O'Byrne et al. v. Farmers' Mutual Insurance Company (Lindsay)

[Indexed as: O'Byrne v. Farmers' Mutual Insurance Co. (Lindsay)]

Ontario Reports

Court of Appeal for Ontario,

Epstein, Pepall and van Rensburg JJ.A.

July 11, 2014

121 O.R. (3d) 387 | 2014 ONCA 543

Case Summary

Insurance — Property insurance — Exclusions — Tenant in second floor apartment in building owned by insured inserting piece of cardboard to bypass furnace thermostat so that furnace would run continuously in her absence — Tenant's actions causing oil to overflow and damage to insured's main floor commercial units — Exclusion in all-risks property insurance policy for mechanical or electrical breakdown or derangement not applying — Pollution exclusion in policy also not applying.

Insurance — Statutory conditions — Waiver — Independent adjuster retained by insurer advising insured that they did not have to deliver proof of loss — Trial judge's finding that insurer waived proof of loss requirement through adjuster amply supported by evidence — Insured [page388] not pleading waiver in action against insurer but waiver a live issue at trial — Trial judge not erring in stating on his own initiative that he was prepared to grant insured leave nunc pro tunc to amend pleading had it been necessary to plead waiver.

The respondents owned a building which was insured by the appellant under an all-risks property insurance policy. The tenant in a second floor apartment inserted a piece of cardboard into the primary control of the oil-fired furnace in the apartment in order to bypass the thermostat, presumably to keep the furnace in constant "hot" operation while she was away. Forcing the furnace to run more or less continuously at an excessively high temperature caused the ignition component to fail. When that occurred, the oil continued to be pumped but was not burned and so overflowed, causing damage to the respondents' main floor commercial units. The appellant took the position that the loss was not covered because of a pollution exclusion in the policy. An independent adjuster retained by the appellant wrote to the respondents advising them that they were not required to deliver a proof of loss. The respondents brought an action against the appellant. The appellant's original statement of defence did not refer to the respondents' failure to deliver a proof of loss. However, an amended statement of defence pleaded that the respondents were precluded from bringing the claim because of their failure to provide a proof of loss. The trial judge found that the appellant waived the proof of loss requirement through the independent adjuster. He rejected the appellant's argument that waiver could not be relied upon because it had not been pleaded by the respondents. He stated that if it were necessary for waiver to have been pleaded, he was prepared to grant leave nunc pro tunc to the respondents to do so because there would be no prejudice to the appellant. He found that neither the pollution exclusion in the policy nor the exclusion for mechanical or electrical breakdown or derangement applied. The action was allowed. The appellant appealed.

Held, the appeal should be dismissed.

The trial judge's conclusion that the appellant waived the proof of loss requirement through the independent adjuster's letter was amply supported by the evidence. As for the respondents' failure to plead waiver, waiver was a live issue at trial and was addressed by both sides in evidence and argument. The trial judge did not err in stating that he was prepared to grant the respondents leave nunc pro tunc to amend their pleading. He was entitled to grant leave to amend pleadings on his own initiative, in the absence of a motion by the respondents for such relief. If those conclusions were wrong and the failure to deliver a proof of loss amounted to imperfect compliance with a statutory condition, relief from forfeiture under s. 129 of the Insurance Act, R.S.O. 1990, c. I.8 might well have been appropriate based on all of the circumstances, including the adjuster's letter and the appellant's failure to plead the absence of a proof of loss until several years into the action.

The trial judge did not err in finding that the mechanical breakdown or derangement exclusion did not apply. The furnace was well-maintained and had no internal problem or defect. The cause of the loss was the tenant's actions. The oil-spill damage was not a multi-causal loss; that is, the failure of a mechanical element of the furnace was not another cause of the oil damage, but rather something that occurred only after the tenant interfered with the proper operation of the furnace. The pollution exclusion in the policy also did not apply. On a plain reading of the pollution exclusion, there had to be another operative exclusion before the pollution exclusion applied. The only other exclusion relied on by [page389] the appellant was the mechanical breakdown or derangement exclusion, which did not apply.

