Trafalgar Insurance Company of Canada et al. v. Imperial Oil Limited. et al.; Dominion of Canada General Insurance Company, Third Party

[Indexed as: Trafalgar Insurance Co. of Canada v. Imperial Oil Ltd.]

57 O.R. (3d) 425

[2001] O.J. No. 4936

Docket No. C34506

Court of Appeal for Ontario

Osborne A.C.J.O., Laskin and Feldman JJ.A.

December 12, 2001

Insurance -- Insurer's obligation to defend -- Exclusion clauses -- Contractor retained to remediate damage caused by oil spill at residence -- Owners of residence brought action against contractor alleging breach of contract and negligence in performance of remedial work -- Contractor insured under commercial general liability policy which excluded coverage where damage or injury arose out of "discharge, dispersal, release or escape of pollutants" at site on which insured was working if operations were to clean up, remove, contain, treat, detoxify or neutralize pollutants -- Insurer had duty to defend under policy -- Pollution exclusion clause did not apply as damage allegedly caused by contractor's negligence did not arise out of escape, discharge, dispersal or release of pollutant -- Exclusion spoke temporally to new escape which occurred while clean-up operation was ongoing -- Damage arising only from continuous exposure to pollutants released earlier not excluded.

The respondent was a contractor principally engaged by property/casualty insurers to clean up or remediate damage caused by fire, water, defective construction and, in this case, an oil spill admittedly caused by I Ltd. at the R residence. The residence was insured under a homeowners' policy issued by T Co. That insurer retained the respondent to clean up the oil spill. R brought an action claiming compensatory damages from I Ltd. and the respondent (among others). In that action, R claimed that the respondent breached its contractual obligation by failing to carry out remedial work within a reasonable time and was negligent in performing the remedial work, that the R family suffered property damage and that "their health has been and continues to be jeopardized". The R action was settled at trial on the basis that liability was to be determined in an action commenced by T Co., which incorporated all of R's personal claims as well as the settlement made in the R action. The appellant insured the respondent under a commercial general liability policy. The appellant took the position from the outset that the respondent's CGL policy did not provide coverage to the respondent based on the appellant's interpretation of the insuring agreement and certain policy exclusions. The policy provided, "We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of 'bodily injury' or 'property damage' to which this insurance applies. . . . This insurance applies only to 'bodily injury' and 'property damage' which occurs during the policy period. The 'bodily injury' or 'property damage' must be caused by an 'occurrence'." The policy contained an exclusion ("the pollution exclusion") for bodily injury or property damage "arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants . . . at or from any site or location on which an insured or any contractors or subcontractors of an insured are performing operations . . . if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants". The appellant took no part in the action and refused to defend the respondent. The respondent moved for summary judgment under Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, seeking a declaration that the appellant had a duty to defend both the R and the T Co. actions. The appellant brought a cross-motion under rule 21.01 for a declaration that it had no duty to defend. The motions judge granted the respondent's summary judgment motion and dismissed the appellant's cross-motion. The appellant appealed.

Held, the appeal should be dismissed.

Per Feldman J.A. (Laskin J.A. concurring): The reasons of Osborne A.C.J.O. are agreed with, with the exception of his reasons and conclusion with respect to the effect of the pollution exclusion clause. The pollution exclusion did not apply on the facts of this case. The application judge did not err by resurrecting the distinction between active and passive polluters when he held that the clause only excluded acts by an insured which cause pollution. The acts alleged to have been done by the respondent occurred during the course of its clean-up of the already discharged oil. The respondent was neither an active nor a passive polluter in respect of the original spill, for which it had no responsibility. The respondent's alleged failure to remediate the situation in a timely manner constituted an independent act which occurred after the original discharge and therefore constituted an independent cause of the plaintiffs' loss. There was no claim made against the respondent for damage caused by the original escape. The claim against the respondent arose out of its later action in failing to clean up the oil and prevent future damage beyond the time when the situation should have been remediated. Therefore, the damage allegedly caused by the respondent's negligence did not arise out of the escape, discharge, dispersal or release of a pollutant as prescribed in the clause. The pollution exclusion made the insurance inapplicable where the property damage that would otherwise be covered -- in this case, the damage from continuous exposure -- arose from an escape, discharge, dispersal or release of pollutants from the site where the insured was performing a clean-up of those pollutants. Because the insured had to be on site dealing with the already-released pollutants for the clause to apply, it was clear that the pollution exclusion spoke temporally to a new escape that occurred while the clean-up operation was ongoing. Such a new escape was excluded. Damage arising only from continuous exposure to pollutants released earlier was not excluded.

Per Osborne A.C.J.O. (dissenting): The claims made against the respondent came within the insuring agreement. The fact that the actual damage to the R property was caused by I Ltd. and not the respondent was irrelevant in determining the appellant's obligation to defend the respondent. There was nothing in the language of the insuring agreement which required that in order for the claim to be covered, it had to be alleged that the insured caused the damage giving rise to the claim for compensatory damages. The words "legally obligated to pay" combined with the conjunctive qualifier "because of" did not require a direct causal connection between the acts of the insured and the property damage. Rather, as long as the act from which the claim arose caused property damage or bodily injury giving rise to a claim for compensatory damages against the insured, the insuring agreement was triggered. The R claim against the respondent was replete with references to continuous and repeated exposure to the fuel oil. The "caused by an occurrence" provision of the insuring agreement was satisfied. While the R claim asserted only that their health was "jeopardized" by the oil spill, not that it caused sickness or disease, there was more than a mere possibility that the pleadings asserted a claim for compensatory damages for bodily injury within the meaning of the insuring agreement. On a reasonable reading of the statement of claim, the Rs were alleging that their health had been damaged and would continue to be damaged.

