Zurich Insurance Co. v. 686234 Ontario Ltd., 2002 CanLII 33365 (ON CA)

Zurich Insurance Company v. 686234 Ontario Limited [Indexed as: Zurich Insurance Co. v. 686234 Ontario Ltd.]

62 O.R. (3d) 447

[2002] O.J. No. 4496

Docket No. C37469

Court of Appeal for Ontario,

Abella, Moldaver and Borins JJ.A.

November 27, 2002

• Application for leave to appeal to the Supreme Court of Canada dismissed with costs April 24, 2003 (Iacobucci, Binnie and LeBel JJ.). S.C.C. File No. 29577. S.C.C. Bulletin, 2003, p. 695.

Insurance -- Commercial general liability insurance policy -- Interpretation -- Coverage -- Exclusions -- Insurer's obligation to defend insured -- Insurer's obligation to indemnify -- Insured owning apartment building -- Insured suing for negligence arising from carbon monoxide leak from apartment building furnace -- Pollution liability exclusion not excluding coverage for injuries from carbon monoxide that leaked from apartment building's furnace.

The owner of an apartment building, 686234 Ontario Limited (the "insured"), was the defendant in two proposed class actions in which it was alleged that the plaintiffs suffered injuries from carbon monoxide that leaked from the apartment's furnace. The plaintiffs pleaded that the insured had been negligent in maintaining, repairing and keeping the furnace in good condition. Zurich Insurance Company (the "insurer") had issued two commercial general liability insurance policies ("CGL policies") to the insured. The insurer applied for a declaratory judgment that it was not obliged to defend the insured nor to indemnify it for the damages claimed, on the ground that the standard pollution liability exclusion contained in the policies applied. Rivard J. dismissed the application, reasoning that the exclusion vitiated coverage from injuries resulting from pollution to the natural environment but that it did not vitiate coverage from injuries resulting from pollution to the indoor environment. The insurer appealed.

Held, the appeal should be dismissed with costs.

In is a principle of the interpretation of insurance policies that coverage should be interpreted broadly in favour of the insured and that exclusion clauses should be strictly and narrowly interpreted against the insurer. A literal meaning should not be applied where it would bring about an unrealistic result or a result that would not be contemplated in the commercial atmosphere in which the insurance was contracted. An interpretation of an ambiguous contractual provision that would render the insured's efforts to obtain insurance protection nugatory should be avoided. An exclusion clause should not be interpreted in a way that is repugnant to or inconsistent with the main purpose of the insurance coverage but so as to give effect to that purpose and the reasonable expectations of the ordinary person as to the coverage purchased. The history of the insurance industry's standard pollution exclusion in CGL policies and the use of environmental terms of art in the exclusion clause showed that it was aimed at barring coverage for environmental contamination arising from the gradual or repeated discharge of hazardous substances into the environment but not to bar coverage for tort claims within the standard CGL coverage. The accidental release of carbon monoxide due to a broken furnace was not environmental pollution within the scope of the clause. Rivard J. correctly interpreted the pollution liability exclusion and was correct in holding that the insurer has a duty to defend and to indemnify the insured for any damages caused by the carbon monoxide leak. Accordingly, the appeal should be dismissed with costs.

APPEAL from a judgment interpreting the meaning of a pollution liability exclusion clause contained in a standard commercial general liability policy.

