COURT FILE NO.: CV-22-00680639-0000

DATE: 20230901

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: CONSTRUCTION DISTRIBUTION & SUPPLY COMPANY INC., and DISCOUNTER’S POOL & SPA WAREHOUSE INC. Applicants

AND:

CONTINENTAL CASUALTY COMPANY o/a CNA INSURANCE Respondent

BEFORE: Justice Chalmers

COUNSEL: D. Bleiwas, for the Applicants

D. Mackenzie, for the Respondent

HEARD: June 7, 2023, via videoconference

REASONS FOR DECISION

OVERVIEW

1Construction Distribution & Supply Company Inc. (CDS) is a tenant of the premises located at Unit B, 760 Dundas Street East, Mississauga. CDS’ affiliate, Discounter’s Pool & Spa Warehouse Inc. (Discounter’s) operates a pool supply store at the leased premises. On November 19, 2019, liquid chlorine leaked from the pool supply store and entered the adjacent unit which was occupied by 2047048 Ontario Ltd. c.o.b. as Highland Furniture. Highland Furniture alleges that the chlorine leak caused damage to its property. On November 10, 2021, Highland Furniture commenced an action against CDS and Discounter’s; Court File No. CV-21-00671847-000 (the Action).

2Continental Casualty Company o/a CNA Insurance (CNA) issued a commercial general liability policy; Policy No.: MPR 2836665 (the Policy). The Applicants are named as the insureds under the Policy. The Applicants sought coverage under the Policy for the defence of the Action. CNA denied coverage on the basis that the coverage was excluded pursuant to the pollution exclusion in the Policy. The Applicants seek a declaration that CNA is under a duty to defend them in relation to the Action in accordance with the terms and conditions of the Policy.

3For the reasons set out below, I find that there is at least a “mere possibility” that the claim brought against the Applicants is covered by the Policy. I find that CNA has a duty to defend the Applicants in the Action.

BACKGROUND FACTS

The Policy

4The Applicants retained an insurance broker, Highcourt Partners Limited (Highcourt) to arrange insurance coverage, including coverage for the pool supply store. Highcourt was provided with information about the business, including the fact that Discounter’s operated a pool supply store and kept a supply of liquid chlorine in storage tanks for sale to the public. After obtaining quotes from various insurers, Highcourt recommended that the Applicants continue their insurance coverage with CNA.

5CNA issued the Policy on May 25, 2019. The policy period was from May 15, 2018, to November 30, 2019. The Policy provided commercial general liability coverage for claims made against the insureds for bodily injury and property damage. The Policy also obligated the insurer to defend any actions brought against the insureds for covered losses.

6The insuring agreement of the Policy provides as follows:

Coverage A - Bodily Injury and Property Damage Liability

1. Insuring Agreement

a. We will pay those sums you become legally obligated to pay as “damages” because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend you against any “action” seeking those damages. However, we will have no duty to defend you against any “action” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any “claim” or “action” that may result…

7The Policy includes the following pollution exclusion:

2. Exclusions

This insurance does not apply to: [….]

p. Pollution Liability

(1) Bodily injury or property damage arising out of the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants:

(a) At or from any premises, site or location which is or was at any time, owned or occupied by, or rented or loaned to you;

At or from any premises, site or location which is or was at any time used by or for you or others for the handling, storage, dispersal, processing or treatment of waste;

Which are or were at any time transported, handled, stored, treated, disposed of, or processed as waste by or for you or any person or organization for whom you may be legally responsible; or

At or from any premises, site or location on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations:

(1) if the pollutants are brought on to the premises, site or location in connection with such operations by you, a contractor or subcontractor; or

(2) if the operations are to test for, monitor, clean up, remove, contain, treat, detoxify, decontaminate, stabilize, remediate or neutralize, or in any way respond to, or assess the effect of pollutants.

Any loss, cost or expense arising out of any government direction or request, demand, or that you or others test for, monitor, clean up, remove, contain, treat, detoxify, decontaminate, stabilize, remediate or neutralize or in any way respond to, or asses the effect of pollutants. Sub-paragraphs (a) and (d)(1) of paragraph 1 of this exclusion do not apply to bodily injury or property damage caused by heat, smoke or fumes from a fire which becomes uncontrollable or breaks out from where it was intended to be.

As used in this exclusion, pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The Pleadings

8On November 12, 2019, there was a chlorine leak within the pool supply store. The incident occurred within the policy period of the Policy. The leak was reported by the Applicants to CNA. By letter dated July 14, 2020, CNA advised the Applicants that coverage was denied on the basis that the pollution exclusion in the Policy eliminated coverage for such claims.