The pollution exclusion applied in this case. The application judge erred by resurrecting the distinction between active and passive polluters when he held that the clause only excluded acts by an insured which cause pollution. The question to be asked in the context of this case was whether the respondent's allegedly negligent clean up was merely incidental to the primary event of the discharge of the fuel oil or whether the alleged negligence constituted a new and independent cause giving rise to the damages claimed. In the latter event, the pollution exclusion would not apply because the claim as it related to the respondent would not arise out of the discharge, dispersal, release or escape of a pollutant.

The respondent's alleged negligence could not be said to be an intervening act which broke the chain of causation. On the basis of the statements of claim in the R and T Co. actions, the respondent's conduct had the effect of allowing the pollutants to contaminate the R property for a longer period of time than would have been the case had the respondent properly remediated the site. By failing to adequately and reasonably remediate the property, it was alleged, the respondent exacerbated the damages caused by the original discharge. Accordingly, the claim against the respondent arose out of the initial escape of the pollutant.

APPEAL by an insurer from a declaration that it had a duty to defend an action against an insured.

Ontario v. Kansa General Insurance Co. (1994), 1994 CanLII 626 (ON CA), 17 O.R. (3d) 38, 111 D.L.R. (4th) 757, [1994] I.L.R. 1-3031 (C.A.) [Leave to appeal to S.C.C. refused (1994), 19 O.R. (3d) xvi, 178 N.R. 398n], revg (1991), 1991 CanLII 7309 (ON SC), 2 O.R. (3d) 269, [1991] I.L.R. 1-2726 (Gen. Div.), consd Other cases referred to Carleton Iron Works Ltd. v. Ellis Don Construction Ltd., [1996] I.L.R. 1-3373 (Ont. Gen. Div.); Consolidated- Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, 112 D.L.R. (3d) 49, 32 N.R. 488, [1980] I.L.R. 1-1176; Derksen v. 539938 Ontario Ltd., 2001 SCC 72, (1999), 45 M.V.R. (3d) 6, 123 O.A.C. 232 (C.A.), affg (1998), 37 M.V.R. (3d) 59 (Ont. Gen. Div.); Hyde Athletic Industries Inc. v. Continental Casualty Co., 969 F.Supp 289 (E.D. Pa. 1997); Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49; Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, 72 O.R. (2d) 799n, 39 O.A.C. 63, 68 D.L.R. (4th) 321, 107 N.R. 321, [1990] I.L.R. 1-2583; Ohio Casualty Insurance Co. v. Bazzi Construction Co., 815 F.2d 1146 (7th Cir. 1987); Opron Maritimes Construction Ltd. v. Canadian Indemnity Co. (1986), 1986 CanLII 89 (NB CA), 19 C.C.L.I. 168 (N.B.C.A.) [Leave to appeal to S.C.C. refused (1987), 21 C.C.L.I. xxxv]; Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1991), 1991 CanLII 2346 (BC SC), 6 C.C.L.I. (2d) 23, 57 B.C.L.R. (2d) 88, [1991] I.L.R. 1-2737 (S.C.); Qualls v. Country Mutual Insurance Co., 123 Ill. App. 3d 831 (1984); Royal Insurance Co. of Canada v. Normerica Building Systems Inc., [1999] O.J. No. 2323 (C.A.), affg [1999] I.L.R. 1-3626 (Ont. Gen. Div.); Tsubaki of Canada Ltd. v. Standard Tube Canada, [1993] O.J. No. 1855 (Gen. Div.) Statutes referred to Environmental Protection Act, R.S.O. 1990, c. E.19, s. 14(1) Rules and regulations referred to Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 20, 21.01, 22

Vernol I. Rogers and Thomas J. Donnelly, for appellant. Robert V. Wright, for respondent.

OSBORNE A.C.J.O. (dissenting): --

Overview

[1] The issue on this appeal is whether J. Macdonald J., the motions judge, was correct in concluding that an insurer under a Commercial General Liability ("CGL") policy had a duty to defend its insured in two actions in which the insured was named, with others, as a defendant. The issue arises in the following circumstances.

[2] The appellant, Dominion of Canada General Insurance Company ("Dominion") insured the respondent, R.W. Hope Limited ("Hope"), under a CGL policy of insurance which was in force at all relevant times. Hope was a contractor principally engaged by property/casualty insurers to clean up or remediate damage caused by fire, water, defective construction and, in this case, by an oil spill admittedly caused by the defendant, Imperial Oil Limited ("Imperial Oil"), at the residence of Dr. and Mrs. Rudner in the City of York (now the City of Toronto).

[3] In 1995, the Rudners commenced an action in which they claimed compensatory damages from Imperial Oil and Hope (and others). I will refer to this action as the Rudner action. The Rudner action was settled at trial on the basis that liability was to be determined in an action commenced in 1999 by Trafalgar Insurance Company of Canada ("Trafalgar"), the Rudners' insurer under a homeowners' policy. I will refer to this action as the Trafalgar action. The Trafalgar action incorporates all of the Rudners' personal claims as well as the settlement made in the Rudner action. In addition, Trafalgar claims its subrogated interest for the costs of remediating the damage caused to the Rudner property by the oil spill.

[4] Dominion took the position from the outset that Hope's CGL policy did not provide coverage to Hope based on Dominion's interpretation of the insuring agreement and certain policy exclusions. It thus took no part in the defence of the Rudner action and refused to defend Hope in the Trafalgar action.