Cases referred to American States Ins. Co. v. Koloms, 687 N.E. 2d 72 (S.C. Ill. 1997); Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, 10 B.C.L.R. (3d) 1, 127 D.L.R. (4th) 618, 186 N.R. 150, [1995] 9 W.W.R. 305, [1995] I.L.R. 1-3232, 13 M.V.R. (3d) 302; [page448] Brissette Estate v. Westbury Life Insurance Co., 1992 32 (SCC), [1992] 3 S.C.R. 87, 96 D.L.R. (4th) 609, 142 N.R. 104, [1992] I.L.R. 1-2888, 47 E.T.R. 109 (sub nom. Brissette Estate v. Crown Life Insurance Co.); Commerce Capital Trust Co. v. Continental Insurance Co. (1982), 1982 2173 (ON SC), 36 O.R. (2d) 38, 133 D.L.R. (3d) 459, [1982] I.L.R. 1-1508 (S.C.); Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 10 (SCC), [1980] 1 S.C.R. 888, 112 D.L.R. (3d) 49, 32 N.R. 488, [1980] I.L.R. 1-1176; Cory & Sons v. Burr (1882), L.R. 9 Q.B. 463; Cunningham v. St. Paul Fire & Marine Ins. Co. (1914), 1914 376 (BC SC), 16 D.L.R. 39, 5 W.W.R. 1098, 26 W.L.R. 870, 19 B.C.R. 33 (S.C.); Essex Insurance Company v. Tri-Town Corporation, 863 F. Supp. 38 (D. Mass. 1994); Excel Cleaning Service v. Indemnity Insurance Co., 1954 9 (SCC), [1954] S.C.R. 169, [1954] 2 D.L.R. 721, [1954] I.L.R. 1-143; Great West Development Marine Corp. v. Canadian Surety Co., 2000 BCSC 806, 19 C.C.L.I. (3d) 52; Medicine Hat (City) v. Continental Casualty Co. (2002), 2002 ABQB 259, 37 C.C.L.I. (3d) 48 (Alta. Q.B.); Pettit and Economical Mutual Ins. Co. (Re) (1982), 1982 2108 (ON SC), 40 O.R. (2d) 344, 143 D.L.R. (3d) 752, [1983] I.L.R. 1-1616 (H.C.J.); Pier Mac Petroleum Installation Ltd. v. Axa Pacific Insurance Co. (1997), 1997 4252 (BC SC), 41 B.C.L.R. (3d) 326 (S.C.); Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 150 (SCC), [1993] 1 S.C.R. 252, 83 Man. R. (2d) 81, 99 D.L.R. (4th) 741, 147 N.R. 44, 36 W.A.C. 81, [1993] 2 W.W.R. 433, [1993] I.L.R. 1-2914; Sirois v. Saindon (1975), 1975 180 (SCC), [1976] 1 S.C.R. 735, 10 W.B.R. (2d) 329, [1975] I.L.R. 1-669, 4 N.R. 343, 56 D.L.R. (3d) 556, revg (1973), 1973 1214 (NB CA), 7 N.B.R. (2d) 280, [1974] I.L.R. 1-597, 44 D.L.R. (3d) 469 (C.A.) (sub nom Co- operative Fire & Casualty Co. v. Saindon); Stoney Run Co. v. Prudential-LMI Commercial Ins. Co., 47 F. 3d 34 (2nd Cir. 1995); Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd. (2001), 2001 21205 (ON CA), 57 O.R. (3d) 425, [2002] I.L.R. 1-4064 (C.A.); Weston Ornamental Iron Works Ltd. v. Continental Insurance Co., [1981] I.L.R. 1-430 (Ont. C.A.), revg [1980] I.L.R. 1-1265 (Ont. H.C.J.); Wigle v. Allstate Insurance Company of Canada (1984), 1984 45 (ON CA), 49 O.R. (2d) 101, 6 O.A.C. 161, 14 D.L.R. (4th) 404, [1985] I.L.R. 1-1863, 30 M.V.R. 167 (C.A.), affg (1984), 1984 1817 (ON SC), 44 O.R. (2d) 677, 5 D.L.R. (4th) 327, [1984] I.L.R. 1-1742 (H.C.J.) Authorities referred to Bick, T.K., and L.G. Youngblood, "The Pollution Exclusion Saga Continues: Does it Apply to Indoor Release" (1997), 5 S.C. Envtl. L.J. 119 Hilliker, G., Liability Insurance Law in Canada, 3rd ed. (Markham: Butterworths, 2001) Stempel, J.W., "Reason and Pollution: Correctly Construing the 'Absolute' Exclusion in Context and in Accord With Its Purpose and Party Expectations" (1998), 34 Tort & Ins. L.J. 1.

David Liblong and Vincent G. Burns, for appellant. John A. Campion and C. William Hourigan, for respondent.

The judgment of the court was delivered by

1BORINS J.A.: -- The dispositive issue in this appeal is the scope of a pollution liability exclusion contained in two commercial general liability ("CGL") insurance policies issued by the [page449] appellant, Zurich Insurance Company ("Zurich"), to the respondent, 686234 Ontario Limited, the owner of an apartment complex. The issue is whether the exclusion bars coverage for damages caused by carbon monoxide poisoning. In two underlying proposed class actions brought against the respondent, the nominal plaintiffs allege that they suffered injuries from breathing carbon monoxide which leaked from the respondent's furnace. Against the respondent they allege negligence in maintaining the furnace and in failing to keep it in good working condition, as well as failing to properly inspect repair work they say had been performed negligently by the company hired by the respondent to repair it, which is a defendant in one of the actions.

2Zurich applied for a declaratory judgment that it was not obliged to defend the respondent, nor to indemnify it for the damages claimed, on the ground that the pollution liability exclusion applied to the circumstances alleged in the underlying actions. In reasons found at (2001), 2001 62755 (ON SC), 33 C.C.L.I. (3d) 267 (Ont. S.C.J.), Rivard J. dismissed the application. On his interpretation of the exclusion, he concluded that it was intended to vitiate coverage for injuries resulting from pollution of the natural environment and not the indoor environment.

3It is from this decision that Zurich has appealed. However, it concedes that if the decision is correct it is obliged to defend the underlying actions and to indemnify the respondent for any damages recovered in the actions.