9The Applicants were advised by Intact Insurance, the property insurer of Highland Furniture, that it would be commencing a subrogated claim against the Applicants in relation to the property damage caused by the chlorine leak. On May 5, 2021, the Applicants wrote to CNA and advised that Intact would be commencing a subrogated claim against them. On May 11, 2021, CNA advised that its position on coverage remained the same.

10On November 10, 2021, Highland Furniture commenced the Action. On November 24, 2021, the Applicants provided CNA with a copy of the Statement of Claim in the Action. The Applicants asked CNA to reconsider its position on coverage and to also consider its duty to defend. CNA did not advise the Applicants of a change in position. The Applicants retained their own counsel to defend the Action.

11In the Statement of Claim, it is alleged that Discounter’s operated a retail swimming pool supply store at unit B, 760 Dundas Street East, Mississauga, from which it sold and stored pool chemicals. It is further alleged that Discounter’s had a holding tank at the premises where they stored liquid chlorine and that on November 12, 2019, approximately 500 to 1,000 litres of liquid chlorine escaped from the holding tank and flowed into the adjacent unit causing damage to Highland Furniture’s property. It is alleged that CDS and Discounter’s are liable in nuisance, strict liability under Rylands v. Fletcher, trespass and negligence. It is further alleged that Discounter’s is liable for breach of contract.

THE ISSUES

12I will address the following issues:

a. The law of the Duty to Defend? and

b. Is coverage negated by the Pollution Exclusion?

ANALYSIS and DISCUSSION

The Law of the Duty to Defend

13The duty to defend issue is to be determined expeditiously having regard to only the policy wording and the allegations contained in the Statement of Claim: Halifax Insurance Co. of Canada v. Innopex Ltd., 2004 33465 (ON CA), at para. 1. I am satisfied that it is appropriate to determine the issue by Application.

14There is no dispute between the parties with respect to the principles to be applied in determining whether an insurer has a duty to defend. As a general rule, the insurer is under an obligation to defend its insured if there is a “mere possibility” that a claim falls within the policy. Where it is clear that the claim falls outside the policy, either because it does not fall within the insuring agreement or is excluded by an exclusion clause, there is no duty to defend. Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 SCR 245, at para. 19.

15The principles the court is to consider in a duty to defend application, were itemized by Justice Perell in Lincoln (Town) v. AIG Insurance Company of Canada, 2020 ONSC 1456, at para. 9:

(a) The insurer has a duty to defend if the pleadings filed against the insured allege facts which, if true, would require the insurer to indemnify the insured.

(b) The court must determine whether the factual allegations, if true, could possibly support the plaintiff's legal claims.

(c) The pleadings govern the duty to defend, not the insurer's view of the validity or nature of the claim nor by the possible outcome of the litigation.

(d) In a duty to defend application, the court must determine the substance and true nature of the claims based on the allegations in the pleadings taking the entire pleading into account and without engaging in a fanciful reading of the statement of claim for the purpose of requiring the insurer to defend.

(e) If there is any possibility that the claim falls within the liability coverage, the insurer must defend.

(f) The court must look beyond the labels used by the plaintiff to ascertain the substance and true nature of the claims.

(g) If there is a claim that is outside or excluded from insurance coverage and a claim within insurance coverage, but the covered claim is entirely derivative of the uncovered claim, which is to say that the claims arise from the same actions and cause the same harm, then the derivative claim will not trigger a duty to defend.

(h) If the pleadings are not sufficiently precise to determine whether the claims would be covered by the policy, the insurer's obligation to defend will be triggered where, on a reasonable reading of the pleadings, a claim within coverage can be inferred.

(i) In determining whether the policy would cover the claim, the usual principles governing the construction of insurance contracts apply, namely: (a) the contra proferentem rule; (b) the principle that coverage clauses should be construed broadly and exclusion clauses narrowly; and (c) where the policy is ambiguous, effect should be given to the reasonable expectations of the parties.

(j) Extrinsic evidence that has been explicitly referred to in the pleadings may be considered to determine the substance and true nature of the allegations.

(k) If the insurance policy contains an unqualified obligation to defend in respect of covered claims, the insurer is required to defend the entire claim; where there is an unqualified obligation to defend, the insurer is required to pay all reasonable costs associated with the defence of those claims, even if those costs further the defence of uncovered claims.

16Where the insurer relies on an exclusion, the court must consider the effect of the exclusion, in relation to the allegations made against the insured in the Statement of Claim. There will be no duty to defend if the duty to indemnify does not exist due to an exclusion: Daverne v. John Switzer Fuels et al. v. Aon Reed et al., 2015 ONSC 1803, at para. 76.

Is Coverage Negated by the Pollution Exclusion?