[5] Hope moved for summary judgment pursuant to Rule 20, Rules of Civil Procedure, R.R.O. 1990, Reg. 194 seeking a declaration that Dominion had a duty to defend both the Rudner and Trafalgar actions. Faced with this motion, Dominion brought a cross-motion under rule 21.01 for a declaration that it had no duty to defend. No issue is taken with the Rule 20 procedural aspects of the motion apart from Dominion's submission that its duty to defend should be measured solely on the basis of the provisions of Hope's CGL policy and the pleadings in the Rudner and Trafalgar actions. Dominion took the position that the evidence Hope filed on its summary judgment motion should not be considered by the motions judge. The motions judge accepted Dominion's submission on this threshold issue.

[6] In reasons reported at (2000), 2000 CanLII 50991 (ON SC), 20 C.C.L.I. (3d) 38, the motions judge granted Hope's summary judgment motion and dismissed Dominion's cross-motion. He held that Dominion was required to pay Hope's solicitor-and-client costs of defending the Rudner action and that it had a duty to defend the ongoing Trafalgar action.

[7] Dominion appeals on the basis that the policy does not cover the damages claimed against Hope in either the Rudner or Trafalgar actions. It submits that the claims against Hope do not come within the insuring agreement and, in the alternative, there is no coverage because three policy exclusions apply.

[8] The resolution of the duty to defend issue requires consideration of the pleadings in the Rudner and Trafalgar actions, the particular provisions of Hope's CGL policy and, of course, the principles that apply in determining whether an insurer has a duty to defend. I will deal first with the claims made against Hope in the Rudner and Trafalgar actions.

The Rudner and Trafalgar Actions

[9] The pleaded facts in the Rudner and Trafalgar actions provide the context in which Dominion's obligation, if any, to defend must be considered. For the most part, I will refer to the pleadings generally. Where required, I will make specific reference to the pleaded positions of the parties in order to identify the substance (as opposed to the mere form) of the pleadings. I will begin with the underlying pleaded facts.

[10] Dr. and Mrs. Rudner owned a home at 7 Rostrevor Road in the City of York. On May 11, 1993, about 800 litres of fuel oil leaked from their oil storage tank into the basement of their home. In their action, they alleged that the oil leaked into the soil under and around their home, was absorbed into the building materials and was exhausted into the air. Because of the oil spill, they left their home on May 12, 1993 and did not return until November 12, 1993. They were also required to leave their home from July 7, 1994 to July 10, 1994 and from July 20, 1994 until August 29, 1994, during which time further remedial work was done on the property.

[11] In the Rudner action, the Rudners claimed that Hope breached its contractual obligations to them by failing to carry out the required remedial work within a reasonable period of time and that it was negligent in performing the remedial work for reasons that are set out in paras. 18(a), (b) and (c) of the Rudners' statement of claim:

18. The Plaintiffs state that R.W. Hope Limited was negligent in performing the remedial work required to remove all contaminants and to restore the Subject Premises to their pre-oil spill condition within a reasonable period of time. Particulars of the negligence of R.W. Hope Limited are as follows:

(a) it contracted the work to inexperienced labourers and subcontractors who failed to follow through on the instructions of the Plaintiffs or Trafalgar, its servants, agents or employees in identifying contaminated soil and building materials and in removing these materials within a reasonable period of time;

(b) it carried out remedial work for the Subject Premises when it knew or ought reasonably to have known that the methods proposed would not remove all contaminated materials from the Subject Premises and would, therefore, not meet guidelines established by government agencies for remedying fuel oil contamination;

(c) it undertook experimental and unproven methods for remedying the fuel oil contamination when it knew or ought reasonably to have known that these methods were not likely to reduce the contamination levels from the fuel oil spill to levels within the accepted government agency guidelines.

[12] In addition to their property damage claims, the Rudners pleaded that they suffered the following damages:

The Plaintiffs state that as a result of the breaches of contract or negligence or breaches of fiduciary duty of the Defendants:

(a) their health has been and continues to be jeopardized; they have lost and will continue to lose enjoyment of life; their social, recreational and work routines have been and will continue to be disrupted; they have been and will continue to be inconvenienced over extended periods of time.

[13] The Rudners made a general allegation of negligence against Imperial Oil (which cross-claimed against Hope) in these terms:

The plaintiffs state that the escape of fuel oil into the basement of their home, the absorption of fuel oil into the foundation walls, building materials and the soil under and around the Subject Premises, the emulsification of fuel oil and its exhaustion into the air spaces, the building materials and household contents of the Subject Premises constitutes a serious health hazard and nuisance for which Imperial is, in law, responsible.

[14] The Rudner action settled for $213,000. Trafalgar and Imperial contributed to the settlement equally. Liability, and thus the appropriate allocation of the $213,000 payment, was to be determined in the Trafalgar action.

[15] Trafalgar, which as I have said, insured the Rudners under a homeowners' policy, was obligated to pay for the damage to the Rudners' home caused by the oil spill. Trafalgar retained Hope to remediate the spill. In its action, Trafalgar alleged that Hope was negligent in its remediation work. The particulars of the alleged negligence are set out in para. 20(iv) of Trafalgar's statement of claim. These allegations generally mirror the allegations of negligence against Hope in the Rudner action.

[16] Imperial Oil cross-claimed against Hope (and other defendants) in the Trafalgar action. In its cross-claim it sought contribution and indemnity for the plaintiffs' claim. Hope commenced a third party action against Dominion in the Trafalgar action in which it sought a declaration that Dominion had a duty to defend Hope in the Trafalgar action and pay Hope its solicitor-and-client costs of defending the settled Rudner action. Hope's successful motion for summary judgment was brought in Hope's third party proceeding against Dominion.

The Applicable Principles

[17] The principles that apply in determining whether an insurer has a duty to defend are set out in the leading case of Nichols v. American Home Assurance Co., 1990 CanLII 144 (SCC), [1990] 1 S.C.R. 801, 68 D.L.R. (4th) 321. The threshold established by Nichols is rather low. The duty to defend arises where there is a "mere possibility" that the claim made against the insured is covered by the policy.