Kalkinis (Litigation guardian of) v. Allstate Insurance Co. of Canada (1998), 1998 6879 (ON CA), 41 O.R. (3d) 528, [1998] O.J. No. 4466, 117 O.A.C. 193, 83 A.C.W.S. (3d) 480 (C.A.), distd

Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada (2008), 91 O.R. (3d) 438, [2008] O.J. No. 1811, 2008 ONCA 368, 61 C.C.L.I. (4th) 163, 238 O.A.C. 64, 167 A.C.W.S. (3d) 182; Derksen v. 539938 Ontario Ltd., [2001] 3 S.C.R. 398, [2001] S.C.J. No. 27, 2001 SCC 72, 205 D.L.R. (4th) 1, 277 N.R. 82, 273 N.R. 356, 150 O.A.C. 1, 153 O.A.C. 310, 33 C.C.L.I. (3d) 1, [2002] I.L.R. I-4029, 15 M.V.R. (4th) 1, REJB 2001-26225, J.E. 2001-1941, 108 A.C.W.S. (3d) 893; Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, [2002] O.J. No. 4496, 222 D.L.R. (4th) 655, 166 O.A.C. 233, 43 C.C.L.I. (3d) 174, [2003] I.L.R. I-4137, 118 A.C.W.S. (3d) 719 (C.A.), consd

Other cases referred to

Corbould v. BCAA Insurance Corp., [2010] B.C.J. No. 2125, 2010 BCSC 1536, 90 C.C.L.I. (4th) 257, 13 B.C.L.R. (5th) 168, [2011] I.L.R. I-5069

Statutes referred to

Insurance Act, R.S.O. 1990, c. I.8, ss. 129, 131, 135(2), 136, Part IV, s. 148, paras. 6, 11, 12

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 26

APPEAL by the defendant from the judgment of Sproat J., [2012] O.J. No. 2056, 2012 ONSC 468 (S.C.J.) for the plaintiffs.

Martin P. Forget and E. Reynolds, for appellant.

Robert N. Kostyniuk, Q.C., and G. Pribytkova, for respondents.

The judgment of the court was delivered by

VAN RENSBURG J.A.: —

Introduction

[1] This action arose out of the discharge of oil from a furnace in a building in Minden, Ontario owned by the respondents, Blake O'Byrne and Colleen O'Byrne. The appellant, Farmers' Mutual Insurance Company (Lindsay), insured the building pursuant to an "all-risks" insurance policy, but denied coverage for the damage caused by the leaked oil. Litigation ensued. The trial judge found in favour of the respondents. He awarded them damages and prejudgment interest in the sum of $66,737, which took into account the funds received as part of a settlement from a co-defendant not party to this appeal.

[2] For the reasons that follow, I would dismiss the appeal. [page390]

Facts and Decision Below

[3] The respondents owned a two-storey multi-use commercial building in Minden, Ontario. The appellant insured the building pursuant to an "all-risks" property insurance policy. The second floor of the building contained two residential apartments. An oil-fired furnace was located in one of the apartments. On March 11 or 12, 2005, the tenant of that apartment inserted a piece of cardboard into the primary control of the furnace between two sets of contacts in order to bypass the thermostat, as the trial judge noted, "presumably to keep the furnace in constant 'hot' operation while she was away". On March 13, 2005, while the tenant was absent, there was a significant spill of heating oil from the furnace. The oil spilled onto the apartment floor, leaked through the floorboards, and saturated the main floor beam and ceiling of the building's lower commercial units. The cause of the discharge was described in the reasons for judgment as follows [at paras. 5-6]:

Grant Shaw was the only qualified furnace technician who testified. Mr. Shaw attended the premises first thing Monday morning. He discovered that the cover of the furnace, and a further cover over a control panel, had been removed. Cardboard paper had been inserted between a set of contacts the result of which was to bypass the thermostat which would ordinarily turn the furnace on and off. His evidence was not seriously challenged in cross-examination and I accept it as to the cause of the oil spill.

With the thermostat bypassed, the furnace temperature was only monitored by a fan limit control which would turn off at 200 degrees. As soon as the furnace fell below 200 degrees it would turn back on. Forcing the furnace to run, more or less continually, at this excessively high temperature would cause the ignition component to fail. This could be, for example, as a result of the high heat warping the nozzles or carbon accumulating in the nozzle. Whatever the specific reason, on a balance of probabilities it was the bypass and high heat which caused the ignition to fail to re-ignite. When this occurred the oil continued to be pumped but was not burned and so overflowed. Mr. Shaw testified that the furnace had received annual maintenance.

