion clause should not operate in this instance. The Court found that the policy was unambiguous in excluding coverage for the release of pollutants and there was no controversy that the chemicals stored on Precision’s premises met the definition of “pollutant”.
The Court of Appeal found that Precision would have had a reasonable expectation that it would be covered for any liability for damage to neighbouring properties from fire, but it could have no reasonable expectation that it would be covered for the escape of chemicals from its premises. The Court was not satisfied that this presented any ambiguity and, accordingly, found that the insurer was not under any obligation to defend Precision in respect of the claims brought by its neighbours since those claims would never be covered under Precision’s liability policy.
Following the result in the B.C. Court of Appeal, Precision sought leave to the Supreme Court of Canada. However, Canada’s highest Court has declined to hear the appeal and thus the B.C. Court of Appeal’s decision on coverage in this instance will stand.
Because of this ruling, businesses engaged in the handling of products that could meet the definition of pollutant should discuss with their insurance professional the extent of coverage available under any given commercial liability policy. Most standard commercial policies will contain exclusion causes for pollution. However, specialty insurance policies are available when coverage for pollution losses is desirable, albeit it will likely come with a higher premium cost.
As this case reveals, it is best to ensure you fully understand the coverage you are purchasing before a loss occurs.
For more information on this decision and insurance law in general, please contact Jeffrey.