[18] The onus is on the insured to establish that, on a possibility basis, the allegations made by the plaintiff, if proved, bring the claim within the four corners of the relevant policy. Once that threshold is met, the onus shifts to the insurer to show that the claim made falls outside the coverage provided by the policy because of an applicable exclusion clause. If there is an exception to an exclusion, the insured bears the burden of establishing that the exception applies.

[19] The Nichols principles were recently affirmed by the Supreme Court of Canada in Monenco Ltd. v. Commonwealth Insurance Co., 2001 SCC 49. In Monenco, the central issue was whether an exclusion in a CGL policy applied with the result that the insurer did not have a duty to defend. Iacobucci J., writing for a unanimous court, reviewed the principles applicable to an insurer's duty to defend. He affirmed the traditional "pleadings rule". He said at para. 28:

Whether an insurer is bound to defend a particular claim has been conventionally addressed by relying on the allegations made in the pleadings filed against the insured, usually in the form of a Statement of Claim. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, then the insurer is obliged to provide a defence. This remains so even though the actual facts may differ from the allegations pleaded.

[20] As Iacobucci J. noted, it necessarily follows that when it is determined that the allegations in the pleadings against the insured fall outside the insuring agreement or, if within the insuring agreement, are excluded by an applicable exclusion, the duty to defend does not arise.

[21] The insurer's duty to defend will arise where, on a reasonable reading of the pleadings, a claim within coverage has been made. Although substantial latitude must be given to the allegations made in the statement of claim, the statement of claim should be read in a realistic way. Consistent with that theme, as Iacobucci J. notes in Monenco at para. 34, it is not the labels used by the pleader, but the true nature of the claim that matters. In other words, the substance of the claims made should be determined. Once that is done, the court will consider whether the claims made, if proved, will trigger the insurer's obligation to pay under the policy having regard to the insuring agreement and any relevant policy exclusions.

[22] Monenco resolved the question of what, if any, extrinsic evidence can be considered to determine whether an insurer has a duty to defend. On this subject, Iacobucci J. held that documents referred to in the pleadings (the contract and joint venture agreement in Monenco) could be considered by the motions judge in determining whether the insurer has a duty to defend. This is consistent with the pleadings rule since documents that may be considered are restricted to those referred to in the pleadings.

[23] The insuring agreement should be read broadly and exclusions narrowly, and ambiguities should be resolved in favour of the insured. However, the plain meaning of the policy language should be respected. Ambiguities should not be judge- made; they should be apparent from a reasonable reading of the policy.

[24] For reasons that follow, I think that the motions judge was correct in concluding that the claims made against Hope in the Rudner and Trafalgar actions fall within the insuring agreement. However, in my view, the pollution exclusion applies with the result that Dominion is not required to defend Hope. Given my conclusion on the relevance of the pollution exclusion, it is, strictly speaking, not necessary to address Dominion's attack on the motions judge's insuring agreement findings. However, in light of counsel's comprehensive submissions on that subject and because the provisions of the insuring agreement must be considered in determining the scope of the policy exclusions, I will first address the various insuring agreement issues and then, of course, the policy exclusions.

The Insuring Agreement

[25] The relevant sections of the insuring agreement in Hope's CGL policy are as follows:

We will pay those sums that the insured becomes legally obligated to pay as compensatory damages because of "bodily injury" or "property damage" to which this insurance applies. . . . This insurance applies only to "bodily injury" and "property damage" which occurs during the policy period. The "bodily injury" or "property damage" must be caused by an "occurrence".

(Emphasis added)

[26] The policy definitions relevant to the insuring agreement are:

-- "Bodily injury" means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.

-- "Property damage" means:

(a) physical injury to tangible property, including all resulting loss of use of that property; or

(b) loss of use of tangible property that is not physically injured.

-- "Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Analysis

1. Do the claims made against Hope come within the insuring agreement?

[27] The insuring agreement provides that the loss for which the insured will be indemnified crystallizes when the insured becomes legally liable to pay compensatory damages because of bodily injury or property damage caused by an occurrence. The term "occurrence" is defined in the policy as an "accident".

[28] The oil spill which was the root cause of the Rudners' claim and Trafalgar's subrogated claim was caused by Imperial Oil. Dominion submits that to come within the "bodily injury" and "property damage" provisions of the insuring agreement, the compensation sought against Hope must relate to "bodily injury" or "property damage" allegedly caused by Hope. Since Hope is not alleged to have caused the oil spill, Dominion contends that the Rudners' claim against Hope, if proved, is not covered by the CGL policy.

[29] The motions judge concluded at para. 10 of his reasons that the fact that the actual damage to the Rudners' property was caused by Imperial Oil, not Hope, "is of no significance" when it comes to determining Dominion's obligation to defend Hope. He interpreted the insuring agreement to mean that Hope does not have to have been targeted in the statement of claim as the cause of the oil spill. He noted that Dominion has a duty to defend if it is pleaded that Hope is legally obligated to pay compensatory damages "because of" bodily injury or property damage. He did not import into the insuring agreement a causation requirement between the insured's actions and the property damage and thus did not give effect to Dominion's submissions on this aspect of the insuring agreement.

[30] I agree with the motions judge's conclusion on this point. There is nothing in the language of the insuring agreement which requires that in order for the claim to be covered, it must be alleged that the insured caused the damage giving rise to the claim for compensatory damages. In my opinion, the words "legally obligated to pay" combined with the conjunctive qualifier "because of" do not require a direct causal connection between the acts of the insured and the property damage. Rather, as long as the event from which the claim arose caused property damage or bodily injury giving rise to a claim for compensatory damages against the insured, the insuring agreement is triggered. This is so whether or not the claim made against the insured is that it actually caused the damage or failed to take reasonable steps to remediate it. In both cases, the claim for compensatory damages arises out of alleged property damage and bodily injury. The claims made against Hope fit within the "because of bodily injury or property damage" language of the policy.