[4] The trial judge found that there was no internal defect or problem in the furnace. He also found that it was well maintained, and accepted the evidence of the furnace technician that it would have continued to operate for a long time. The trial judge concluded that the oil spill and related damage were caused by the unexpected actions of the tenant. This finding was not challenged on appeal.

[5] The quantity of oil that was spilled was unknown, but the trial judge stated that it was a substantial amount. The interior of the building was significantly impacted. There was no escape of oil outside of the building. As such, there was no [page391] claim for any damage or loss to the exterior of the building or the surrounding land.

[6] The trial judge quantified damages on the basis of the cost of repair, the temporary relocation of the respondents' business that was operated in the commercial unit on the main floor of the building, and lost rental revenue. The appellant does not appeal the assessment of damages.

The Appeal

[7] The appellant argues three grounds of appeal:

(1) the trial judge erred in refusing to dismiss the action on the basis that the respondents had failed to deliver a proof of loss;

(2) the trial judge erred in failing to apply the "mechanical breakdown or derangement" exclusion in the insurance policy; and

(3) the trial judge erred in failing to apply the pollution exclusion in the insurance policy.

[8] I will address each of these issues in turn.

(1) The failure to deliver a proof of loss

i. Background

[9] Section 136 of the Insurance Act, R.S.O. 1990, c. I.8 requires a proof of loss containing prescribed information and verified by a statutory declaration ("proof of loss") to be filed before any insured may commence an action for money payable under a contract of insurance. Section 131 of the Insurance Act provides that no term or condition of a policy is waived by the insurer "unless the waiver is stated in writing and signed by a person authorized for that purpose by the insurer".

[10] The respondents reported the damage to the appellant the day that it was discovered, but did not deliver a proof of loss. An independent adjuster, Brent Clarkson, was appointed by the appellant in respect of the respondents' claim under the policy. In a letter dated March 28, 2005 (the "adjuster's letter"), Mr. Clarkson advised the respondents that the loss was not covered because of a pollution exclusion in the policy. He further advised that Haliburton Highlands Mental Services Corporation, which had signed a lease with the respondents on behalf of the tenant of the apartment, would be paying the loss. The adjuster's letter also stated the following: "To comply with [page392] the Insurance Act of Ontario, a Proof of Loss form is enclosed; however, as outlined this form is forwarded on every claim in this case coverage is not applicable and therefore completion of same would not be required."

[11] In their statement of claim issued in July 2006, the respondents pleaded that they did not file a proof of loss because they were not asked to do so. The appellant's original statement of defence, delivered in November 2006, did not refer to the respondents' failure to deliver a proof of loss. However, an amended statement of defence delivered in May 2010 pleaded that the respondents were precluded from bringing the claim because of their failure to provide a proof of loss. There was no pleading by the respondents in their claim or reply that the requirement to deliver a proof of loss had been waived by the insurer.

ii. Findings of the trial judge

[12] The trial judge found that the appellant waived the proof of loss requirement through the independent adjuster, Mr. Clarkson. The trial judge concluded that the appellant had elected to communicate with the respondents about their coverage under the policy through the adjuster, and that the adjuster was speaking for the insurer in the adjuster's letter. This was reinforced by the fact that, in response to a letter from the respondents' counsel, the insurer's claims examiner referred specifically to the adjuster's letter and the adjuster's advice that the loss was not covered. The trial judge further concluded that the adjuster had both actual and apparent authority to communicate with the respondents on the appellant's behalf. He noted that the appellant did nothing to disavow the letter. The trial judge also determined that the adjuster did not subsequently advise the respondents that a proof of loss would need to be filed in order to pursue a claim for the loss.

[13] The trial judge also found that, while not essential to his reasoning, the appellant's initial statement of defence, that did not plead any deficiency in the proof of loss, constituted a further waiver of the requirement to deliver a proof of loss.

[14] Finally, on the waiver issue, the trial judge rejected the appellant's argument that waiver could not be relied upon because it had not been pleaded by the respondents. Although he was of the view that waiver should have been pleaded, the trial judge concluded that it was clear throughout the trial that the respondents relied upon waiver. The issue was addressed by both sides through evidence and argument. The trial judge stated that if it were necessary for waiver to have been pleaded, [page393] he was prepared to grant leave nunc pro tunc to the respondents to do so because there would be no prejudice to the appellant.

iii. Analysis

[15] The appellant contends that the trial judge erred in concluding that the appellant waived the proof of loss requirement. The appellant asserts two bases for this ground of appeal, one substantive and the other procedural.

