COURT FILE NO.: CV-12-00877-00

CV-12-00489-00

DATE: 2012-04-03

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: CV-12-00489-00

Maria Grazia Demarco

Applicant

AND:

997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar), Kuldip Singh Lachhar and Dominion of Canada General Insurance Company

Respondents

RE: CV-12-0877-00

The Dominion of Canada General Insurance Company

Applicant

AND:

997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar), Kuldip Singh Lachhar and Maria Grazia Demarco

Respondents

BEFORE: Ricchetti, J.

COUNSEL: A. Roth, Counsel, for Ms. Demarco

C. Morrison and S. Quesnelle, Counsel, for The Dominion of Canada General Insurance Company (“Dominion Insurance”)

HEARD: March 29, 2012

ENDORSEMENT

[ 1 ] No one appeared for 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar) or Kuldip Singh Lachhar.

[ 2 ] The procedure adopted by both parties in this case is somewhat unusual.

The Action CV-11-5027-00

[ 3 ] On December 21, 2011 Ms. Demarco commenced an action in the Superior Court (Action No. CV-11-5027-00) against 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar) and/or Kuldip Singh Lachhar (the “Action”). In the Action Ms. Demarco seeks damages against the defendants for $1,000,000 for negligence, waste, breach of contract, breach of contractual indemnity, and compensation pursuant to The Environmental Protection Act , R.S. O. 1990, c. E.19. Ms. Demarco is the owner of the subject property. The property was rented to 997366 Ontario Ltd. commencing in 1992. The subject property was abandoned in approximately 2010. Pollutants were found on the subject property. The essence of the claim was that 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar) and/or Kuldip Singh Lachhar had caused environmental contamination to Ms. Demarco’s property while operating a gas station on the property for some 18 years. The damages sought are clean up costs of Ms. Demarco’s property.

The Application CV-12-00489-00

[ 4 ] It appears that 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar) and Kuldip Singh Lachhar have no assets. Mr. Lachhar has gone bankrupt. As a result, Ms. Demarco’s only possible recovery is against 997366 Ontario Ltd.’s insurance company. Ms. Demarco does not want to proceed to trial and obtain a judgment against 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar) in the Action and then seek to enforce the judgment against defendants’ insurer only to be met with a defence that no coverage is available under the tenant’s policy. There is an obvious saving of time and money if the determination of 997366 Ontario Ltd.’s coverage for this claim under the insurance policy could be made at this time.

[ 5 ] As a result, Ms. Demarco brought the application in CV-12-0489-00 against the respondents seeking:

A declaration that the Respondent Dominion of Canada General Insurance Company is obliged to indemnify and/or defend 997366 Ontario Ltd. under its insurance policy 0879307.

The Application CV-12-00877-00

[ 6 ] Dominion Insurance had denied 997366 Ontario Limited has coverage under its policy for Ms. Demarco’s claim.

[ 7 ] As a result, Dominion Insurance brought an application against its insured, 997366 Ontario Ltd., Mr. Lachhar (the “tenants”) and Ms. Demarco seeking a declaration that Dominion Insurance has no obligation to defend or indemnify the tenants for the claims made by Ms. Demarco.

Jurisdiction to Deal with the Applications

[ 8 ] The applicable portions of Rule 14.05(3) of the Rules of Civil Procedure provide as follows:

(3) A proceeding may be brought by application where these rules authorize the commencement of a proceeding by application or where the relief claimed is,

(d) the determination of rights that depend on the interpretation of a deed, will, contract or other instrument, or on the interpretation of a statute, order in council, regulation or municipal by-law or resolution; or

(h) in respect of any matter where it is unlikely that there will be any material facts in dispute.

[ 9 ] Clearly, the determination of rights depends on the interpretation of Policy of Insurance EAL 0879307 issued by Dominion Insurance to K&B Gas Bar (“Policy”).

[ 10 ] Further, both parties believed there were no material facts in dispute. Both make reference to Rule 14.05(3) (h).

[ 11 ] While having three proceedings may not be the most efficient way to deal with the issue, I accept there is now efficiency to the courts and the parties that, if possible, a judicial determination be made at this time as to whether the Policy covers the claim Ms. Demarco makes against the tenants.

The Facts

[ 12 ] Ms. Demarco owns the property known as 8017 Hornby Road, Halton Hills, Ontario (“Property”). Previously, she and her husband were the joint owners of the Property.

[ 13 ] In about 1992, Mr. Lachhar leased the Property and operated a gasoline service station. This continued until approximately December 2010.