[31] Dominion also submits that there is no coverage because the property damage for which Hope is allegedly responsible was not caused by an "occurrence". Hope complains that Dominion raises this issue for the first time on appeal. It was not referred to in Dominion's statement of defence in the third party action, and was not raised as part of Dominion's argument on the motion and cross-motion. Nonetheless, I will deal with it, particularly since I see no merit in it. I agree with Dominion, as does Hope, that faulty workmanship is not an occurrence. See Royal Insurance Co. of Canada v. Normerica Building Systems Inc., [1999] I.L.R. 1-3626 (Ont. Gen. Div.), affd [1999] O.J. No. 2323 (C.A.); Carleton Iron Works Ltd. v. Ellis Don Construction Ltd., [1996] I.L.R. 1-3373 (Ont. Gen. Div.); Tsubaki of Canada Ltd. v. Standard Tube Canada, [1993] O.J. No. 1855 (Gen. Div.). However, occurrence is defined in the insuring agreement to include within the ambit of accident, ". . . continuous or repeated exposure to substantially the same general harmful conditions".

[32] The Rudners' claim against Hope is replete with references to continuous and repeated exposure to the fuel oil. In my view, the "caused by an occurrence" provision of the insuring agreement is satisfied. I would not give effect to this ground of appeal.

[33] To summarize, I agree with the motions judge's interpretation of the language of the insuring agreement on the general issue as to whether the occurrence giving rise to the claim for compensatory damages must be alleged to have been caused by Hope. I think that the motions judge was correct to conclude that there is more than a "mere possibility" that Hope may be obligated to pay compensatory damages to the Rudners because of damages to their home. I see no merit in Dominion's new argument that the property damage was not caused by an occurrence.

The bodily injury issue

[34] Dominion also submits that the Rudners' statement of claim contains no allegation that they have experienced bodily injuries. Dominion thus contends that the bodily injury component of the insuring agreement is not engaged. Dominion's factum puts it this way:

There is no allegation in the pleadings that "bodily injury" has occurred. Although the Rudners alleged in the Rudner action that "their health has been and continues to be jeopardized", that is not bodily injury, sickness or disease.

[35] It seems to me to be clear that apart from Dominion's now rejected causation and occurrence arguments, Dominion's position with respect to the bodily injury claim is based on the simple premise that there is no claim for compensatory damages for bodily injury. In support of that submission, Dominion emphasizes that the Rudners' statement of claim alleges that the oil spill "jeopardized" their health, not that it caused sickness or disease or any particular physiological problem. Thus, according to Dominion, the damage claims asserted by the Rudners do not come within "bodily injury" as defined in Hope's CGL policy.

[36] In my view, the answer to the bodily injury question is seductively simple. If the pleadings do not contain a claim for compensatory damages for bodily injury, neither Hope nor its insurer will be required to defend what must be taken as a non- existent claim. Since Dominion at this point in the analysis is required to defend the Rudner/Trafalgar property damage claims, in my view, the best course of action would be to allow the trial judge to determine whether the pleadings as they are constituted at the time of trial contain a claim for compensatory damages for bodily injury.

[37] In any case, I agree with the motions judge's conclusion that there is "more than a mere possibility that the pleadings assert a claim for compensatory damages for bodily injury within the meaning of the insuring agreement". On a reasonable reading of the Rudners' statement of claim, the Rudners are alleging that their health has been damaged and will continue to be damaged. Although the pleading is vague, that seems to me to represent its substance. Put another way, the Rudners' statement of claim would support an award of damages consequent upon bodily injury if, of course, bodily injury was found to exist by the trier of fact. Even where the claim against the insured is ambiguous, as is this claim relating to bodily injury, if, having regard to the substance of the claim, the claim can be interpreted in such a way as to bring it within the policy coverage, the insurer must defend it. See Opron Maritimes Construction Ltd. v. Canadian Indemnity Co. (1986), 1986 CanLII 89 (NB CA), 19 C.C.L.I. 168 (N.B.C.A.), leave to appeal to the Supreme Court of Canada refused (1987), 21 C.C.L.I. xxxv (S.C.C.).

[38] I see no merit in Dominion's bodily injury submissions.

2. Do the claims made against Hope fall outside of the policy coverage because of an exclusion clause?

The pollution exclusion

[39] In an alternative submission, Dominion contends that on the facts pleaded, the pollution liability exclusion in its policy is engaged. The pollution exclusion provides:

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:

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:

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

[40] The plain language of the pollution exclusion requires consideration of a threshold question -- is the fuel oil a "pollutant"? If it is, the next question is whether the pollution exclusion is engaged where the insured, Hope, did not cause the discharge, dispersion, release or escape of the pollutant.

[41] In my view, the oil which escaped from the Rudners' storage tank and contaminated their property was a "pollutant" within the definition of that term in the pollution exclusion:

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

[42] The fuel oil which contaminated the Rudners' property is, in my view, a liquid contaminant.

