COURT OF APPEAL FOR ONTARIO DATE: 20211220 DOCKET: C69114

MacPherson, Simmons and Nordheimer JJ.A.

BETWEEN

The Estate of John Hemlow, Deceased Applicant (Respondent)

and

Co-operators General Insurance Company Respondent (Appellant)

Counsel: Robert Dowhan, for the appellant Curtis C. Zizzo and Branko J. Kurpis, for the respondent

Heard: November 5, 2021 by video conference

On appeal from the judgment of Justice James R. Turnbull of the Superior Court of Justice, dated January 29, 2021, with reasons reported at 2021 ONSC 664.

MacPherson and Nordheimer JJ.A.:

A. Introduction

[1] Sadly, John Hemlow, an independent mechanical contractor, was killed in a workplace accident that also caused extensive property damage at the location where he was working. The company that suffered the property damage commenced a lawsuit against Mr. Hemlow’s Estate and the company that retained him to do the work.

[2] Mr. Hemlow had an insurance policy with Co-operators General Insurance Company (“Co-operators”) that excluded coverage for damage caused by “pollutants”. Co-operators took the position that this provision applied to the workplace accident and, accordingly, informed Mr. Hemlow’s Estate that it would not defend the claim on behalf of the Hemlow Estate.

[3] The Hemlow Estate brought an application seeking a declaration that Co‑operators had a duty to defend the action against the Estate. The application judge granted the application. Co-operators appeals from that decision.

B. Facts

(1) The parties and events

[4] The late John Hemlow was a sole proprietor who carried on business as a mechanical contractor. When he took over his brother’s business in 2011, he applied for and received a Commercial General Liability (“CGL”) policy with Co‑operators. One of the exclusions in the policy was a Total Pollution Exclusion which reads, in part:

This insurance does not apply to:

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

[5] In a different part of the policy – i.e., not connected to the Total Pollution Exclusion – the word “Pollutants” is defined:

“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant including smoke, odours, vapour, soot, fumes, acids, alkalis, chemicals and waste.

[6] In 2015, Rich Products of Canada Limited retained Wear-Check, a company that specializes in equipment oil and filter analysis, to sample and analyze the mechanical and refrigeration systems at its processing facility. Wear-Check subcontracted with Mr. Hemlow to carry out the sampling and analysis work.

[7] During the course of his work, Mr. Hemlow opened a valve to a pipe containing pressurized ammonia. The resulting ammonia exposure killed Mr. Hemlow and caused significant damage to the Rich Products property.

[8] Rich Products brought an action in negligence, nuisance and breach of contract against Wear-Check and the Estate of John Hemlow. Co-operators advised the Estate that it would not defend the claim against the Estate. The Estate brought an application seeking a declaration that Co-operators has a duty to defend the action.

(2) The application judge’s decision

[9] The application judge granted the Estate’s application. He concluded: “I am satisfied that Co-operators must defend this action on the merits on behalf of its insured, the late John Hemlow.”

[10] The application judge found that Co-operators was to defend the action because the word “Pollution” was ambiguous. He found that it was ambiguous because it was left undefined in the policy and could be interpreted as including only environmental pollution.

[11] The core of the application judge’s reasons in support of this conclusion is found in these passages from his judgment, at paras. 62 and 65:

In my view, the pollution exclusion clause is worded to protect the insurer from liability for environmental pollution and the improper disposal or contamination of hazardous waste. It would have taken very little for a clause to be added in the Total Pollution Exclusion document signed by Mr. Hemlow to state that the exclusion is not limited to environmental claims, but also includes all claims arising from any emission of any of the enumerated substances. The insurance industry has been gradually rewording these pollution clauses and exclusions over the years, as evidenced by the cases provided to this court. However, Co-operators has failed to make its intentions clear and easily understandable in this Policy.

The definition used by Co-operators of “Total Pollution Exclusion” was misleading in that it not only included an exclusion of events which an average person would associate with pollution, but any accidental occurrence that caused any damage to the customer’s property and which did not lead to environmental pollution as commonly understood.

C. Issue

[12] The appellant says that there is a single issue on this appeal, which it frames in its factum as: Did the Application Judge err in concluding that the Total Pollution Exclusion clause contained in the CGL Policy does not apply to exclude Co‑operators’ duty to defend the Estate in the Rich Products of Canada Limited Action?

D. Analysis

(1) Standard of review

[13] The law on the standard of review for contract interpretation is well-established. Questions of mixed fact and law are entitled to deference unless the trial judge made a palpable and overriding error. Extricable questions of law are subject to a correctness standard of review: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at para. 53. Sattva, at para. 54, specifies that courts should be cautious in identifying questions of law in disputes involving contractual interpretation.