[16] First, the appellant submits that the trial judge erred in concluding that the adjuster's letter constituted a waiver. The appellant also disputes the trial judge's conclusion that its failure to raise the issue until it amended its statement of defence three and a half years later constituted a waiver.

[17] Second, the appellant asserts that the trial judge erred in finding waiver in the absence of a specific pleading of waiver by the respondents. The appellant also argues that the trial judge erred in amending the statement of claim nunc pro tunc, and of his own volition.

[18] The statutory conditions in Part IV of the Insurance Act were included in the policy. Statutory conditions 6 and 12 [of s. 148] required the respondents to deliver to the appellant a proof of loss as a precondition to commencing any action on the policy. Under statutory condition 12, the appellant was not obliged to pay a claim until 60 days following delivery of a proof of loss. Under statutory condition 11, a proof of loss was also required before the respondents had the right to an appraisal in the event of disagreement as to the amount of the loss.

[19] Section 131 of the Insurance Act requires that any waiver of a term or condition of an insurance contract must be in writing and signed by a person authorized for that purpose by the insurer. The question is whether the adjuster's letter or the appellant's pleading met the requirements of s. 131 such that the appellant waived the proof of loss requirement.

[20] The appellant's argument on this issue amounts to an attack on the trial judge's finding that the adjuster's letter advising the respondents that it was unnecessary to deliver a proof of loss was a written communication on behalf of, and binding on, the appellant. This finding by the trial judge is amply supported by the evidence. This evidence includes the fact that the appellant never disavowed the adjuster's letter, and in fact specifically referred to it when communicating with the respondents' legal counsel. No one from the appellant insurance company gave evidence at trial, and the adjuster's bald statement that he had no authority to waive any of the conditions was, of course, not determinative of the issue. I would not interfere with the trial [page394] judge's conclusion that the adjuster's letter constituted a waiver of the proof of loss requirement in the circumstances of this case.

[21] With respect to the amendment of the pleading nunc pro tunc, the appellant relies on Kalkinis (Litigation guardian of) v. Allstate Insurance Co. of Canada (1998), 1998 6879 (ON CA), 41 O.R. (3d) 528, [1998] O.J. No. 4466 (C.A.), where this court concluded that it was wrong for a trial judge to embark on an analysis of a completely new and wholly unexpected legal argument advanced by counsel after the parties closed their cases following trial.

[22] What occurred here bears no resemblance to the circumstances in Kalkinis. It is clear from the trial record that waiver was a live issue at trial and was addressed by both sides in evidence and argument, including during opening statements. In my view, the trial judge did not err in granting leave to the respondents to amend their pleading in the absence of any evidence of prejudice to the appellant.

[23] I also reject the appellant's argument that the trial judge erred when he stated he was prepared to grant leave to amend in the absence of the respondents' motion for such relief. There is nothing in Rule 26 [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194] that necessarily bars a court from granting leave to amend pleadings on its own initiative. As I have already noted, waiver was a live issue at trial and granting leave would have been warranted in all the circumstances. As such, the appellant's argument that the waiver issue should not have been considered because the respondents' counsel did not specifically request leave to amend their pleading would reflect the triumph of form over substance, and cannot succeed.

[24] The appellant contends that it was prejudiced by the manner in which the court proceeded with respect to the amendment, having lost the opportunity to argue that an amendment to plead waiver would entail the withdrawal of an earlier admission made by the respondents in their statement of claim. I disagree. The respondents' pleading that they did not file a proof of loss because they were not asked to do so does not, under any reasonable interpretation, amount to an admission that the requirement to file a proof of loss was never waived.

[25] Accordingly, I would not interfere with the trial judge's conclusion that an amendment to the pleadings would be granted had it been necessary for the respondents to plead waiver.