4The pollution liability exclusion is a standard industry clause found in CGL policies in Canada and the United States of America. As it will assist in understanding the parties' positions and the reasons of the application judge, it is helpful to reproduce the exclusion in its entirety:

This insurance does not apply to:

1. Pollution Liability

a. "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:

1. At or from premises owned, rented or occupied by an insured;

2. At or from any site or location used by or for an insured or others for the handling, storage, disposal, processing or treatment of waste;

3. Which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for an insured or any person or organization for whom the insured may be legally responsible; or

4. At or from any site or location on which an insured or any contractors or subcontractors working directly or indirectly on behalf of an insured are performing operations: [page450]

a. if the pollutants are brought on or to the site or location in connection with such operations; or

b. if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

b. Any loss cost, or expense arising out of any governmental direction or request that you test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapour, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Sub-paragraphs 1 and 4(a) of paragraph a. of this exclusion do not apply to "bodily injury" or "property damage" caused by heat, smoke or fumes from a hostile fire. As used in this exclusion, a "hostile fire" means one which becomes uncontrollable or breaks out from where it was intended to be.

(Emphasis added)

The Positions of the Parties

5It is Zurich's position that the language of the exclusion is clear and unambiguous, and in accordance with its plain meaning, it applies to the underlying claims against the respondent. It argues that any injury or damage caused clearly falls within the exclusion as there was a "discharge, dispersal, release or escape" of carbon monoxide, a "pollutant", "at or from premises owned" by the respondent. As the emission of carbon monoxide fumes from the furnace constituted the "release" of a "gaseous . . . irritant or contaminant", any "bodily injury" or "property damage" resulting from such emission is excluded from coverage.

6The respondent's position is that the purpose of the exclusion is to bar coverage only for damages resulting from the pollution of the natural outdoor environment resulting from industrial, commercial or large scale pollution, and not for damages resulting from indoor pollution due to routine commercial hazards such as a faulty heating system. The respondent relies on four arguments in support of its position:

(1) As the exclusion is inherently ambiguous as to whether it applies to indoor or outdoor releases, the ambiguity is to be resolved in favour of the insured.

(2) The historical purpose of the exclusion, which was drafted by the insurance industry, demonstrates that its drafters intended to exclude only damages resulting from releases to the natural environment. [page451]

(3) The terms used in the exclusion, such as "discharge, dispersal, release or escape of pollutants", "handling, storage, disposal, processing or treatment of waste", "transported, handled, stored, treated, disposed of or processed as waste" and "monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants" are terms of art in environmental law that are generally used in environmental protection legislation in reference to damage or injury to the natural outdoor environment caused by improper disposal or containment of hazardous materials.

(4) Even if it is found that the exclusion is unambiguous, it should nevertheless be interpreted in favour of the respondent on the ground that the reasonable expectation of the owner of an apartment building who has sought and paid for CGL insurance would be that the insurance policy protects it through coverage and indemnity for precisely the type of claims advanced in the underlying actions -- claims for damages for bodily injury and property damage incurred by its tenants from carbon monoxide poisoning resulting from a faulty furnace.

Reasons of the Application Judge

7The application judge referred to the principles that apply to the interpretation of insurance policies, noting that exclusion clauses are to be "construed narrowly" and where they are ambiguous, that "the doctrine of contra proferentum will be applied to construe the ambiguity against the drafter of the document." He also noted that the CGL policy provided broad coverage with respect to indemnity for compensatory damages for bodily injury or property damage.

8In dismissing the application, the application judge concluded in paras. 14-19:

A reading of the Pollution Liability exclusion, construed narrowly, and in the context of the factual background of this case lead me to the conclusion that Zurich must defend or [sic] indemnify the respondent for the claims for damages made by its tenants.

The Pollution exclusion clause in the insurance contract points to an environmental emphasis and application. It speaks of bodily injury or property damage "arising out of the discharge, dispersal, release or escape of pollutants". Reference is to "the handling, storage, disposal, processing or treatment of waste". It deals with "pollutants" . . . "which are at any time transported, handled, stored, treated, disposed of, or processed as waste".

Paragraph a.(4)(a) of the exclusion refers to a situation "if the pollutants are brought on or to the site or location"; Paragraph a.(4)(b) speaks of a situation [page452] "if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants"; Paragraph b. deals with "any governmental direction or request that you test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants".

All of this language used in the exclusion clause, when read together, points to a clear intention to exclude 'environmental' pollution damage from coverage under the policy, as opposed to the accidental discharge of carbon monoxide in the improper repair of a furnace system. I conclude that a proper interpretation of the policy as a whole, including the exclusion clauses does not entitle Zurich, at this stage to deny coverage.

The essence of the claim against the respondent is negligence due to the improper repair of a furnace. It does not arise from the discharge, release or escape of pollutants which were on the premises. The pollutant, carbon monoxide was the accidental result of the alleged negligent repair of the furnace.

This is not a situation where a pollutant was on the premises and escaped or was somehow released resulting in injury or damage. It is a case where, as a result of the alleged improper repair of a furnace, improper combustion occurred resulting in the creation of carbon monoxide. That carbon monoxide is then alleged to have caused injury to the plaintiff.