[ 14 ] The Property was leased under a written lease dated September 1, 1992 between Ms. Demarco and her husband as lessors and 997366 Ontario Limited as lessees (“Lease”). The lessors were careful to ensure that the Lease required the tenant to conform to specified environmental practices set out in article 8. The lessors had a contractual right under the Lease to conduct an environmental audit at any time. The Lease also required the lessors to carry liability insurance, building insurance and fire insurance. The Lease did NOT require the tenants to carry environmental or pollution insurance.

[ 15 ] In 2007 the tenants, operating as K&B Gas Bar, sought and obtained CGL insurance from Dominion Insurance. There is no evidence that Dominion Insurance believed it provided pollution insurance coverage or that it undertook any investigations of the Property to determine any existing pollutant issues or the operations to assess the risk of pollutants escaping into the Property. In fact, the evidence is to the contrary – Dominion Insurance believed its policy excluded pollution coverage with a very limited exception.

[ 16 ] The express language of the Policy provided liability coverage, under all parts, only if the damage occurred during the policy period . There is no evidence as to when the damage to the Property occurred and, more specifically, whether any of the pollutant escaped during the policy period. The gas station was in operation since 1992. Dominion Insurance only insured the property commencing in 2007.

[ 17 ] The Policy provided for “ Common Exclusions – Coverages A, B, C and D ” which included very clear language under the heading:

4. POLLUTION:

“Bodily injury”, “property damage” or “personal and advertising injury” arising out of the actual, alleged or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”:

(1) At or from any premises, site or locations which is or was at any time owned or occupied by, or rented or loaned to any insured.....

(4) at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations if the “pollutants” are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor....

[ 18 ] The coverage in “Coverage A – Bodily Injury and Property Damage Liability” is clear – it only covers damage to third party properties. This is not applicable to the claim by Ms. Demarco in the Action. There is no coverage under this part.

[ 19 ] The coverage in “Coverage D- Tenants’ Legal Liability” provides for an absolute exclusion for “property damage” arising:

“out of the actual, alleged or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”

“at or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured”; or

“at or from any premises, site or location on which any insured or any contractors or subcontractors working directly or indirectly on any insured’s behalf are performing operations if the “pollutants” are brought on or to the premises, site or location in connection with such operations by such insured, contractor or subcontractor.”

[ 20 ] The Auto Clips Extension provided some limited pollution coverage but only to third parties. This limited pollution coverage provides:

This form 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 “clean up”, 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 under this form;

(ii) to loss or damage caused directly be a peril not otherwise excluded under this form;

The Position of the Parties

[ 21 ] Ms. Demarco’s counsel did not at the hearing seriously dispute that the language of the Policy excludes the claims made in the Action. However, Ms. Demarco’s counsel submits that:

a) there was a reasonable expectation by Ms. Demarco that the tenant would obtain pollution insurance to cover this type of loss; and

b) Ms. Demarco is the innocent party.

[ 22 ] Dominion Insurance states that it undertook certain risks and was paid a premium solely for the risks insured. Counsel submits that those risks did not include:

a) There is no evidence that the pollution occurred during the policy period. Dominion Insurance was the insurer for only a portion of the entire leased period. Further, it appears that Dominion Insurance was the last insurer for the tenant; and

b) Dominion Insurance did not intend or accept coverage for claims for pollution damages to the tenant’s property. Environmental pollution is specialty insurance which it did not carry or provide to this insured; and

Analysis

[ 23 ] Ms. Demarco’s Application is premature. There is no lis between Ms. Demarco and Dominion Insurance. The insurance contract is between “K & B Gas Bar” and Dominion Insurance. As a stranger to the Policy, Ms. Demarco has not rights to claim under the Policy or demand any benefits under the Policy.

[ 24 ] Ms. Demarco’s only rights with respect to its tenant’s insurance is found under s. 132 of the Insurance Act which provides:

Where a person incurs a liability for injury or damage to the person or property of another, and is insured against such liability, and fails to satisfy a judgment awarding damages against the person in respect of the person’s liability, and an execution against the person in respect thereof is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied. (emphasis added)

[ 25 ] This provision is only available to Ms. Demarco if she can establish that her tenants were “insured against such liability” claimed and upon which a judgment was obtained.

[ 26 ] As Ms. Demarco has not yet obtained a judgment against Dominion Insurance’s insured, Ms. Demarco cannot succeed on its application at this time.

[ 27 ] Let me now turn to Dominion Insurance’s application. As I indicated above, it is expedient for this court and for the parties, if possible, to determine whether there is, assuming Ms. Demarco is successful in her action against her tenants and obtains a judgment, coverage under the Policy for the claim made in the Action.