[14] For a particular category of contract – namely, standard form contracts – the standard of review is correctness: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37. This is because there is no meaningful factual matrix specific to the particular parties to assist in the interpretation process: see Ledcor, at para. 4.

[15] In our view, the Total Pollution Exclusion is not a standard form contract. We say this for two reasons.

[16] First, the appellant does not seriously contend that a correctness standard should apply based on Ledcor. Rather, the appellant’s position is that there are extricable questions of law that the application judge got wrong under the Sattva standard.

[17] Second, the Total Pollution Exclusion cannot fairly be characterized as a standard form contract. Standard form contracts are typically standard printed forms that will often be offered on a “take it or leave it” basis; the potential insured person either agrees to take the terms as they are or declines to enter the transaction altogether: see Ledcor, at para. 25.

[18] This description does not apply to the Total Pollution Exclusion signed by Mr. Hemlow. Initially, Mr. Hemlow and Co-operators were discussing a policy with a standard pollution exclusion. He was then asked to sign a separate Total Pollution Exclusion. Thus various options were in play; it was not a “take it or leave it” situation. Accordingly, the Sattva standard of review applies. Unless the appellant can identify an extricable question of law, the palpable and overriding error standard applies.

(2) The merits

[19] At the outset, it is important to remember that an insurer’s duty to defend arises from the claims as pleaded. McLachlin J. made this point in Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801, where she said, at p. 810:

However, general principles relating to the construction of insurance contracts support the conclusion that the duty to defend arises only where the pleadings raise claims which would be payable under the agreement to indemnify in the insurance contract.

[20] The problem in this case is that the parties have fixed on their dispute over the interpretation of the pollution exception without giving proper consideration to the nature of the claims advanced against the Estate. Those claims are founded in negligence, nuisance, and breach of contract. There is nothing in the statement of claim that involves, or asserts, a claim arising out of “pollution” as that term is commonly understood. Rather, the claim advanced by Rich Products is a straightforward claim for damage to its property.

[21] If the damages to the property of Rich Products had resulted from an explosion or a fire caused by Mr. Hemlow, there would be no debate over whether he would be entitled to coverage under his CGL policy with the appellant. He would be. That result does not change because the mechanism causing the damage happens to be a substance that can be labelled as a pollutant.

[22] Mr. Hemlow sought coverage under his CGL policy in case he did something in the course of his work that gave rise to a claim against him. Put another way, Mr. Hemlow sought coverage from his insurer should he happen to be negligent in his work and a claim was brought against him. It is of importance to this issue to recognize that Mr. Hemlow was not engaged in work that generally involved risks from pollution. That is one factor that distinguishes this case from ING Insurance Co. of Canada v. Miracle, 2011 ONCA 321 (“ING”), which we will discuss in greater detail below.

[23] In this case, it is alleged that Mr. Hemlow acted in a negligent manner when he opened a valve and allowed the ammonia to escape. His alleged negligence caused damage to the property of Rich Products. It is his alleged negligence that is at the core of the claim pleaded by Rich Products. A claim arising from negligence is precisely the type of claim for which parties obtain CGL policies. It is the type of risk that Mr. Hemlow sought coverage for. The fact that the damage causing substance was a pollutant does not change the nature of the claim. It also must not be allowed to distract from the proper interpretation of the CGL policy nor obscure or distort the conclusion as to whether a duty to defend arises.

[24] We repeat what we said at the outset of our analysis. The existence of the duty to defend depends on the nature of the claim made: Prudential Life Insurance Co. v. Manitoba Public Insurance Corp. (1976), 67 D.L.R. (3d) 521 (Man. C.A.), at p. 524, cited with approval in Nichols. Here the claim made falls within the terms of the CGL policy because it is a claim for breach of contract and negligence. The duty to defend therefore arises.

[25] Given that conclusion, it is unnecessary to delve deeply into the debate over the application of the two leading cases dealing with pollution exclusion clauses for CGL policies, upon which counsel expended most of their efforts. Nevertheless, we will touch on them briefly because the results of these two cases tend to prove the point that we have just made.

[26] The first is Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 62 O.R. (3d) 447 (C.A.) (“Zurich”). In our view, that case is similar to the case here, both on its facts and on the particular provisions in the insurance policy. In that case, the numbered company insured (“686”) was the owner of an apartment building. 686 was the defendant in two proposed class actions in which it was alleged that the plaintiffs suffered injuries from carbon monoxide that leaked from the building’s furnace. The plaintiffs pleaded that 686 had been negligent in maintaining, repairing and keeping the furnace in good condition.