[26] As a final observation on the appellant's argument that it ought to have succeeded in its defence of the claim because the respondents did not deliver a proof of loss, I note that s. 129 of the Insurance Act permits the court to grant relief from forfeiture or avoidance of insurance in the event of an insured's [page395] imperfect compliance with a statutory condition as to the proof of loss. If the failure to deliver a proof of loss were considered imperfect compliance, relief from forfeiture might well have been appropriate in the present case based on all of the circumstances, including the adjuster's letter telling the respondents that they did not have to deliver a proof of loss, and the trial judge's finding that a proof of loss, although adverted to in the adjuster's letter, had not had been enclosed or subsequently provided to the respondents. Section 135(2) of the Insurance Act provides that an insurer cannot rely on the s. 136 proof of loss requirement as a defence to an action on a contract of insurance absent the timely provision to the insured of forms upon which to make the proof of loss required by a contract of insurance.

[27] I would also consider the appellant's failure to plead the absence of a proof of loss until several years into the action as relevant to the question of relief from forfeiture, rather than as a form of waiver. As the trial judge found, the respondent initially denied coverage based on the pollution exclusion, and did not insist on the filing of a proof of loss, which would have led to an appraisal and some type of hearing process. As the trial judge noted [at para. 38], "[t]here is no reason to regard this as a slip or error that [the appellant] could not have intended".

[28] For all of these reasons, I would not give effect to this ground of appeal.

(2) The mechanical breakdown or derangement exclusion

i. Background

[29] As its second ground of appeal, the appellant asserts that an exclusion for mechanical or electrical breakdown or derangement in the policy (the "mechanical exclusion") applied to the loss. That exclusion, found in the "Perils Excluded" section of the policy, provides as follows:

This Form does not insure against loss or damage directly or indirectly caused by, resulting from, contributed to or aggravated by: . . . e) centrifugal force, mechanical or electrical breakdown or derangement in or on the "premises" [.]

ii. Findings of the trial judge

[30] The trial judge accepted the evidence that the cause of the discharge of oil was the tenant's inserting a piece of cardboard into the control panel. The trial judge found that "it was the bypass and high heat that caused the ignition to fail to re-ignite. When this occurred the oil continued to be purged but was not burned and so overflowed." This finding is not challenged on appeal. [page396]

[31] In interpreting the mechanical exclusion, the trial judge referred to an authority from this court: Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada (2008), 91 O.R. (3d) 438, [2008] O.J. No. 1811, 2008 ONCA 368. In that case, Borins J.A., at paras. 10 and 24, accepted that the words "mechanical or electrical breakdown" in this type of exclusion denote "a failure in the operation of a piece of equipment due to some mechanical or electrical defect in some part or parts of the equipment", and that "breakdown" and "derangement" refer to an internal problem or defect in a machine.

[32] The trial judge observed that the furnace in question was well maintained and had no internal problem or defect, and that the cause of the loss was the tenant's actions. He noted [at para. 76] that the "zone of risk" intended to be excluded from coverage was "the risk that a mechanical system is poorly designed, manufactured with a defect, not properly maintained or simply fails over time", and that the risk of a tenant doing something unexpected or stupid was not intended to be excluded by the "mechanical breakdown or derangement" exclusion.

iii. Analysis

[33] In this court, the appellant asserts that the mechanical exclusion should apply because the loss (the damage caused by the oil spill) "was caused indirectly", "resulted from", "was contributed to" or "was aggravated by" the failure of the ignition to re-ignite, which was a failure in the operation of the furnace due to a mechanical defect or derangement. The appellant contends that the trial judge ignored the plain wording of the mechanical exclusion, which should apply when a mechanical breakdown or derangement is one of the things that caused or contributed to the loss or damage.

[34] The appellant relies on Derksen v. 539938 Ontario Ltd., [2001] 3 S.C.R. 398, [2001] S.C.J. No. 27, 2001 SCC 72 as authority for the proposition that an exclusion can be worded so as to apply to a loss with multiple causes if only one of the causes is contemplated by the exclusion. The appellant asserts that, to the extent that the loss was caused in part by the tenant's conduct (not contemplated by the mechanical exclusion) and in part by the failure of the furnace's ignition (contemplated by the mechanical exclusion), the mechanical exclusion ought to apply to the entirety of the loss, and coverage ought to be excluded.

[35] In Derksen, Major J., at para. 47, referred to exclusion clauses with language such as "cause directly or indirectly" or "caused by, resulting from, contributing to or aggravated by" as being the type of language that might effectively exclude [page397] a multi-causal loss. The appellant argues that, because such language is used in the mechanical exclusion, the exclusion contemplates a multi-causal loss where one of the causes is a "mechanical breakdown or derangement". Because one of the causes of the oil damage in this case was a "mechanical breakdown or derangement", it follows that the mechanical exclusion should apply.

