Insurance & Reinsurance
In finding that the clause unambiguously excluded coverage for environmental claims, the Court of Appeal set aside a lower court's ruling and held that the insurers did not have a duty to defend in the circumstances.
Environmental remediation can be very expensive. As a result, it is not uncommon for commercial general liability policies to exclude coverage for environmental liabilities. These exclusion clauses are typically broadly drafted in an attempt to capture a wide range of environmental risks. The British Columbia Court of Appeal was recently asked to enforce a broadly-worded, pollution-exclusion clause. In finding that the clause unambiguously excluded coverage for environmental claims, the Court of Appeal set aside a lower court's ruling and held that the insurers did not have a duty to defend in the circumstances.
West Van Holdings Ltd. and a related company (together, "West Van") owned a property in West Vancouver. Various businesses had operated on the property over the years, including a dry-cleaner and an auto repair business. In 2014, an adjacent land owner started an action against West Van, alleging that dry-cleaning chemicals and petroleum products had escaped from West Van's property and contaminated the soil and groundwater of the neighbouring land.
At different points in time both Intact and Economical had insured West Van under commercial general liability ("CGL") policies. Each policy covered West Van for property damage occurring during the applicable policy period. However, while the language differed somewhat between the policies, each contained a clause that excluded claims for property damage "arising out of" the discharge, release, escape, etc., of pollutants.
Given the allegations in the claim, Intact and Economical refused to fund West Van's defence on the basis that any liability for the claims against West Van would be excluded from coverage and thus did not trigger the duty to defend. On the other hand, West Van argued that the exclusion clauses were not unlimited in scope, and so long as there was a "mere possibility" that a claim might succeed that was within coverage the insurers had a duty to defend the action.
West Van commenced a proceeding and moved for a declaration that Intact and Economical had a duty to defend it. After reviewing the policies, the court found that the exclusion clauses were ambiguous in that, among other things, it was not clear whether the policies ousted coverage for losses arising from pollutants used prior to West Van's ownership and use of the land. The court noted that the insurer could have more clearly expressed its intention in the policy if it wished to exclude coverage. As a result, the court held that the insurers had a duty to defend West Van against the environmental claims being advanced against it. The insurers appealed.
The British Columbia Court of Appeal set aside the lower court's decision.
The Court of Appeal noted that the Plaintiff had alleged four causes of action: statutory liability under B.C.'s Environmental Management Act ("EMA"), negligence, nuisance, and strict liability.
Under the EMA, and similar environmental-protection legislation in other Canadian provinces, a person can be liable for contamination caused by a predecessor third party. West Van argued that the CGL policies did not clearly exclude this type of liability. The Court of Appeal disagreed. First, the Court noted that the claim did not reference contamination arising from a predecessor third party's ownership or use of the land. As there was no allegation that a third party predecessor owner or operator contaminated the lands, there was no possibility that West Van could be liable for such loss and no duty to defend arose in the absence of such an allegation. Second, even if there was such an allegation, the Court noted that CGL policies, which are occurrence-based policies, are generally not intended to cover property damage arising prior to the policy coming into effect. Absent explicit language providing coverage for historical contamination, a CGL policy would not be interpreted as covering a claim arising from an event occurring long before the policy came into force.
The Court also held that the pollution-exclusion clauses applied to oust coverage for the other causes of action. The claim against West Van alleged that contaminants had "been used, kept, disposed of, handled or treated on the Adjacent Lands in a manner that caused or allowed the Contaminants to be discharged or deposited into, or to escape and enter the soils and groundwater of the Adjacent Lands and Lands."  West Van argued that the exclusion clauses did not explicitly exclude claims arising from the "migration of pollutants". However, the Court highlighted the fact that the policies excluded all claims "arising out of" the escape of pollutants and found this was broader than the allegations in the claim and clearly and unambiguously excluded those claims from coverage.
In short, the Court of Appeal found that the claims advanced against West Van either did not fall under the initial grant of coverage or were clearly excluded by the pollution-exclusion clauses. As a result, the insurers did not owe a duty to defend.
Statutory causes of action, such as the one advanced in West Van, can expose owners of land that is the source of contamination to significant liability. For example, in the Ontario decision of Huang v. Fraser Hillary's Limited, the defendant dry-cleaning business was found liable in nuisance and pursuant to section 99 of Ontario's Environmental Protection Act  for contaminating the Plaintiff's property and ordered to pay over $1.8 million in damages. Liability was imposed under the EPA even though the spills occurred years before the relevant sections in the EPA came into force. An appeal to the Court of Appeal was dismissed and application for leave to the Supreme Court of Canada was recently denied. While issues of insurance coverage were not raised in Huang, it is clear that remediation costs can be very significant and, in some cases, can exceed the value of the property.
In light of the potential exposure, an insurer must take care if it wishes to exclude environmental or pollution claims from its policies. Fortunately, the West Van decision indicates that Canadian courts will enforce clearly worded and broadly drafted exclusions. In this regard, the decision provides some useful guidance to insurers as to how the court will interpret a phrase like "arising out of".
Finally, while West Van is good news for insurers who have intended to exclude environmental liability from their CGL policies, both West Van and Huang emphasize the importance of carefully evaluating potential environmental risks at the underwriting stage and then ensuring the policy language clearly and unambiguously delineates the scope of the risk the insurer is willing to accept.
 Emphasis added.
 R.S.O. 1990, c. E. 19 [the "EPA"].