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Will pollution exclusion clauses stand up in commercial general liability insurance policies? The Ontario Court of Appeal says yes, when they are directed at activities likely to cause traditional soil and water pollution. See ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liquidate, 2011 ONCA 321.

Andrew Miracle ran two gas bars on a First Nations reserve. One of the underground storage tanks allegedly leaked, contaminating nearby federal Crown property. The Attorney General of Canada sued several parties, including the gas bar, for $1,850,000 in damages for the loss in value of its property, the cost of investigation and the cost of remediating the property.

Miracle had purchased a commercial general liability insurance policy from ING, which contained a standard pollution exclusion clause. ING sought a declaration that it was not required to defend the action, because of the pollution exclusion. The federal Crown and one of the other defendants opposed the application, on the basis of a 2002 decision, Zurich Insurance Co. v. 686234 Ontario Ltd. 2002 CanLII 33365 (ON C.A.).

In Zürich, the Court of Appeal had refused to allow an insurer to use a pollution exclusion to deny liability for alleged carbon monoxide pollution from a negligently installed furnace in an apartment building. At the time, Justice Borins said, the historical context of the pollution exclusion revealed that its purpose was “to bar coverage for damages arising from environmental pollution, and not the circumstances of this case in which a faulty furnace resulted in a leak of carbon monoxide”. Thus, he held that the exclusion was ambiguous and should be interpreted in favour of the insured. He distinguished a building owner with a defective furnace from a party involved in pollution-creating activity, at para. 38:

There is nothing in this case to suggest that the respondent’s regular business activities place it in the category of an active industrial polluter of the natural environment. Put simply, the respondent did not discharge or release carbon monoxide from its furnace as a manufacturer discharges effluent, overheated water, spent fuel and the like into the natural environment. It was discharged or released as a result of the negligence alleged in the underlying claims, which remains to be proved. As I have pointed out, the history of the exclusion demonstrates that it would produce an unfair and unintended result to conclude, in the context of a CGL policy, that defective machinery maintenance constitutes “pollution”, even when it gives rise to carbon monoxide poisoning. In this regard, it is necessary to understand that the exclusion focuses on the act of pollution, rather than the resulting personal injury or property damage.

The Attorney General therefore argued that the pollution exclusion only applied to “active industrial polluters” who necessarily emit pollutants, instead of those whose pollution is allegedly caused by negligence. This would have made such clauses almost useless. The Court of Appeal firmly rejected this argument, and held that the pollution exclusion applied:

[22]     … in this case, the insured was engaged in an activity that carries an obvious and well-known risk of pollution and environmental damage: running a gas station. Indeed, the statement of claim is framed as a claim for damage to the natural environment caused by a form of pollution… the statement of claim asserts the causes of action commonly associated with pollution-based claims for environmental damage: strict liability (presumably on the basis of Rylands v. Fletcher (1868), L.R. 3 H.L. 330) and nuisance as well as negligence. The negligence claim is based in part upon alleged breaches of both provincial and federal environmental legislation and regulation. The damages claimed are for harm to the environment: the loss of property value due to contamination of the soil, the cost of investigating, testing and monitoring the contamination caused by the migration of a hazardous product from the lands of the insured, and the cost of rectifying the contamination and remediating the plaintiff’s property. Such a claim fits entirely within the historical purpose of the pollution exclusion, which was “to preclude coverage for the cost of government-mandated environmental cleanup under existing and emerging legislation making polluters responsible for damage to the natural environment”: …

[23]     I do not accept the argument that the phrase “active industrial polluter of the natural environment” used in Zurich should be read as restricting the reach of the pollution exclusion clause to situations where the insured is engaged in an activity that necessarily results in pollution. Liability insurance is purchased to cover risks, not outcomes that are certain or inevitable…the exclusion clearly extends to activities, such as storing gasoline in the ground for resale at a gas bar, that carry a known risk of pollution and environmental harm.

ING therefore succeeded in its application, and is not required to defend the lawsuit against Miracle.

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