Analysis

I

9The pollution liability exclusion, while attracting little judicial scrutiny in Canada, has received considerable attention in the United States: G. Hilliker, Liability Insurance Law in Canada, 3rd ed. (Markham: Butterworths, 2001) at p. 198. Indeed, in two survey articles American commentators have said that over the past two decades the exclusion has been the subject of extensive and heated litigation: T.K. Bick & L.G. Youngblood, "The Pollution Exclusion Saga Continues: Does it Apply to Indoor Release" (1997), 5 S.C. Envtl. L.J. 119; J.W. Stempel, "Reason and Pollution: Correctly Construing the 'Absolute' Exclusion in Context and in Accord With Its Purpose and Party Expectations" (1998), 34 Tort & Ins. L.J. 1.

10These articles, and the cases which they consider, focus on the positions taken by insurers and policyholders. Typically, insurers have urged a literal interpretation of the text of the exclusion to attempt to deny the sorts of claims traditionally covered under a basic CGL policy. Insurers have asserted that any liability claim against an insurer, whether it arises from a carbon monoxide leak from a faulty furnace or fumes from freshly applied paint, is excluded if it involves "vapour", "fumes" or "chemicals". Policyholders have urged that the exclusion be interpreted in the context of the policy and its purpose, the drafting history of the exclusion, its purpose from the perspective of the insurance industry, together [page453] with the objectively reasonable expectations of the parties. They assert that the exclusion was intended to exclude coverage for natural outdoor environmental pollution and not for routine occurrences that have received long- standing coverage under CGL policies simply because the cause of the damage fits within a hyperliteral application of the text of the exclusion.

11The background and purpose of the pollution liability exclusion is discussed in detail by Professor Stempel. For many years, CGL liability policies did not contain any exclusions designed to limit coverage for environmental risks. Traditionally, CGL policies generally provided coverage with respect to liability imposed by law to pay damages because of bodily injury or property damage caused by an accident or occurrence. Coverage under CGL policies for pollution-related claims depended upon whether the claim fell within the scope of the insurance contract.

12In 1970 in the United States the Insurance Rating Board, a predecessor of the Insurance Service Office, Inc. ("ISO"), in response to litigation that emerged from environmentally significant discharges of pollutants resulting in damage to the natural environment, introduced by way of an endorsement attached to CGL policies, a specific exclusion with respect to environmental liability. By 1973, a pollution liability exclusion became part of the standard CGL policy. It was known as the "sudden and accidental" pollution exclusion because, by its language, it did "not apply if [the] discharge, dispersal, release or escape was sudden and accidental".

13In the early 1980s, following extensive litigation over the scope of the sudden and accidental pollution exclusion, the ISO introduced a new version of the exclusion, the "absolute" pollution exclusion. As Professor Stempel points out at p. 5: "All observers agree that the new exclusion was drafted to replace the 1973 'sudden and accidental' exclusion because insurers were distressed by judicial decisions holding that the 1973 exclusion did not preclude coverage for gradual but unintentional pollution." The absolute exclusion, therefore, was intended 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. Thus, as a practical matter, the absolute pollution exclusion, free of the "sudden and accidental" language, appeared to solve the insurance industry's problem in the industrial pollution context. By 1986 the absolute pollution exclusion became the insurance industry standard and is found in virtually every CGL policy issued since that time. It is this absolute pollution liability exclusion that is found in the respondent's CGL policy. [page454]

14As Hilliker points out at p. 197, it was in 1985, with the introduction of a new standard form CGL policy, that the Insurance Bureau of Canada changed the environmental liability exclusion then in use, to the absolute pollution exclusion that had been drafted in the United States by the ISO. Thus, with some minor variations introduced by individual insurers, the absolute pollution exclusion is now found in all CGL policies in the United States and Canada.

II

15Based on the evolution and the drafting history of the absolute pollution exclusion, Professor Stempel has concluded that it bars coverage for classic environmental degradation pollution and not tort claims previously conceded to be within the scope of standard CGL coverage. Specifically, the exclusion does not bar coverage of the average tort incidentally accompanied by contaminants, such as coverage in a slip-and- fall action involving bleach. Many American courts have reached the same conclusion. One of the leading cases is American States Ins. Co. v. Koloms, 687 N.E. 2d 72 (S.C. Ill. 1997) which, like this case, involved carbon monoxide poisoning caused by a negligently maintained furnace. Justice McMorrow, who wrote the opinion of the court, reviewed the evolution and drafting history of the absolute pollution exclusion, and reached the same conclusion as that reached by Professor Stempel.

16I find the following passages from Justice McMorrow's opinion at pp. 81-82 both helpful and persuasive.

