COURT FILE NO.: CV-22-00389-00/CV-23-0016-00 DATE: 2024-02-20

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

The Corporation of the City of Thunder Bay, Applicant G. McGuire, for the Applicant

- and -

Great American Insurance Company, Respondent M. Barrett, for the Respondent

A N D B E T W E E N:

Lloyd’s Underwriters, Applicant J. Tam and T. Donnelly, for the Applicant

- and -

Great American Insurance Company and The Corporation of the City of Thunder Bay, Respondents G. McGuire and M. Barrett, for the Respondents

HEARD: June 30, 2023, at Thunder Bay, Ontario Madam Justice T. J. Nieckarz

Decision On Applications

Overview

[1] This decision relates to two separate applications (the “Applications”) with similar relief sought.

[2] The Applicant in CV-22-0389-00, The Corporation of the City of Thunder Bay (the “City”), seeks a declaration stating that the Respondent, Great American Insurance Company (“GAIC”) has a duty to defend the City in three court actions pertaining to “pinhole leaks” in water pipes.

[3] The Applicant in CV-23-016-00, Lloyd’s Underwriters (“Lloyd’s”) has acknowledged its duty to defend and similarly seeks a declaration that GAIC has a duty to defend the City. Lloyd’s also seeks a declaration that GAIC must contribute to the costs of defending the litigation against the City on a “time on risk” basis.

[4] In response to both applications, GAIC denies there is any duty to defend. GAIC relies on a lead exclusion clause contained in the applicable policy.

[5] The parties to the Applications agree that GAIC has the burden of proving that the exclusion clause clearly and unambiguously applies so as to exclude any possibility of coverage for the actions in question.

[6] For the following reasons I find that GAIC has failed to meet its burden, and that there is a duty on the part of GAIC to defend the pinhole leak actions.

Background

[7] Between January 1, 2017, and January 1, 2020, the City was insured under a general liability insurance policy issued by Lloyd’s. Lloyd’s made the decision to stop underwriting Ontario municipalities effective January 1, 2020, causing the City to have to seek out an alternate insurer.

[8] Aon Reed Stenhouse Inc. (“Aon”) was the insurance broker acting as the City’s agent in finding and binding alternate coverage.

[9] In February 2019, Aon contacted GAIC with respect to an underwriting opportunity in the Canadian municipality market. GAIC agreed to insure only certain Ontario municipalities, including Thunder Bay.

[10] In October 2019, GAIC and Aon began discussing what coverage would be afforded to various municipalities, and what exclusions would apply. GAIC retained legal counsel in Ontario to review and to help draft the policy wordings. All drafts reviewed by GAIC contained the lead exclusion.

[11] On November 1, 2019, Aon sent an email to GAIC, further to an October 29, 2019, meeting between members of Aon and GAIC, confirming various matters related to the municipal insurance coverage, including the wording of the policies. In the email, Aon acknowledges that GAIC will require the municipalities’ policies to address exposure to lead claims, noting “Pollution – need to address lead (in water).”

[12] On November 13, 2019, Aon sent a further email to GAIC clarifying the plan of action for completing the policy wording. In this email, Aon acknowledged that a lead exclusion needed to be included in all the Ontario municipal policies.

[13] GAIC’s actions were consistent with its overall policies. Following widespread media coverage of the Flint, Michigan water crisis in 2015, GAIC had started to include lead exclusion clauses in all of its United States public entity policies. It sought to do the same for those municipalities in Ontario for whom it was prepared to provide coverage.

[14] On or about December 20, 2019, Aon sent an Insurance Renewal Proposal to the City that proposed to replace the Lloyd’s liability policy with the GAIC liability policy effective January 1, 2020. The proposal highlighted in detail the changes in policy that were being offered by GAIC as compared to the existing Lloyd’s policy. The proposal noted various exclusions but made no reference to a lead exclusion.

[15] On December 23, 2019, the City accepted the proposed policy as outlined to it. The City signed the proposal, which stated on pg. 21 as follows:

We hereby acknowledge receipt and review of the information presented in the renewal proposal and provided in the attached Quote disclosure Form. We hereby instruct Aon Reed Stenhouse Inc. (Aon) to bind the insurance program(s) selected by us and understand that our instruction to bind constitutes an acceptance of the terms and conditions and payments described in the proposal. [Emphasis added.]