[ 28 ] The general rules of interpreting an insurance policy on coverage issues were described by Justice Wilson in York Region Condominium Corp. No. 772 v. Lombard Canada Ltd. (2007) 85 (O.R.3d) 294:

Principles of Interpretation

[42] There is a shifting onus of proof with respect to coverage issues. The insured bears the initial onus of proof to establish that the facts bring the claim within the ambit of the relevant insuring agreement. If this threshold is met, the onus then shifts to the insurer to prove that an exclusion clause applies. If there is an exception to an exclusion clause, the burden of proof shifts back to the insured, to establish that the exception applies. Alie v. Bertrand & Frere Construction Co. (2002), 2002 31835 (ON CA) , 62 O.R. (3d) 345 , [2002] O.J. No. 4697 (C.A.) , at p. 358 O.R.; Total Cleaning & Security Services Ltd. v. Guardian Insurance Co. of Canada , [1993] O.J. No. 1456 , 41 A.C.W.S. (3d) 164 (Gen. Div.) , affd 1996 22100 (ON CA) , [1996] O.J. No. 4389 , 67 A.C.W.S. (3d) 565 (C.A.) , at para. 9 .

[43] Courts must decide coverage issues based upon an analysis of the words and exact terms of the insurance policy itself. General principles of insurance contract interpretation are merely interpretative aids, but are not determinative of coverage issues. Bridgewood Building Corp. (Riverfield) v. Lombard General Insurance Co. of Canada (2006), 2006 10205 (ON CA) , 79 O.R. (3d) 494 , [2006] O.J. No. 1288 (C.A.) .

[44] The Supreme Court of Canada in Brisette Estate v. Westbury Life Insurance Co., 1992 32 (SCC) , [1992] 3 S.C.R. 87 , [1992] S.C.J. No. 86 , 96 D.L.R. (4th) 609 sets out guidelines to be used by Canadian courts in interpreting insurance policies. Sopinka J. stated at pp. 92-93 S.C.R., pp. 610-11 D.L.R. that the rules of construction relating to insurance contracts are to be applied as follows:

(1) The court must search for an interpretation from the whole of the contract which promotes the true intent of the parties at the time of entry into the contract.

(2) Where words are capable of two or more meanings, the meaning that is more reasonable in promoting the intention of the parties will be selected.

(3) Ambiguities will be construed against the insurer.

(4) An interpretation which will result in either a windfall to the insurer or an unanticipated recovery to the insured is to be avoided. [page303]

[45] The general principles of interpretation of insurance policies have been further elaborated in several Supreme Court of Canada decisions including Derksen v. 539938 Ontario Ltd ., 2001 SCC 72 () , [2001] 3 S.C.R. 398 , [2001] S.C.J. No. 27 , at para. 47 , Monenco Ltd. v. Commonwealth Insurance Co ., 2001 SCC 49 () , [2001] 2 S.C.R. 699 , [2001] S.C.J. No. 50 , at para. 11 , Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co. , 1993 150 (SCC) , [1993] 1 S.C.R. 252 , [1993] S.C.J. No. 10 , 99 D.L.R. (4th) 741 , at p. 268 S.C.R., p. 752 D.L.R.; National Bank of Greece (Canada) v. Katsikonouris , 1990 92 (SCC) , [1990] 2 S.C.R. 1029 , [1990] S.C.J. No. 95 , 74 D.L.R. (4th) 197 at p. 1038 S.C.R., p. 201 D.L.R.:

(1) The contra proferentem rule construes any ambiguity in the policy against the insurer, as the author of the contract;

(2) the question of coverage should be construed broadly whereas the applicability of exclusion clauses should be interpreted narrowly;

(3) at least where the policy is ambiguous, the court should give effect to the reasonable expectations of the parties; and

(4) policy language should be construed in its ordinary, everyday meaning.

[ 29 ] Ms. Demarco faces one other significant hurdle regarding the interpretation of Dominion Insurance’s policy. Much of the language is virtually identical to the language that was before the Court of Appeal in ING Insurance Co. Of Canada v. Miracle , 2011 ONCA 321 . In that case, the insured sought to enforce the policy against its own insurer. The insurer sought a declaration that it had no duty to defend or indemnify the insured because the claim was excluded from liability. At para 22, the Court of Appeal described the reasonableness and enforceability of pollution clauses:

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. While the respondent Canada now attempts to characterize its claim as if it primarily, if not exclusively, sounds in negligence, that ignores the fact that the statement of claim asserts the causes of action commonly associated with pollution-based claims for environmental damage: strict liability (presumably on the basis of Rylands v. Fletcher (1868), L.R. 3 H.L. 330 ) and nuisance as well as negligence. The negligence claim is based in part upon alleged breaches of both provincial and federal environmental legislation and regulation. The damages claimed are for harm to the environment: the loss of property value due to contamination of the soil, the cost of investigating, testing and monitoring the contamination caused by the migration of a hazardous product from the lands of the insured, and the cost of rectifying the contamination and remediating the plaintiff's property. 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.