Our review of the history of the pollution exclusion amply demonstrates that the predominate motivation in drafting an exclusion for pollution-related injuries was the avoidance of the "enormous expense and exposure resulting from the 'explosion' of environmental litigation." Weaver, 140 N.H. at 783, 674 A.2d at 977, quoting Vantage Development Corp. v. American Environment Technologies Corp., 251 N.J. Super. 516, 525, 598 A.2d 948, 953 (1991). Similarly, the 1986 amendment to the exclusion was wrought, not to broaden the provision's scope beyond its original purpose of excluding coverage for environmental pollution, but rather to remove the "sudden and accidental" exception to coverage which, as noted above, resulted in a costly onslaught of litigation. We would be remiss, therefore, if we were to simply look to the bare words of the exclusion, ignore its raison d'etre, and apply it to situations which do not remotely resemble traditional environmental contamination. The pollution exclusion has been, and should continue to be, the appropriate means of avoiding "the yawning extent of potential liability arising from the gradual or repeated discharge of hazardous substances into the environment". Tufco, 104 N.C. App. at 323, 409 S.E.2d at 699, quoting Waste Management of Carolinas, Inc. v. Peerless Insurance Co., 315 N.C. 688, 698, 340 S.E.2d 374, 381 (1986). We think it improper to extend the exclusion beyond that arena. [page455]

Notwithstanding the above, ASI submits that the deletion of the requirement that the pollution be "[discharged] into or upon land, the atmosphere, or any watercourse or body of water" should be viewed by this court as a clear signal of the industry's intent to broaden the exclusion beyond traditional environmental contamination. We disagree. This same argument was rejected in West American Insurance Co. v. Tufco Flooring East, Inc., 104 N.C. App. 312, 409 S.E.2d 692 (1991), a case which involved the application of the pollution exclusion to damages caused by the release of fumes from a flooring sealant. In Tufco, the court noted that, even after its amendment in 1986, the absolute pollution exclusion continued to employ terms of art which bespeak of environmental contamination. The court reasoned:

Because the operative policy terms 'discharge, dispersal, release, and escape' are environmental terms of art, the omission of the language 'into or upon land, the atmosphere or any watercourse or body of water' in the new pollution exclusion is insignificant. The omission of the phrase only removes a redundancy in the language of the exclusion that was present in the earlier pollution exclusion clause. Consequently, we find that any 'discharge, dispersal, release, or escape' of a pollutant must be into the environment in order to trigger the pollution exclusion clause and deny coverage to the insured. Tufco, 104 N.C. App. at 325, 409 S.E.2d at 700.

See also Center for Creative Studies, 871 F. Supp. at 946 ("the fact that the [former version] contained language relating to discharge 'into or upon land, the atmosphere . . .' is not significant"). We agree with this analysis. In our view, the deletion of the aforementioned language does not portend an expansion of the pollution exclusion beyond the context of traditional environmental contamination.

Given the historical background of the absolute pollution exclusion and the drafters' continued use of environmental terms of art, we hold that the exclusion applies only to those injuries caused by traditional environmental pollution. The accidental release of carbon monoxide in this case, due to a broken furnace, does not constitute the type of environmental pollution contemplated by the clause. Accordingly, the judgment of the appellate court is affirmed.

17One of the many other cases that reached the same result as the Koloms court is Stoney Run Co. v. Prudential-LMI Commercial Ins. Co., 47 F.3d 34 (2d Cir. 1995), which also involved carbon monoxide poisoning due to a faulty heating and ventilation system. The District Court had dismissed two claims for indemnity brought by a policyholder against its insurer on the basis of the standard pollution liability clause in its CGL policy. The Court of Appeal reversed and entered judgment for the policyholder. The sole issue before the Court of Appeal was whether the underlying claims fell unambiguously within the exclusion. If not, any ambiguity was to be construed against the insurer.

18The court commenced its analysis by construing the exclusion clause in light of its general purpose. Applying earlier decisions, it found that the purpose of the clause was to exclude coverage for entities which knowingly pollute the environment. [page456] The court noted that in most cases the exclusion was found to be ambiguous in the sense that it could reasonably be interpreted as applying to pollution of either the natural outdoor environment or the indoor environment, such as the air in a building or a home. In such cases the ambiguity was resolved on the basis of the reasonable understanding of the insured in respect to whether the exclusion in the context of the CGL policy applied only to claims for injuries based on industrial environmental pollution, and did not exclude injuries caused by common irritants and contaminants such as carbon monoxide emitted from a faulty furnace. The court also noted that it was significant in interpreting the exclusion that it contained terms such as "discharge" and "dispersal", which are terms of art of environmental law used in reference to injuries caused by "disposal or containment of hazardous waste".

19At p. 39 the court concluded:

We need not decide the precise scope of the pollution exclusion clause contained in Plaintiffs' policies. Instead, we need only determine whether the clause is ambiguous as applied to the facts of this case and subject to no other reasonable interpretation than the one advanced by Prudential. As noted above, the pollution exclusion clause can be reasonably interpreted as applying only to environmental pollution. A reasonable policyholder might not characterize the escape of carbon monoxide from a faulty residential heating and ventilation system as environmental pollution. Accordingly, we find the pollution exclusion clause ambiguous as applied to the Gruner and Schomer actions.

20There is, of course, considerable divergence in the American cases that have construed the exclusion, with the result that courts have not reached a clear consensus as to its proper interpretation. This is true even within the context of carbon monoxide poisoning. Cases which have held that the exclusion applies to instances of carbon monoxide poisoning have applied a literal construction to the exclusion, noting that its language is specific on its face even though a literal interpretation results in a broad application of the exclusion. However, as Professor Stempel observes at p. 48, the bulk of the carbon monoxide poisoning cases have held that the exclusion does not apply. At p. 121, Bick & Youngblood observe that a majority of the cases have concluded that damages arising from indoor pollution are not excluded from coverage by the absolute pollution exclusion.