[36] In my view, the error in the appellant's argument is in seeking to characterize the oil spill damage as a multi-causal loss. What occurred here was a chain of events set in motion by the tenant's insertion of a piece of cardboard, which in turn bypassed the thermostat, which forced the furnace to run at an excessively high temperature, causing the ignition component to fail and oil to be pumped continuously without burning.

[37] A similar chain of causation was considered in Caneast. Due to a regional power outage that interrupted the supply of electricity to refrigeration and pickle processing equipment, a company sustained substantial spoilage of a large quantity of pickles and cucumbers. The interruption to the power supply caused the refrigeration system to fail, which, in turn, caused the spoilage. The court specifically noted that a "mechanical breakdown or derangement" referred to an internal problem or defect in the equipment, and not a failure to operate due to the external interruption of a power supply.

[38] The fact that an element of the furnace ceased to operate does not engage the application of the mechanical exclusion. The Caneast decision establishes that it is not sufficient to find that some type of mechanical or electrical breakdown or derangement occurred: it is essential to examine the cause of that occurrence. The failure of a mechanical element of the furnace was not another cause of the oil damage, but rather something that occurred only after the tenant interfered with the proper operation of the furnace. Simply put, the oil damage was the result of external interference, and not a defect in the furnace. On the authority of Caneast, I would not give effect to the appellant's argument on multi-causal loss and the applicability of the mechanical exclusion.

[39] The appellant also asserts that the insertion of cardboard by the tenant to bypass the thermostat was itself a "mechanical derangement", in the sense that this action interfered with the normal operation inside of the furnace. Again, I would emphasize the conclusion of this court in Caneast, that whether one considers a breakdown or derangement under such an exclusion, there must be an internal problem or defect in the machine.

[40] Accordingly, I would dismiss this ground of appeal. [page398]

(3) The pollution exclusion

i. Background

[41] Initially, the appellant denied the respondents' claim relying solely on the pollution exclusion in the policy. The pollution exclusion reads as follows:

POLLUTION EXCLUSION

This policy does not insure against:

a) loss or damage caused directly or indirectly by any actual or alleged spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of "pollutants", nor the cost or expense of any resulting "cleanup", but this exclusion does not apply:

(i) if the spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of "pollutants" is the direct result of a peril not otherwise excluded on this policy.

(ii) to loss or damage caused by a peril not otherwise excluded under this policy.

b) cost or expense for any testing, monitoring, evaluation or assessing of an actual, alleged, potential or threatened spill discharge, emission, dispersal, seepage, leakage, migration, release or escape of "pollutants".

(Except limited coverage as provided in Additional Agreement of the Insurer, clause #4)

[42] "Pollutant" is defined as follows:

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminants including odour, vapour, fumes, acids, alkalis, chemicals and waste.

[43] Clause 4 of subsection IV of the policy ("Additional Agreements of the Insurer") provides as follows:

POLLUTION DAMAGE -- INSURED PREMISES:

(a) Indemnity Agreement

The insurer will indemnify the insured, subject to the deductible, for expenses incurred to "cleanup" "pollutants" from land or water at the "premises" provided the spill, discharge, emission, dispersal, seepage, leakage, release, migration or escape of "pollutants":

(i) first occurs during the policy period and

(ii) is sudden, unexpected and unintentional from the standpoint of the insured; and

(iii) is required to be reported to a provincial authority.

. . . . . [page399]

(d) Additional Exclusions

The insurer shall not be liable for:

(i) Expenses for "cleanup" away from or beyond the "premises" resulting from any spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of "pollutants" even if the "pollutant" emanated from the "premises";

(ii) Expenses for "cleanup" of any spill discharge, emission, dispersal, seepage, leakage, migration, release or escape of "pollutants" that began before the effective date of this policy;

(iii) Fines, penalties, punitive or exemplary damages.

ii. Findings of the trial judge

[44] The appellant argued that the respondents' claim was for loss or damage caused by the spill or discharge of fuel oil which is a pollutant, and that this was excluded by the pollution exclusion.