[43] The motions judge, proceeding on the basis that the fuel oil in question was a pollutant, found that the pollution exclusion did not apply because the fuel oil had escaped before Hope was on the scene to clean up the Rudners' property. The motions judge noted that para. 15 of Dominion's statement of defence pleads that any claim against Hope in respect of the parts of the premises other than those where Hope did work are necessarily a result of "migration of fuel oil already on the premises". He emphasized that the pollution exclusion does not on its face apply to bodily injury or property damage arising out of "the presence" of a pollutant. He concluded at para. 23 of his reasons:

In my opinion, the pollution exclusion does not apply to bodily injury or property damage arising out of the presence of a pollutant. As well, this exclusion does not apply to bodily injury or property damage arising out of the improper removal of a pollutant, unless the improper removal includes, or is alleged to include discharge, dispersal, release or escape of the pollutant. This is so even if the insured, or its contractors or subcontractors were monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing the pollutant within the meaning of the exclusionary clause. On the pleadings, there was no discharge, dispersal, release or escape of fuel oil, a pollutant in the circumstances alleged, at any time during the applicant's involvement. The bodily injury and property damage for which the applicant is sued do not "arise out of" discharge, dispersal etc. of the fuel oil, but out of the failure to remedy its presence.

(Emphasis added)

[44] Dominion submits that the motions judge erred in finding that the bodily injury and property damage for which Hope is sued do not arise out of the discharge of the fuel oil, but out of the failure to remedy its presence. Dominion's position is that the motions judge's analysis creates a distinction between an active polluter (Imperial Oil) and a passive polluter (Hope), a distinction which was rejected by this court in Ontario v. Kansa General Insurance Co. (1994), 1994 CanLII 626 (ON CA), 17 O.R. (3d) 38, 111 D.L.R. (4th) 757, leave to appeal to the Supreme Court of Canada refused (1994), 19 O.R. (3d) xvi, 178 N.R. 398n. Dominion's position is that the claim against Hope arises out of the discharge of the fuel oil, as does the claim against Imperial Oil.

[45] In contrast, Hope submits that the question in Kansa was whether there was a continuous chain of causation, unbroken by a new act of negligence between the pollution and the damages sustained. Hope submits that its allegedly negligent work in cleaning up the oil spill was an intervening act that broke the chain of causation between the discharge of oil and the property damage.

[46] The motions judge understandably did not refer to this court's judgment in Kansa since Dominion did not rely on this case in argument before him. In my view, Kansa is relevant to the proper interpretation of the pollution exclusion. It establishes the test for determining whether damage for which an insured is alleged to be responsible in law can be said to arise out of the "discharge, dispersal, release or escape" of pollutants, in the context of a case where the insured (in Kansa, the Province of Ontario which was accused of regulatory negligence), did not actually cause the discharge of the pollutant.

[47] The relevant pollution exclusion in Kansa provided:

7. Exclusions.

This policy shall not apply to claims arising out of:

(i) the discharge, dispersal, release or escape of smoke, vapours . . . or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water of any description . . .

The regulatory negligence of which the Province was accused in Kansa appears to have consisted of non-feasance after the initial polluting event.

[48] The language of the pollution exclusion in Kansa does not, in my view, differ in substance from the language of the pollution exclusion in Hope's CGL policy. In Kansa, the insured, the Province of Ontario, sought a declaration that its insurer, Kansa, was obligated to defend a third party claim brought against it in which it was alleged that provincial officials were negligent in failing to adequately respond to the escape of contaminants from the defendant's land. It was further alleged that this negligence caused damage to the plaintiff. Kansa contended that because the claim against Ontario arose from the escape of a pollutant, coverage was excluded by the terms of the pollution exclusion. Ontario responded that the exclusion was intended to apply only to active, or actual, polluters. It argued that because it was not alleged to have caused the escape of the pollutant, it was not an actual polluter. Since the claim against it did not arise out of the discharge of a pollutant, the pollution exclusion did not apply and thus the insurer was required to defend the third party claim.

[49] Labrosse J.A., writing for the court, rejected the distinction between active and passive polluters. He concluded that the Province's alleged negligence could not be divorced from the discharge of the pollutants which caused the damage and therefore the claim fell within the exclusion. He further reasoned that under the Environmental Protection Act, R.S.O. 1990, c. E.19, s. 14(1), the insured would, in any event, be considered an active polluter. Applying a chain of causation test, Labrosse J.A. found a continuous chain of causation because the regulatory negligence of the Crown did not constitute an intervening act of negligence between the pollution and the damages sustained. He put it in this way at p. 45 O.R.:

The regulatory negligence of the Crown is not an intervening act which takes the occurrence or the damages outside the scope of the pollution exclusion clause. Damages resulting from a failure to regulate or a failure to warn of the release of pollutants constitute damages arising from the discharge of pollutants. The Crown's alleged negligence was merely incidental to the primary event of pollution and constituted a continuing cause rather than a new and independent cause giving rise to the loss.

(Emphasis added)

[50] It seems to me that Kansa, which involves pleaded facts structurally similar to those in the Rudner/Trafalgar pleadings, answers the question whether the claim against Hope "arose out of" the initial discharge or escape of the fuel oil for purposes of interpreting and applying the pollution exclusion. In light of Kansa, the question to be asked in the context of this case is whether Hope's allegedly negligent clean up was merely incidental to the primary event of the discharge of the fuel oil or whether Hope's alleged negligence constitutes a new and independent cause giving rise to the damages claimed. In the latter event, the pollution exclusion would not apply because the claim as it relates to Hope would not arise out of the discharge, dispersal, release or escape of a pollutant.

[51] Consistent with the Kansa analysis, I do not think that Hope's alleged negligence can be said to be an intervening act which broke the chain of causation. On the basis of the Rudner/ Trafalgar statements of claim, Hope's conduct had the effect of allowing the pollutants to contaminate the Rudner property for a longer period of time than would have been the case had Hope properly remediated the site. By failing to adequately and reasonably remediate the property, Hope exacerbated the damages caused by the original discharge. That seems to me to be the substance of the Rudner/Trafalgar claims. The escape of the fuel oil necessitated the clean up. Indeed, the pollution exclusion in Hope's CGL policy specifically applies to the clean up of an escaped pollutant and thus the clean up is part of the exclusion.