21Typical of the cases which have held that the exclusion precludes coverage for damages caused by carbon monoxide poisoning is Essex Insurance Company v. Tri-Town Corporation, 863 F. Supp. 38 (D. Mass. 1994), in which several hockey players, spectators and referees were poisoned by carbon monoxide emitted from a Zamboni which had resurfaced the ice between periods of a [page457] hockey game. In granting the insurer's motion for summary judgment declaring that it had no duty to defend or to indemnify the insured area under its CGL policy as to claims arising from the alleged poisoning, Judge Young held at pp. 40-41:

Here the individual claimants seek damages for injuries caused by the discharge of carbon monoxide from a malfunctioning Zamboni. Although the injuries may be attributable in part to other causes, i.e., the ventilation in the arena or the negligence of the person who installed the catalytic converter, this does not obligate Essex to indemnify Rockland Rink. Once the carbon monoxide was released into the atmosphere causing injuries, the incident fell within the scope of the absolute pollution exclusion, and Essex' general indemnification obligation ceased.

Although the Court is troubled by what appears to be Essex' ability continually to limit the scope of coverage while constantly increasing premiums, the Court is bound to interpret and enforce contracts to which both parties freely agree in accordance with their plain language. As this Court was one of the first so to interpret the old version of the pollution exclusion language, In re Acushnet River, 725 F. Supp. at 1267-68; see C.L. Hauthaway & Sons Corp. v. American Motorists Ins. Co., 712 F. Supp. 265, 267-69 (D. Mass. 1989) (Harrington, J.) (same), so too it is now obligated to interpret this new "absolute" version. Based upon the unambiguous language of the policy, the Court declares that the discharge of pollutants from the Zamboni falls within the absolute pollution exclusion.

III

22Before reviewing the few Canadian cases which have considered the absolute pollution liability exclusion, it is helpful to refer to the principles of construction that apply to the interpretation of an exclusion clause contained in an insurance policy.

23The Supreme Court of Canada provided a useful review of the principles of construction in Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 150 (SCC), [1993] 1 S.C.R. 252 at pp. 268-69, 99 D.L.R. (4th) 741:

In each case the courts must examine the provisions of the particular policy at issue (and the surrounding circumstances) to determine if the events in question fall within the terms of the coverage of that particular policy. This is not to say that there are no principles governing this type of analysis. Far from it. In each case, the courts must interpret the provisions of the policy at issue in light of general principles of interpretation of insurance policies, including, but not limited to:

(1) the contra proferentum rule;

(2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and

(3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.

24The principle that coverage should be interpreted broadly in favour of the insured and that exclusion clauses should be [page458] strictly and narrowly interpreted against the insurer was affirmed by Major J. on behalf of the Supreme Court of Canada in Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405 at p. 414, 127 D.L.R. (4th) 618. Citing as authority Excel Cleaning Service v. Indemnity Insurance Co., 1954 9 (SCC), [1954] S.C.R. 169, [1954] 2 D.L.R. 721, Major J. added at p. 414 S.C.R. that "the construction given to a policy of insurance must not nullify the purpose for which the insurance was sold".

25Of particular significance to this appeal is the oft- quoted passage from the reasons of Estey J. in Consolidated- Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 10 (SCC), [1980] 1 S.C.R. 888 at pp. 901-02, 112 D.L.R. (3d) 49:

Even apart from the doctrine of contra preferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.

(Emphasis added)

26Helpful, also, is the decision of this court in Weston Ornamental Iron Works Ltd. v. Continental Insurance Co., [1981] I.L.R. 1-430 (Ont. C.A.). The plaintiff's business included the maintenance and welding of construction equipment. About 45 per cent of this work was carried out on the customer's job site. After the plaintiff was found liable for a fire that destroyed a bulldozer that was being repaired by its employee at a job site, its insurer refused to indemnify it on the basis of an exclusion in the CGL insurance policy that barred coverage for "loss of . . . any personal property . . . as a result of any work performed thereon by the Insured". The trial judge considered that as it was clear, plain and unambiguous, the exclusion clause barred coverage for the loss.

27In allowing the appeal, Lacourcière J.A. stated at pp. 479-80 I.L.R.: [page459]

Having regard to the constant and primary risk of fire loss and damage to equipment being repaired by the use of a welding torch, it would be anomolous to exclude from coverage the principal liability risk facing Weston in its outside work. Damage or destruction by fire of the heavy equipment being repaired away from the shop was the appellant's main concern according to its witnesses and the agency's witnesses. The exclusion clause should not be interpreted in a way which is repugnant to or inconsistent with the main purpose of the insurance coverage but so as to give effect to it. Thus, even if the exemption clause were found to be clear and unambiguous it should not be enforced by the courts when the result would be to defeat the main object of the contract or virtually nullify the coverage sought for protection from anticipated risks. The doctrine that in construing a contract, one must look to the entire document and reject words or indeed provisions which are inconsistent with the main purpose of the contract, was enunciated by Lord Halsbury in the House of Lords as early as 1893 in Glynn v. Margetson & Co., [1893] A.C. 351. . . . The Supreme Court of Canada in Consolidated-Bathurst Export Limited v. Mutual Boiler and Machinery Insurance Company, supra, gave the doctrine its approval.