[45] The trial judge rejected this defence, concluding that the pollution exclusion did not apply to the circumstances of this case. He relied on the decision of this court in Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, [2002] O.J. No. 4496 (C.A.) as authority for the interpretation of a pollution exclusion. The trial judge referred to certain principles from that case, namely:

(a) the use of words such as "discharge, dispersal, release and escape" reflect that the exclusion is directed to a pollutant that results in traditional environmental contamination: see Zurich, para. 16;

(b) the pollution exclusion does not apply to injuries caused by common irritants and contaminants emitted from a faulty furnace: see Zurich, para. 18;

(c) the pollution exclusion can be reasonably interpreted as applying only to environmental pollution: see Zurich, para. 19; and

(d) if the exclusion is capable of more than one reasonable interpretation it is ambiguous and should be interpreted in favour of the insured: see Zurich, para. 39.

[46] Based on Zurich, the trial judge concluded that the pollution exclusion in the policy should be interpreted as only excluding traditional environmental contamination. Since the oil remained within the building, the spill did not amount to traditional environmental contamination, and the pollution exclusion did not apply to the loss that occurred. [page400]

iii. Analysis

[47] I agree with the trial judge's conclusion that the pollution exclusion does not apply to exclude the respondents' claims. However, I do so on different grounds.

[48] First, I note that the pollution exclusion must be read in the context of the policy as a whole. The policy is an "all-risks" property insurance policy. Typically, such policies insure any against loss or damage caused by any event except those that are excluded. Indeed, the policy states under "Insured Perils": "This Form, except as herein provided, insures against all risk of direct physical loss or damage to the property insured."

[49] Next, all of the words contained in the pollution exclusion must be considered. The first part of the exclusion is broadly worded to exclude "loss or damage caused . . . by any actual . . . spill . . . of 'pollutants'". The policy defines "pollutant" to include any liquid contaminant. An exception to the pollution exclusion then states that the exclusion does not apply "if the discharge . . . of pollutants is the direct result of a peril not otherwise excluded under this policy".

[50] On a plain reading of the pollution exclusion, there must be another operative exclusion before the pollution exclusion applies. The only other exclusion relied upon by the appellant is the exclusion for "mechanical breakdown or derangement". Indeed, during oral argument, appellant's counsel acknowledged that the pollution exclusion would apply in the circumstances of this case only if the mechanical exclusion also applies. As I have already noted, I do not agree that the mechanical exclusion applies in these circumstances. On this basis alone, I would dismiss this ground of appeal.

[51] The appellant also took issue with the trial judge's interpretation of the pollution exclusion, and in particular his reliance on principles identified by this court in the Zurich case.

[52] As discussed above, the plain language of the pollution exclusion is determinative of the question of its application in this case, so it is unnecessary to consider the interpretive principles from Zurich. That said, I note that the pollution exclusion at issue in this case forms part of an "all risks" property insurance policy, while the Zurich case dealt with the interpretation of the standard absolute pollution exclusion in a CGL (comprehensive general liability) policy. As Sigurdson J. noted in Corbould v. BCAA Insurance Corp., [2010] B.C.J. No. 2125, 2010 BCSC 1536, 13 B.C.L.R. (5th) 168, this is a material distinction. The court's analysis and its interpretation of the absolute pollution exclusion in a CGL policy in Zurich were informed by the [page401] underwriting history of that particular exclusion, as described in academic writing and American case law. The interpretation of the pollution exclusion in an "all-risks" property insurance policy might well engage different considerations. I do not consider the principles identified in Zurich as directly relevant to the interpretation of the pollution exclusion in this case.

[53] I do not necessarily agree with some of the trial judge's other conclusions regarding the policy that are premised on the Zurich case. For example, he found that the pollution exclusion should be read as applying only to "traditional environmental contamination" and that the exclusion would not operate because the oil spill was contained within the building and had not spread to the natural environment outside the building. The extent to which the policy provides coverage for pollution damage depends on a reading of the pollution exclusion as well as the indemnity and exclusion provisions contained in "Additional Agreements of the Insurer" at clause 4, entitled "Pollution Damage -- Insured Premises". It is sufficient for our purposes to note that the damage that occurred here was not excluded.

Conclusion

[54] Accordingly, I conclude that none of the grounds of appeal has merit. I would therefore dismiss the appeal, with costs to the respondents fixed at $30,000, inclusive of disbursements and HST.

Appeal dismissed.

End of Document