AXA Insurance was successful at the British Columbia Court of Appeal in reversing a Judge’s decision from a Summary Trial. The insureds sought leave to Appeal from the Supreme Court of Canada and their application for leave was denied. 

The reason this case is important is the B.C.C.A. applied the pollution exclusion in a CGL Policy where the original cause of the loss was a fire loss. 

The plaintiffs were the owners of an electro-plating business in Surrey, B.C.  Their business was located in a multi-tenanted commercial building.  On April 12, 2011, a fire broke out in the premises of Precision Plating.  The fire activated the sprinkler system and the water from the sprinkler system caused the chemical vats to overflow.  The partially diluted chemical solution spread from Precision Plating’s premises to the neighbouring properties.  As a result, a number of these property owners brought actions against Precision Plating, alleging they suffered property damage caused by the contamination.  Precision Plating sought coverage under their CGL Policy with AXA. AXA denied that any coverage was owed for defence costs and indemnity in regard to any claims made against Precision Plating by the owners of neighbouring premises. 

Precision then brought an action against AXA and their insurance broker, seeking coverage for both defence costs and indemnity. 

The CGL Policy provided the standard coverage for bodily injury or property damage due to an accident or occurrence.  However, it was the wording of the pollution exclusion that ultimately convinced the B.C.C.A. that AXA had properly excluded the claim. The pollution exclusion read as follows:

“4.  This insurance does not apply to (b)(i) Bodily Injury, Personal Injury or Property Damage caused by, contributed to by or arising out of the actual, alleged or threatened discharge, emission, dispersal, seepage, leakage, migration, release or escape at any time of pollutants: (1) at or from any premises, site or location owned, rented or occupied at any time by an insured;

The term pollutants was defined within the CGL Policy as follows:

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including but not limited to smoke, odour, vapour, soot, fumes, airborne or waterborne particles, acids, alkali, chemicals, sewage, microorganisms and waste.  Waste includes (but is not limited to) materials to be recycled, reconditioned or reclaimed”.

On Appeal, AXA  argued that the wording of the pollution exclusion was unambiguous and that the Judge erred in finding the cause of the damage was fire and the application of the pollution exclusion would not defeat the reasonable expectations of the parties.  The insured argued that it purchased liability insurance to cover liability caused by fire, it had a fire on its premises which caused the overflow of the vats and this loss should be covered. 

The Court after a lengthy review of the law concluded that the standard of review of a Judge’s interpretation of insurance policy provisions is correctness. 

The BCCA dealt first with the duty to defend.  The Court started with the well-established premise that if there is any doubt as to whether the claim falls within the policy, it must be resolved in favour of the insured.  The Court also said that they must look at the true nature or substance of the claim being made.

In reviewing the coverage under the CGL Policy, the Court goes to great lengths to break down the coverage to its basic components.  The Court said that in their review of the policy, the wording of the pollution exclusion should be read as follows:

“the pollution exclusion operates so as to exclude coverage for all sums…to pay by reason of the liability…for compensatory damages…because of…property damage…caused by, contributed to by or arising out of the…release…of pollutants.  The liability for release of pollutants is therefore not covered”.

The Court indicates the Judge misconstrued the policy as requiring him to examine the proximate cause of the loss or damage when he should have looked at the source of the liability.  In other words, it was not the fire damage that was the basis of the four lawsuits against Precision Plating but rather the escape of the chemical contaminants. 

The Court then discusses “concurrent causes” where two distinct perils have caused a single loss.  They reviewed the Derksen v 539938 Ontario Limited, 2001 SCC 72 (CanLII) case where damage was caused by (a) an alleged negligent clean up of a work-site and (b) the alleged negligent use and operation of a motor vehicle.  In that case, the Supreme Court of Canada found that coverage could not be defeated in such a case by an exclusion clause that only excluded one of the two concurrent sources of liability.  In the pleadings against Precision Plating, there was only one of the actions where there was alleged negligence associated with the fire as a concurrent source of liability.  In the Derksen case, the Supreme Court of Canada had suggested that if insurance companies wanted to use an exclusion that also excluded a concurrent cause, then they should be using language such as “caused by, resulting from, contributed to or aggravated by”.  This was the exact language used by AXA in their pollution exclusion.  The B.C.C.A. therefore made a finding that “the CGL Policy does not cover a claim where a liability associated with the release of pollutants is alleged, whether as a sole or concurrent cause”. 

The Court found the AXA CGL Policy effectively excluded coverage for any loss arising out of a finding of liability for the escape of pollutants. The Court said if the pleadings alleged liability for the escape of pollutants, there would be no duty to defend because there is no possibility that AXA would have an obligation to indemnify.