17The Applicants argue that the starting point in the interpretation of the pollution exclusion is the decision of the Court of Appeal in Zurich Insurance Co. v. 686234 Ontario Ltd., 2002 33365 (ON CA). In that case, the owner of an apartment building was sued in two class action proceedings. It was alleged that some of the residents sustained bodily injury because of carbon monoxide that had leaked from a faulty furnace. In the underlying actions, the plaintiffs alleged that the owner of the building was negligent for failing to maintain and repair the furnace. The insurer took the position that there was no coverage under the policy because the pollution exclusion applied.

18The Court of Appeal adopted a narrow interpretation of the pollution exclusion. The Court found that the release of carbon monoxide in these circumstances failed the common-sense test for “pollution”. The release of carbon monoxide was as a result of the regular business activities of a landlord. The landlord was not an active industrial polluter and did not discharge the carbon dioxide into the natural environment. The court held that the pollution exclusion did not apply, and the insurer was obligated to defend the action. The court stated as follows:

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

38There is nothing in this case to suggest that the respondent's regular business activities place it in the category of an active industrial polluter of the natural environment. Put simply, the respondent did not discharge or release carbon monoxide from its furnace as a manufacturer discharges effluent, overheated water, spent fuel and the like into the natural environment. It was discharged or released as a result of the negligence alleged in the underlying claims, which remains to be proved. As I have pointed out, the history of the exclusion demonstrates that it would produce an unfair and unintended result to conclude, in the context of a CGL policy, that defective machinery maintenance constitutes "pollution", even when it gives rise to carbon monoxide poisoning. In this regard, it is necessary to understand that the exclusion focuses on the act of pollution, rather than the resulting personal injury or property damage.

19The Applicants also rely on the decision of Hemlow Estate v. Co-operators General Insurance Company, 2021 ONSC 664, aff’m 2021 ONCA 908. The applicant/insured was an independent mechanical contractor. He was retained to analyze mechanical and refrigeration systems at a facility operated by Rich Products of Canada Limited. In carrying out this work, Mr. Hemlow opened a valve to a pipe containing pressurized ammonia. The ammonia escaped and killed Mr. Hemlow and damaged Rich Products’ property. Rich Products brought an action against Mr. Hemlow’s Estate and others in negligence. Mr. Hemlow’s insurer took the position that the claim was excluded pursuant to the pollution exclusion.

20The motions judge held that the term “pollution” was ambiguous. The term “pollution” in the way the term is normally understood by most people, means pollution of the natural environment: Hemlow Estate v. Co-operators General Insurance Company, 2021 ONSC 664, at para. 59. The motions judge concluded as follows:

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: Hemlow at para. 62.

21In dismissing the appeal, the Court of Appeal noted that the claim against the insured was based on negligence, nuisance, and breach of contract. There was no allegation that the damages arose out of pollution and instead this was a straightforward claim for property damage. The Court of Appeal stated as follows:

23In 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.

22CNA argues that the decision of the Court of Appeal that is most applicable is ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liqui, 2011 ONCA 321. In Miracle, the insured operated a gas station. It was alleged that there was a leak from an underground tank that resulted in the release of gasoline onto adjacent land. The adjacent property owner brought a claim for property damage, the costs of an environmental assessment and the environmental clean-up costs. The Court of Appeal held that the pollution exclusion applied and as a result there was no duty to defend, or indemnity, the insured. The Court stated as follows:

22Unlike 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, [1861-1873] All E.R. Rep. 1 (H.L.)) 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.

23I do not accept the argument that the phrase "active industrial polluter of the natural environment" used in Zurich should be read as restricting the reach of the pollution exclusion clause to situations where the insured is engaged in an activity that necessarily results in pollution. Liability insurance is purchased to cover risks, not outcomes that are certain or inevitable. There is a general principle of insurance law that only fortuitous or contingent losses are covered by liability policies: Liberty Mutual Insurance Co. v. Hollinger Inc., 2004 10995 (ON CA), [2004] O.J. No. 481, 236 D.L.R. (4th) 635 (C.A.), at paras. 16-17. Accepting the argument that the pollution liability exclusion only applies to "active" industrial polluters -- those who are already excluded from ordinary liability insurance coverage by virtue of the fortuity principle -- would effectively denude the clause of any meaning. In my view, the exclusion clearly extends to activities, such as storing gasoline in the ground for resale at a gas bar, that carry a known risk of pollution and environmental harm.

24Therefore, the claim as pleaded falls squarely and unambiguously within the language of the exclusion clause as a claim "arising out of the actual, alleged or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants". Indeed, it would take a "hyperliteral" reading of the language of Zurich, detached from the facts and issue considered in that case, to conclude otherwise.