[52] In my view, just as the regulatory negligence alleged in Kansa was considered to be a claim arising out of the initial polluting activity, the claim made against Hope arises out of the initial escape of the pollutant. Indeed, there seems to me to be a more direct connection between the escape of the pollutant and its subsequent clean up than there was between the escape of the pollutant and the regulatory negligence alleged against Ontario in Kansa.

[53] Given the ambit of the pollution exclusion, which as I have said includes clean-up operations, in my view, the pollution exclusion applies irrespective of the fact that Hope did not cause the discharge in the first place. See Hyde Athletic Industries Inc. v. Continental Casualty Co., 969 F.Supp. 289 at 297 (E.D. Pa. 1997).

[54] My conclusion as to the application of the pollution exclusion prompts the concern raised by counsel for the respondent that Hope's CGL policy would be useless given this interpretation of the scope of the pollution exclusion clause: see Consolidated-Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, 112 D.L.R. (3d) 49. In Consolidated Bathurst, Estey J. said at p. 901 S.C.R. that, "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."

[55] It is not clear to me that the interpretation of the pollution exclusion clause which I favour would render Hope's insurance policy nugatory. Hope's pleadings in its third party claim against Dominion in the Trafalgar action state that to Dominion's knowledge, Hope carried on business as a general contractor performing restoration work for insurers. Hope also pleaded that the work it performed in this instance was in the ordinary course of its business as disclosed to Dominion. I do not think it can safely be assumed that Hope's CGL policy would be rendered nugatory, given the scope of Hope's work as a general contractor. It is not evident from the pleadings that environmental remediation was Hope's primary line of work.

[56] Finally, the circumstances of this case differ from those in Derksen v. 539938 Ontario Ltd., 2001 SCC 72, where the issue put to the court by stated case under Rule 22 was whether the defendant's automobile policy or its CGL policy, or both, provided coverage for the claims made by the plaintiffs. Neither Hope nor Dominion raised Derksen in support of their positions with respect to the duty to defend in this case. Although the Supreme Court of Canada's reasons had not been released when this matter was argued before the motions judge, the judgment of this court had been: (1999), 1999 CanLII 3749 (ON CA), 123 O.A.C. 232, 45 M.V.R. (3d) 6 (C.A.).

[57] In Derksen, the claims arose out of an accident in which one child was killed and three were injured when a steel base plate (part of a road sign assembly), which had been put on the defendant's truck by the defendant driver as part of the clean up at a work site, flew off the truck through the windshield of an oncoming school bus. The plaintiffs in various actions resulting from the tragic accident alleged negligence at the work site and in the operation of the truck. On the basis of an agreed statement of fact, the motions judge held that the accident resulted from concurrent causes (negligent clean up and negligent operation of the truck) and that both the CGL and the automobile policies provided coverage, notwithstanding the standard "use or operation of an automobile" exclusion in the CGL policy: (1998), 37 M.V.R. (3d) 59 (Ont. Gen. Div.). The automobile insurer's appeal to this court was dismissed, as was its appeal to the Supreme Court of Canada where Major J. affirmed the concurrent causes analysis of the motions judge and this court. He said at para. 32, "These two separate acts of negligence, in combination, contributed to the accident."

[58] Here, the issue is whether Hope's CGL insurer has a duty to defend. This issue was considered on the basis of the pleadings, not, as in Derksen, on an agreed statement of facts. The pleadings do not involve allegations of concurrent negligence, but rather what I would label allegations of sequential negligence, that is Imperial Oil's primary negligence in allegedly causing the escape of the fuel oil and Hope's alleged negligence, which in my view arose out of the oil spill, in allegedly failing to eliminate or limit the consequences of Imperial Oil's earlier negligence. These allegations of negligence are closely related but are not concurrent. Unlike Derksen, the claims against Imperial Oil and Hope would give rise to different assessments of compensatory damages. In my view, for these reasons Derksen does not assist in resolving the issue whether the pollution exclusion applies.

The business risk exclusions

[59] Hope's CGL policy contains exclusions generally referred to as "business risk" exclusions. These exclusions are included in the policy to ensure that there is no coverage for the insured's own negligent or defective work. It is accepted that if there were such coverage, the CGL policy would become a performance bond. This concern was referred to by the 7th Circuit of the United States Court of Appeals in Ohio Casualty Insurance Co. v. Bazzi Construction Co., 815 F.2d 1146 at 1148 (7th Cir. 1987), quoting Qualls v. Country Mutual Insurance Co., 123 Ill. App. 3d 831 (1984):

Comprehensive general liability policies . . . are intended to protect the insured from liability for injury or damage to the persons or property or others; they are not intended to pay the costs associated with repairing or replacing the insured's defective work and products, which are purely economic losses . . . Finding coverage for the cost of replacing or repairing defective work would transform the policy into something akin to a performance bond.

[60] (See also Privest Properties Ltd. v. Foundation Co. of Canada Ltd. (1991), 1991 CanLII 2346 (BC SC), 6 C.C.L.I. (2d) 23, 57 B.C.L.R. (2d) 88 (S.C.)).

[61] Dominion submits that there are two relevant business risk exclusion clauses that apply. The first excludes damage to real property caused by Hope's operations. This exclusion reads:

This insurance does not apply to:

h. "Property damage" to:

5. That particular part of real property on which you or any contractor or subcontractor working directly or indirectly on your behalf is performing operations, if the "property damage" arises out of those operations; . . .

[62] Hope accepts that this exclusion applies to deny coverage for the particular part of the Rudners' property on which Hope performed its operations. However, Hope contends that on a reading of the pleaded allegations, only a part of the Rudner/Trafalgar claims for compensatory damages against Hope involved Hope's allegedly defective work on the Rudners' property.