I am satisfied that the doctrine can properly be applied to the interpretation of the impugned clause now being considered. In entering into what was described as a comprehensive general liability insuring agreement, it could not have been the intention of the parties to practically render nugatory the "away from shop" liability coverage for the most obviously inherent risk of the appellant's business. In my view, the exclusion clause does not bar the appellant's right to be indemnified for its loss.

(Emphasis added)

28From Weston Ornamental Iron Works it is clear that this court has concluded that even though an exclusion clause may be clear and unambiguous, it will not be applied where: (1) it is inconsistent with the main purpose of the insurance coverage and where the result would be to virtually nullify the coverage provided by the policy; and (2) where to apply it would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. As I noted earlier in discussing the American authorities, these principles are used by American courts in interpreting the absolute pollution liability exclusion in CGL policies. See, also, Re Pettit v. Economical Mutual Ins. Co. (1982), 1982 3191 (ON SC), 40 O.R. (2d) 344, 143 D.L.R. (3d) 752 (H.C.J.); Wigle v. Allstate Insurance Co. of Canada (1984), 1984 45 (ON CA), 49 O.R. (2d) 101, 14 D.L.R. (4th) 404 (C.A.), leave to appeal to S.C.C. refused (1985), 14 D.L.R. (4th) 404n; Brissette Estate v. Westbury Life Insurance Co., 1992 32 (SCC), [1992] 3 S.C.R. 87, 96 D.L.R. (4th) 609.

IV

29Given the substantial litigation in the United States over the scope of the absolute pollution liability exclusion, surprisingly [page460] few Canadian cases have considered it. Although a number of cases have considered the earlier "sudden and accidental" pollution exclusion, I do not find them helpful in respect to the absolute exclusion under consideration in this appeal.

30In Pier Mac Petroleum Installation Ltd. v. Axa Pacific Insurance Co. (1997), 1997 4252 (BC SC), 41 B.C.L.R. (3d) 326 (S.C.), the exclusion was held to preclude coverage for the cost of repairs caused by a petroleum leakage resulting from the negligent construction of a gas bar. It would appear that the court literally construed the exclusion.

31In Great West Development Marine Corp. v. Canadian Surety Co. (2000), 19 C.C.L.I. (3d) 52, 2000 BCSC 806, the insured was the owner and developer of a condominium project. Fill from the project was sold to a person who later sued the developer alleging that she had received poor quality soil containing construction debris that would leach toxic chemicals and contaminate her crops and the groundwater. The court held that the insurer had a duty to defend as the underlying claim did not entirely rest upon the threatened escape of pollutants. As the thrust of the claim was that the fill was of poor quality, this by itself did not bring the claim within the scope of the exclusion.

32The exclusion was held not to apply in Medicine Hat (City) v. Continental Casualty Co. (2002), 2002 ABQB 259, 37 C.C.L.I. (3d) 48 (Alta. Q.B.) in which employees of the city sustained neurological problems from the use of methanol and lubrizol in city buses. It was acknowledged that lubrizol and methanol were pollutants. After referring to American authorities, Foster J. held at para. 27:

"Discharge, dispersal, release or escape of pollutants" is the language of improper or unintended events or conduct. It is not the language of intended use or consequences or of the normal operation of facilities or vehicles. In this case, the polluting substance or gas is part of and confined to the intended and normal operation of a transit garage and buses. This conduct and these events do not fall within the exclusion clause. In my view, the pollution exclusion clause is intended to protect the insurer from liability for the enforcement of environmental laws. The exclusion clause uses environmental terms of art because it is intended to exclude coverage only as it relates to environmental pollution and the improper disposal or contamination of hazardous waste.

33Like two of the three trial court decisions, the recent decision of this court in Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd. (2001), 2001 21205 (ON CA), 57 O.R. (3d) 425, [2002] I.L.R. 1-4064 (C.A.) does not assist in resolving whether the pollution liability exclusion applies in the circumstances of this case. Although the majority of the court considered the scope of the exclusion based on the assumption that an oil spill was a liquid contaminant within the meaning of the exclusion, it held on the facts of the [page461] case that the negligence alleged for which the insured was responsible was not an act that came within the exclusion. Consequently, the exclusion did not provide any relief to the insurer.

Conclusion

34Clearly, there have been more cases in the United States than in Canada that have considered the absolute pollution liability exclusion clause generally and, more specifically, its application to carbon monoxide poisoning. The few Canadian cases that have dealt with the absolute pollution liability exclusion have not explored in depth its history and purpose. It is also evident that more academic commentary in the United States has considered this issue. As Hilliker notes at p. 32, where there is little or no Canadian authority on a point of insurance law, our courts have turned to American law for assistance. This is particularly so where the same provision, such as the absolute pollution liability exclusion in CGL policies, is in common use by the insurance industry in Canada and the United States and where the American authorities have applied rules of construction not materially different from our own.