23CNA argues that the release of chlorine from Distributor’s storage tanks is analogous to the release of petroleum from the underground storage tanks in Miracle. In both cases, a pollutant emanated from the premises owned or occupied by the insured. Also in both cases, the substance that escaped fell within the definition of “pollutant” in that the substance was a liquid or gaseous irritant or contaminant.

24CNA states that the Statement of Claim advances claims that are consistent with environmental claims. At paragraph 48, it is alleged that the escape of the chlorine required expert remediation efforts. At paragraph 50, it is alleged that the plaintiff incurred costs of emergency clean-up, repair, and remediation efforts. At paragraph 59, it is alleged that the Defendants failed to adhere to the guidelines for storage of pool chemicals and failed to ensure that there was a containment system surrounding the storage tanks to contain spills. At paragraph 76, the Plaintiff relies on the Environmental Protection Act, R.S.O. 1990, c. E.19.

25I am of the view that Miracle is distinguishable on the facts, for the same reason it was distinguished in Hemlow. In Miracle, it was alleged that the petroleum escaped from Miracle’s facilities into the natural environment. The petroleum flowed across the land and catch basins lying under or adjacent to the plaintiff’s property, and as a result, the plaintiff’s property suffered damage including subsurface and groundwater contamination. The plaintiff alleged that it incurred costs and expenses in investigating, testing, and monitoring the source and extent of the contamination. As noted in Hemlow, the claim in Miracle, “fit comfortably within the historical purpose of the pollution exclusion”.

26Although the claim in this case refers to some remediation efforts, the focus of the claim is on the damage to Highland Furniture’s property. As noted by the Applicants, if the claim was for environmental damage to the land, the claim would have been advanced by the landlord/owner of the property and not the tenant. Here, as in Hemlow, there is no allegation of damage to the natural environment, or a suggestion that “any government-mandated cleanup is in play”: Hemlow at paras. 33, 34.

27It is my view, that the commonly understood definition of pollution is the escape of an irritant or contaminant into the natural environment that causes damages related to the clean-up of the contamination, and the costs of investigating, testing, and monitoring the contamination. In other words, an “irritant or contaminant” does not become “pollution” unless the substance enters the natural environment, and there is a requirement to investigate, test and clean-up the substance.

28In Miracle, the damages were allegedly caused by the discharge of gasoline into the natural environment, which required rectification of the contamination and remediation of the plaintiff’s property. The court held that the pollution exclusion applied in those circumstances. In Zurich, the carbon dioxide was not released into the natural environment but instead was confined to the apartment building. In Hemlow, the ammonia was not released into the natural environment and was confined to the premises. In both Zurich and Hemlow, no damages were claimed for the cost of rectifying the contamination.

29Here, the liquid chlorine did not enter the natural environment. It is alleged that the liquid chlorine entered the premises occupied by Highland Furniture and caused damage to its property. The nature of the claim is damage to Highland Furniture’s property arising out of the insureds’ negligence. The nature of the claim is not the escape of a contaminant that escaped into the natural environment and resulted in government-mandated clean-up costs. I am satisfied that based on the commonly understood definition of pollution, and the historical purpose of the pollution exclusion, the claim against the Applicants does not fall within the pollution exclusion.

DISPOSITION

30I conclude that the pollution exclusion in the Policy does not apply in the circumstances of this case. I find that the Applicants are entitled to the relief sought, and I grant the declaration that CNA is obligated to defend the Applicants in the Action.

31After CNA denied coverage, the Applicants were required to retain their own counsel to defend the Action. The Applicants claim costs of the defence in the amount of $10,870.87, inclusive of counsel fee, disbursements and H.S.T. I find that CNA is under an obligation to defend the Action. Had CNA undertaken the defence at the outset, the Applicants would not have been required to incur any costs of defending the Action. The Applicants are entitled to their costs of defending the Action on a solicitor and own client basis. I am of the view that the costs claimed by the Applicants for the defence of the Action are reasonable and I grant judgment in favour of the Applicants in the amount of $10,870.87.

32The Applicants are successful on the Application and are entitled to their costs. The Applicants filed a Bill of Costs in which they claim solicitor and own client costs in the amount of $40,836.06. The Respondents filed a Costs Outline which provides that if successful, CNA would have sought costs on a partial indemnity scale in the amount of $15,887.03 inclusive of counsel fee, disbursements and H.S.T.

33I encourage the parties to settle the issue of costs. If the parties are unable to come to an agreement, the Applicants may deliver written cost submissions consisting of no more than three typed pages, excluding offers to settle and caselaw, within 15 days of the date of these reasons. The Respondent may deliver its submissions in response on the same basis, within 15 days of receiving the Applicants’ submissions.

Chalmers J