[63] The pleadings do not disclose the extent of Hope's remediation work. I cannot, therefore, say whether exclusion "h" applies. As the onus is on Dominion to establish that this exclusion does apply, I would not give effect to this ground of appeal.

[64] The second business risk exclusion is the "impaired property" exclusion. This exclusion applies to property that was not physically damaged, but which is less useful because the insured's work was defective or inadequate. This exclusion provides:

This insurance does not apply to:

k. "Property damage" to "impaired property" or property that has not been physically injured arising out of:

1. A defect, deficiency, inadequacy or dangerous condition in "your product" or "your work"; or

2. A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

[65] I am not satisfied that business risk exclusion "k" applies. This clause does not apply without proof that the property can be restored to use. "Impaired property" is defined in the policy as:

. . . tangible property, other than "your product" or "your work", that cannot be used or is less useful because:

a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or

b. You have failed to fulfill the terms of a contract or agreement:

if such property can be restored to use by:

a. The repair, replacement, adjustment or removal of "your product" or "your work"; or

b. Your fulfilling the terms of the contract or agreement.

[66] Again, the application of this exclusion cannot be determined on the pleadings and thus I would not give effect to this ground of appeal.

Conclusion

[67] Because I think the pollution exclusion does apply, I would allow Dominion's appeal. Although it was successful in the outcome, Dominion was unsuccessful on three of the four principal issues it argued on this appeal. I would thus award Dominion fifty per cent of its assessable costs. I would set aside the order below and in its place issue a declaration that Dominion has no duty to defend Hope in the Trafalgar action or pay Hope's costs of defending the settled Rudner action. As my conclusion in this matter was influenced by this court's judgment in Kansa, which was not argued before the motions judge, I would not grant costs of the motion and cross-motion before the motions judge.

[68] FELDMAN J.A. (LASKIN J.A. concurring): -- I have had the benefit of reading the reasons for judgment of Osborne A.C.J.O. and agree with all but one aspect of those reasons, the effect of the pollution exclusion clause. In my view, on the facts of this case, the pollution exclusion does not apply, and therefore does not relieve Dominion of its duty to defend the action brought against its insured, Hope.

[69] The relevant portion of the pollution exclusion clause provides:

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:

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:

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

[70] For the purposes of the analysis, it is not necessary to finally decide whether oil is always a pollutant within the definition set out in the exclusion. Assuming that the oil that was the subject of the clean-up on the Rudner property is a liquid contaminant, the issue is whether the wording of the pollution exclusion applies to the claim made against Hope.

[71] Osborne A.C.J.O. concluded that the trial judge erred by resurrecting the distinction between active and passive polluters when he held that the clause only excludes acts by an insured which cause pollution. His concern is that that distinction was rejected by this court in Ontario v. Kansa General Insurance Co., supra. There the court held that the damage caused by the alleged regulatory negligence of Ontario in permitting the defendant to allow pollutants to escape onto a neighbour's property constituted damage arising from that discharge of the pollutant, even though the government did not actually discharge the pollutant, but only permitted the discharge to occur by failing to enforce the law. The government's alleged negligence was therefore not a new and independent cause of the loss, and as a result, the damages claimed against the government were excluded by the clause because they were damages arising from the discharge itself.

[72] In this case, the acts alleged to have been done by Hope occurred during the course of its clean-up of the already discharged oil. Hope was neither an active nor a passive polluter in respect of the original spill, for which it had no responsibility. Hope's alleged failure to remediate the situation in a timely manner constitutes an independent act, which occurred after the original discharge and therefore constituted an independent cause of the plaintiffs' loss. There is no claim made against Hope for damage caused by the original escape, nor could there be. The claim against Hope does not arise out of the original escape of the oil but out of its later action in failing to clean up the oil and prevent future damage beyond the time when the situation should have been remediated. Therefore the damage allegedly caused by Hope's negligence does not arise out of the escape, discharge, dispersal or release of a pollutant as prescribed in the clause.

[73] The analysis can be tested by considering first the wording of the coverage clause, then whether the acts that come within coverage are excluded. Coverage is given where there is an occurrence. An occurrence is defined as an accident, including continuous or repeated exposure to the harmful conditions. Although Hope is not alleged to have caused the original escape, it is entitled to coverage because it is allegedly responsible from the time of its negligence, for continuous exposure of the property to the oil contamination.

[74] The pollution exclusion makes the insurance inapplicable where the property damage that would otherwise be covered -- in this case, the damage from continuous exposure -- arises from an escape, discharge, dispersal or release of pollutants from the site where the insured is performing clean-up of those pollutants. Because the insured must be on site dealing with the already-released pollutants for the clause to apply, it seems clear that the pollution exclusion speaks temporally to a new escape that occurs while the clean-up operation is ongoing. Such a new escape is excluded. Damage arising only from continuous exposure to pollutants released earlier, is not excluded.

[75] The exclusion requirement that the escape must be from the site where the insured is working also supports the interpretation that the clause is speaking to a new escape that occurs while the insured is working on site. Although, in this case, the original oil spill occurred on the same site where Hope was called to perform the remediation, depending on the circumstances in each case, the original escape may or may not occur on or from that site.

Conclusion

[76] In determining whether an insurer has a duty to defend, the test is whether there is a mere possibility that the claim made against the insured is covered by the policy: Nichols v. American Home Assurance Co., supra. In my view, based on the wording of the coverage and exclusion clauses and the allegations made against Hope in the pleadings, the insured Hope is covered. However, we need only decide for the purposes of this appeal whether coverage is necessarily excluded. I am satisfied that it is not, and therefore the insurer has a duty to defend Hope in the action.

Result

[77] I would dismiss the appeal with costs.

Appeal dismissed.