35Over a century ago, in Cory & Sons v. Burr (1882), L.R. 9 Q.B. 463 at p. 469, Brett L.J. said the reason for resorting to American authorities in these circumstances is to ensure uniformity in the construction of provisions in insurance contracts that are in use in all countries. Lord Justice Brett's views were adopted in Cunningham v. St. Paul Fire & Marine Ins. Co. (1914), 1914 376 (BC SC), 5 W.W.R. 1098, 16 D.L.R. 39 (B.C.S.C.) at p. 1102 W.W.R. See, also, Commerce Capital Trust Co. v. Continental Insurance Co. (1982), 1982 2173 (ON SC), 36 O.R. (2d) 38 at p. 42, 133 D.L.R. (3d) 459 (S.C.) per Callaghan J. In dissenting reasons in Co-operative Fire & Casualty Co. v. Saindon, 1975 180 (SCC), [1976] 1 S.C.R. 735, 56 D.L.R. (3d) 556, at p. 740 S.C.R., Laskin C.J., in concluding that an insurer had not brought itself within an exclusion clause in a comprehensive liability policy, had this to say about adopting American authority:

In accord with this view is a line of insurance cases in the American Courts dealing with exactly the situation that confronts us here. Cases in the United States on insurance matters have been freely cited in Canadian Courts because form policies developed in the United States have found their way into policies issued by insurers here: see 11 C.E.D. (Ont.) (2nd ed. 1954), s. 44 (Title, Insurance); 13 C.E.D. (Western) (2nd ed. 1962), s. 42 (Title, Insurance); and see, for example, Caldwell v. Stadacona Fire and Life Ins. Co. [(1883), 1883 42 (SCC), 11 S.C.R. 212] at p. 257; see also MacGillivray on Insurance Law (5th ed. 1961), passim.

36The American authorities that have interpreted the absolute pollution liability exclusion in cases involving claims arising [page462] from carbon monoxide poisoning have not reached a uniform interpretation. One line of cases, as exemplified by Essex Insurance Company, has construed the exclusion literally and held that it bars claims arising from common business hazards such as carbon monoxide poisoning claims not normally viewed as pollution. Another line of cases, as exemplified by Koloms and Stoney Run, has held that the exclusion does not bar such claims. In reaching this result, these cases have declined to focus hyperliterally on the text of the exclusion, and have applied various interpretative approaches including finding ambiguity in the exclusion, considering the history of the exclusion clause and its environmental context, the purpose of the CGL policy, and the objectively reasonable expectation of the parties. As I have pointed out, these are the essential grounds relied on by the respondent and, generally, applied by the application judge, for construing the exclusion against Zurich.

37I find the second line of American cases to be more persuasive than the line of cases that has literally interpreted the exclusion. In my view, in construing contracts of insurance, dictionary literalism is often a poor substitute for connotative contextual construction. When the full panoply of insurance contract construction tools is brought to bear on the pollution exclusion, defective maintenance of a furnace giving rise to carbon monoxide poisoning, like related business torts such as temporarily strong odours produced by floor resurfacing or painting, fail the common sense test for determining what is "pollution". These represent claims long covered by CGL insurance policies. To apply an exclusion intended to bar coverage for claims arising from environmental pollution to carbon monoxide poisoning from a faulty furnace, is to deny the history of the exclusion, the purpose of CGL insurance, and the reasonable expectations of policyholders in acquiring the insurance.

38There 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 [page463] the exclusion focuses on the act of pollution, rather than the resulting personal injury or property damage.

39Accepting for the purpose of my conclusion that carbon monoxide is a "pollutant" within the meaning of the exclusion, although it is arguably clear in its plain and ordinary meaning, the exclusion is overly broad and subject to more than one compelling interpretation, as is evident from its construction by American courts. Given that the exclusion is capable of more than one reasonable interpretation, it is ambiguous and should be interpreted in favour of the respondent. The historical context of the exclusion suggests that its purpose is 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. Based on the coverage provided by a CGL policy, a reasonable policyholder would expect that the policy insured the very risk that occurred in this case. A reasonable policyholder would, therefore, have understood the clause to exclude coverage for damage caused by certain forms of industrial pollution, but not damages caused by the leakage of carbon monoxide from a faulty furnace. In my view, the policy provisions should be construed to give effect to the purpose for which the policy was acquired.

40In my view, the application judge correctly interpreted the pollution liability exclusion and was correct in holding that Zurich has a duty to defend the underlying claims against the respondent and to indemnify the respondent for any damages caused by the carbon monoxide leak. Therefore, I would dismiss the appeal with costs. If the parties cannot agree on the amount of costs, counsel may make written submissions on the scale and the amount thereof. The respondent's submissions, together with its bill of costs, are to be served and filed within 15 days from the release of the reasons for judgment. Zurich is to have ten days thereafter to respond.