[ 30 ] As I stated above, Ms. Demarco’s counsel did not seriously contest that the claim against the tenants is covered under the Policy. Counsel’s factum simply states that the Policy responds to damages and that the contamination occurred during the Policy period. Unfortunately, the matter is not that simple. The Policy does not cover all damages which may be claimed against the tenants. The specific wording of the Policy must be considered. Further, simply saying that the contamination occurred during the Policy period does not make it so when there is no evidence to support this statement.

[ 31 ] Ms. Demarco’s counsel’s factum goes on to state that the “Limited Pollution Liability” coverage, deleted the “Pollution” exclusion. Again, counsel takes too simplistic approach to the issue. There is an absolute Pollution exclusion clause in the Policy. However, there is a limited “exclusion to the exclusion”. Counsel fails to consider or address that the limited exclusion does not cover the type of claim the tenants now faces. Ms. Demarco’s counsel’s interpretation is not consistent with the clear wording of the Policy. Furthermore, this interpretation would “virtually nullify” the absolute pollution exclusion coverage of the Policy. Again, the Court of Appeal dealt with the interpretation of the “exclusion to the exclusion” at para. 31:

The respondents argue that giving effect to the pollution exclusion clause in this case would virtually nullify the coverage sought by Miracle in the first place. They cite the following passage from Weston Ornamental Iron Works Ltd. v. Continental Insurance Co. , [1981] O.J. No. 78 (C.A.) , at para. 16 :

The exclusion clause should not be interpreted in a way which is repugnant to or inconsistent with the main purpose of the insurance coverage but so as to give effect to it. Thus, even if the exemption clause were found to be clear and unambiguous it should not be enforced by the courts when the result would be to defeat the main object of the contract or virtually nullify the coverage sought for protection from anticipated risks . [Emphasis added.]

[ 32 ] Let me briefly deal with Ms. Demarco’s counsel’s oral submissions. The reasonable expectations of the parties as to coverage under the Policy are the expectation of Dominion Insurance and the tenant. It has nothing to do with Ms. Demarco’s expectations. The reasonable expectations of the insured and insurer are relevant to ensure a commercially sensible interpretation. Justice Sharpe stated at para 14 of ING supra the following:

The reasonable expectations of the insured and insurer will support a commercially sensible interpretation of the policy. Estey J. described this approach in Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co. , 1979 10 (SCC) , [1980] 1 S.C.R. 888 , at pp. 901-902 :

Even apart from the doctrine of contra proferentum ... the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entering into the contract. ... [A]n interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result.

[ 33 ] There is nothing to suggest that Dominion Insurance’s interpretation is not consistent with the clear and plain language of the Policy and, I find it is a commercially reasonable and sensible interpretation in the circumstances.

[ 34 ] While Ms. Demarco may be the innocent party, so is Dominion Insurance. They insured a particular risk. They charged a premium commensurate with that risk. On the other hand, Ms. Demarco could have ensured that the tenants obtained pollution insurance or Ms. Demarco could have herself obtained pollution insurance. There is no evidence that Ms. Demarco conducted any environmental investigation over the years. The fact that the Property was managed by her husband before their separation is simply not relevant.

[ 35 ] I conclude Ms. Demarco's claim against the tenants is not covered under the Policy.

Conclusion

[ 36 ] As a result, Dominion Insurance’s application is granted. A judgment shall issue declaring that Dominion Insurance is under no obligation to defend of indemnify the tenants (its insured) for the claims made in the Action.

Costs

[ 37 ] Dominion Insurance will provide written submissions within 3 weeks from the release of this decision. The submissions are limited to 3 written pages plus a bill of costs plus any authorities.

[ 38 ] Ms. Demarco’s responding submissions shall be provided to me within 2 weeks thereafter. The submissions are subject to the same limits on length.

[ 39 ] There shall be no reply submissions without leave.

Ricchetti, J.

Date: April 3, 2012

COURT FILE NO.: CV-12-00877-00
CV-12-00489-00

DATE: 2012-04-03

SUPERIOR COURT OF JUSTICE - ONTARIO RE: Maria Grazia Demarco, Applicant - AND - 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar), Kuldip Singh Lachhar and Dominion of Canada General Insurance Company, Respondents AND BETWEEN: The Dominion of Canada General Insurance Company, Applicant - AND - 997366 Ontario Ltd. (o/a K&B Gas Bar and/or Canadian Gas Bar), Kuldip Singh Lachhar and Maria Grazia Demarco, Respondents BEFORE: Ricchetti, J. COUNSEL: S. Grillone for the Plaintiff D. McDuff for the Defendant ENDORSEMENT Ricchetti J.

DATE: April 3, 2012