In a recent Ontario Court of Appeal decision, Thunder Bay (City) v Great American Insurance Company, the court upheld the application judge’s ruling that the exclusion clause relied on by an insurer was ambiguous and the insurer owed a duty to defend.
Background
Multiple actions were commenced against the City of Thunder Bay (the City) relating to alleged pinhole leaks in water pipes. The actions alleged that the City’s introduction of sodium hydroxide into the water supply led to the pinhole leaks, which resulted in widespread property damage and other losses.
The City held a comprehensive general liability policy with the Great American Insurance Company (GAIC). GAIC denied that it had a duty to defend or indemnify the City with respect to these claims due to the policy’s exclusion clause for claims relating to the effects of lead. GAIC argued that, as the purpose of the City’s use of sodium hydroxide was to counter the effects of lead, the exclusion clause was triggered.
The entirety of the exclusion clause read as follows:
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.
The Application Decision
The application judge held that clause (a) and (b)(i) were unambiguous. However, it was clause (b)(ii) which GAIC relied on. The Court noted that this clause had not been interpreted in any prior case law.
The City argued that this exclusion clause applied to situations where, instead of a claimant demanding that the City conduct remediation or pay to have remediation done (which is the subject matter of clause (a)(i)), clause (b)(ii) applied only where a claimant sought compensation for remediation that the claimant had already performed or will perform in the future. GAIC’s interpretation was that this clause operated as a form of “basket clause” to exclude all claims that were in any way related to the effects of lead.
The application judge found that both these interpretations were plausible and therefore held that clause (b)(ii) was ambiguous. In doing so, the Court applied the legal principles applicable to the duty to defend and the interpretation of exclusion clauses. The mere possibility that a claim is covered under an insurance policy is sufficient to trigger the duty to defend. When seeking to rely on an exclusion clause, the insurer must show that the exclusion clearly and unambiguously excludes coverage. Where, after applying the principles of contract interpretation, an exclusion remains capable of two or more reasonable interpretations, courts have consistently refused to apply the exclusion.[2]
After finding the exclusion clause to be ambiguous and applying the principles of contract interpretation, especially considering the parties’ reasonable expectations, the application judge found in favour of the City and held that GAIC owed a duty to defend. Ultimately, the Court determined that clause (b)(ii) of the lead exclusion did not clearly and unambiguously exclude claims for property damage incurred incidental to the treatment of lead in circumstances where lead was not the cause of the damage.[3]
The Court of Appeal Decision
In its brief reasons for decision, the Court of Appeal upheld the decision of the application judge. The Court stated that GAIC failed to demonstrate any error in the application judge’s analysis or conclusions with respect to the lead exclusion. The Court agreed that section (b)(ii) of the exclusion was ambiguous and that, accordingly, GAIC owed the City a duty to defend. The Court highlighted the application judge’s reliance on the seminal decision of Progressive Homes Ltd. v Lombard General Insurance Co. of Canada, and specifically the following statement:
Having found that the claims in the pleadings fall within the initial grant of coverage, the onus now shifts to Lombard to show that coverage is precluded by an exclusion clause. Because the threshold for the duty to defend is only the possibility of coverage, Lombard must show that an exclusion clearly and unambiguously excludes coverage. [4]
Conclusion
This decision is significant as it is the first case in Canada to interpret a lead exclusion clause of the type contained in clause (b)(ii). The decision also acts as an important reminder to insurers that exclusions will apply only when they clearly and unambiguously exclude coverage for a claim. The mere possibility that an exclusion may not apply is sufficient to trigger the duty to defend. Insurers should bear this jurisprudence in mind when drafting and revising the wording of exclusions in their insurance policies.
[2] Ibid at paras 34-35.
[3] Ibid at paras 59-60.
[4] 2010 SCC 33 at para 51.