[27] Zurich is substantially similar to this case on its facts. In Zurich, a faulty furnace resulted in a leak of carbon monoxide. In this case, there was an accidental leak of ammonia from a refrigerator. While both of those substances would be considered pollutants, in neither case was the thrust of the allegedly negligent conduct the handling, or potential discharge, of a pollutant.

[28] Second, the definition, coverage and exclusion clauses in the insurance policies in the two cases are very similar in their scope. The only significant difference appears to be that in the Co-operators policy the word “odours” has been added to the list of Pollutants. This does not affect the analysis.

[29] In fairness, the appellant does not deny or attempt to qualify the close factual and legal identity between Zurich and this case. Instead, the appellant contends that two subsequent decisions by this court narrow the reasoning and potential application of Zurich and lead to a different result in this case.

[30] We have already mentioned one of those cases, namely, ING. The issue in that case was, as in this appeal, an Exclusion under a CGL policy. The application judge dismissed ING’s application for a declaration that it had no duty to defend or indemnify Miracle. Relying on Zurich, the application judge found that there was nothing in Miracle’s regular business activity, which was operating a gas station, that placed it in the category of an active industrial polluter of the natural environment. The application judge concluded that since a reasonable insured would expect the exclusion to apply to industrial pollution and not to a gas leak, the plaintiff’s claim did not come within the pollution exclusion.

[31] The distinction between ING and this case, however, arises from the nature of the claim advanced. Indeed, the decision in ING reinforces the point we made at the outset about the importance of the claim as pleaded. In rejecting the application judge’s reasoning and conclusion, Sharpe J.A. said, at para. 22:

Unlike Zurich, in this case, the insured was engaged in an activity that carries an obvious and well-known risk of pollution and environmental damage: running a gas station. Indeed, the statement of claim is framed as a claim for damage to the natural environment caused by a form of pollution … Such a claim fits entirely within the historical purpose of the pollution exclusion, which was “to preclude coverage for the cost of government-mandated environmental cleanup under existing and emerging legislation making polluters responsible for damage to the natural environment”: See Zurich, at para. 13. [Emphasis added.]

[32] As will be apparent, the facts in the present case are very different from those in ING and thus properly lead to a different result.

[33] The damages sought in the Statement of Claim in ING were to cover the loss in value of the plaintiff’s adjacent property, the costs of conducting an environmental assessment, and the costs of remediating the property – all because of the gas that leaked onto the plaintiff’s property. Accordingly, the claims fit comfortably within the historical purpose of the pollution exclusion.

[34] The situation is very different in this appeal. In this case, what is sought by Rich Products is damages for “out of pocket expenses, business losses and property damage” (reasons at para. 21). In other words, the facts in this case, unlike ING, do not fit within the historical purpose of the pollution exclusion, which is to mitigate coverage for the cost of government-mandated environmental cleanup: see Zurich, at para. 13 and ING, at para. 22. In this case, there is no suggestion that any government-mandated cleanup is in play.

[35] The second case the appellant relies on to suggest that Zurich should not govern this appeal is O’Byrne v. Farmers’ Mutual Insurance Company (Lindsay), 2014 ONCA 543. We can deal with this case briefly. In that case, in an obiter statement in the penultimate paragraph of her judgment, van Rensburg J.A. said, at para. 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.

[36] The appellant latches onto this passage to suggest that the language of Zurich is too broad and needs to be narrowed to provide coverage to insureds only if their conduct led to direct damage to the environment.

[37] We do not accept this submission. The policy in O’Byrne was an “all risks” property insurance policy. The present appeal involves the interpretation of an exclusion clause in a CGL policy. This difference is “material”: see O’Byrne, at para. 52.

[38] In the end, it is important to recognize, as the application judge did at para. 50, that on a motion to determine if the insurer has a duty to defend the applicant will succeed if there is a “mere possibility” that a claim falls within the coverage under the policy: see Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, at para. 19.

[39] Recalling that Sattva cautions against too quickly or easily identifying questions of law in disputes involving contractual interpretation, we conclude that there is no palpable and overriding error in the application judge’s conclusion relating to the coverage and exclusion issue in this case.

E. Disposition

[40] We would dismiss the appeal. We would award the respondent its costs of the appeal fixed at $15,000 inclusive of disbursements and HST.

Released: December 20, 2021 “J.C.M.” “J.C. MacPherson J.A.” “I.V.B. Nordheimer J.A.” “I agree. Janet Simmons J.A.”