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When a Spade Is Not a Spade: Pollution Exclusion Clauses in Commercial General Liability Insurance Policies

4 minute read

With increasing emphasis in the public, the media, and the courtroom on environmental protection, contamination, and remediation, it is unsurprising that pollution exclusion clauses have become quite common across a broad array of insurance contracts, including Commercial General Liability policies. These clauses exclude losses arising out of the discharge or escape of pollutants from the coverage provided to the insured.

The Court of Appeal for Ontario’s recent decision in Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908 has clarified that not every claim involving something that might be classified as a “pollutant” will allow an insurer to invoke a pollution exclusion clause to avoid its duty to defend or indemnify the insured.

In Hemlow Estate, Mr. Hemlow, an independent contractor, was killed in a workplace accident when he opened a valve to a pipe containing pressurized ammonia. The resulting ammonia exposure caused significant property damage. The company that suffered the property damage commenced a lawsuit against Mr. Hemlow’s Estate.

At the time of the accident, Mr. Hemlow was insured under a Commercial General Liability policy. The policy contained a Total Pollution Exclusion clause that read:

This insurance does not apply to:

1)   Pollution Liability

a) “Bodily Injury” or “property damage” or “personal injury” arising out of the actual, alleged, potential or threatened spill discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”.

“Pollutants” was defined in a different area of the policy as “any solid, liquid, gaseous or thermal irritant or contaminant including smoke, odours, vapour, soot, fumes, acids, alkalis, chemicals and waste.”

Hemlow’s insurer took the position that it would not defend the claim on behalf of the Hemlow Estate on the basis that the ammonia leak which caused the damage underlying the claim triggered the Total Pollution Exclusion. In turn, the Estate brought an application seeking a declaration that the insurer had a duty to defend the action.

The application judge found in favour of the Estate. He held that the word “pollution” was ambiguous and could be interpreted to apply only to environmental pollution, thus applying the principle of contra preferentum to interpret the policy in favour of the insured.

On appeal, the insurer argued that the Total Pollution Exclusion was not ambiguous and could not be read as narrowly as the application judge did. The insurer argued that the exclusion should apply and that it did not owe a duty to defend the Estate.

The Court of Appeal disagreed, but took a different path than the application judge in reaching its conclusion that the insurer did owe a duty to defend the claim against the Estate.

The court emphasised the governing principle that an insurer’s duty to defend arises from the claims as pleaded. Where the pleadings raise claims which would be payable under the insurance contract, the insurer has a duty to defend the action.[1]

Rather than focusing on the scope of the Total Pollution Exclusion clause or the definition of “pollutant”, the court focused on the allegations in the pleading. The claim advanced in Hemlow Estate was a straightforward action for damage to property; nothing in the statement of claim involved a claim arising out of “pollution”. The court found that the core of the claim was the alleged negligence of Mr. Hemlow, precisely the type of claim for which the insurance was obtained.[2]

Ultimately, the Court of Appeal held the fact that the damage-causing substance might be classified as a pollutant does not change the nature of a claim: “the existence of a duty to defend depends on the nature of the claim made.”[3]

As a duty to defend application only considers whether there is a mere possibility that a claim falls within the coverage under the policy, the Court of Appeal held that threshold had been met and dismissed the appeal.

Hemlow Estate provides an important reminder to insurers, insureds, and other litigants that it is the nature of the claim, not necessarily its subject matter, which governs the duty to defend analysis. Simply because a “pollutant” might be involved in causing the injury or damage giving rise to a claim, a pollution exclusion clause may not apply to relieve an insurer from its duty to defend an insured.

[1] Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908, at para. 19.

[2] Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908, at paras. 22-23.

[3] Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908, at para. 24.

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