[16] On December 30, 2019, Aon provided the City with a binder of insurance (the “Binder”) for the GAIC general liability policy with an effective date of January 1, 2020, to January 1, 2021. The Binder was prepared by Aon, and there is no evidence that GAIC was involved in the preparation of the Binder. The Binder confirms that it is subject to all terms and conditions of the policy to be issued, which, when delivered, will replace the Binder.

[17] The Binder also contained a section entitled “Special Terms/Conditions & Exclusions”. Neither that section, nor anywhere else in the Binder, referred to a lead exclusion. The policy wording was not provided with the Binder.

[18] Despite this, GAIC says that by late October 2019, it had advised Aon that GAIC would not simply be adopting the language of the previous policies issued by Lloyd’s. GAIC says that when Aon issued the Binder to the City, Aon was aware and understood that the coverage was subject to a lead exclusion and that the wording later delivered would contain the lead exclusion. Communications with respect to the policy were only between GAIC and Aon, and the lead exclusion was not communicated by Aon to the City, until much later.

[19] On January 2, 2020, Aon sent an email to the City as follows:

This is to confirm that coverage has been bound effective January 1, 2020, to January 1, 2021, as per our proposal and as per the signed acceptance form. We attach our Binders of Insurance as temporary proof of insurance until the policy documents are issued. [Emphasis added.]

[20] The GAIC policy is a “Comprehensive General Liability Policy” (“CGL”). Insuring Agreement “A” of the policy provides coverage of up to $5,000,000 for “Bodily Injury and Property Damage Liability.”

[21] On March 19, 2020, GAIC’s Ontario counsel provided to Aon a draft of the policy wordings, which included the lead exclusion. On March 27, 2020, while Aon raised concerns about some other exclusions (pollution, cannabis), it confirmed that the lead exclusion was acceptable, noting “Lead (okay)”.

[22] On April 8, 2020, the City paid to Aon the $979,000 annual premium for the GAIC insurance coverage. There is no indication that the City was aware of the lead exclusion at this point.

[23] The first notification that the City appears to have received regarding the lead exclusion was on May 13, 2020, when Aon emailed the City the 79-page GAIC CGL policy. Aon also attached a 3-page letter from Aon to the City dated May 12, 2020, with the subject line “Update to General Liability Policy wording for 2020”. The letter outlined changes made and clarifications to information previously provided in the proposal, and stated:

Exclusions have now been revised to include:

Lead

This exclusion was found in the policy wording at page 21 and is more particularly described below.

[24] In February 2020, articles began appearing in the local and national press about the prevalence of pinhole leaks in copper pipes since the City began using sodium hydroxide in the water. The City suggests that GAIC’s revision to the policy may have been motivated by concern generated by the press coverage.

[25] The City was served with the following actions, alleging that the City’s introduction of sodium hydroxide into the water supply has caused widespread property damages and other losses, for which the City is alleged to be liable in negligence and other causes of action:

a. In October 2020, a Statement of Claim was issued by the St. Joseph’s Care Group, claiming damages estimated in the amount of $350,000 [“St. Joseph’s”].

b. In November 2020, a Statement of Claim was issued with Patricia Stadnyk as the representative plaintiff under the Class Proceedings Act, 1992, claiming general damages in the amount of $350 million [“Stadnyk”].

c. In December 2021, a Statement of Claim was issued by the District of Thunder Bay Social Services Administration Board, claiming damages in the amount of $5 million [“DSAB”].

d. In September 2022, a Statement of Claim was issued in the Thunder Bay Small Claims Court with the Northbridge General Insurance Corporation and Patricia Hunter as plaintiffs, claiming damages in the amount of $35,000 plus costs and interest. Ms. Hunter is a homeowner who is alleged to have suffered damage to her property arising out of leaks in her water pipes. Northbridge is Ms. Hunter’s home insurer and brought the subrogated claim on behalf of its insured [“Northbridge”].

(collectively referred to as the “Actions”).

[26] There is no dispute that a duty to defend claims covered by the Comprehensive General Liability policy is found in the policy (on page 17).

[27] GAIC denied coverage for the Actions on the basis that they are not claims covered by the Policy. Originally, GAIC relied on three policy exclusions:

a. Lead

b. Pollution

c. Intentional acts

GAIC confirmed that it “will not provide Thunder Bay with a defence nor indemnify it pursuant to the Policy.” While GAIC maintains that it has no duty to defend or indemnify, it has since confirmed that the lead exclusion is the sole basis for denying a duty to defend or indemnify.

[28] The Lloyd’s policy did not contain any exclusion pertaining to lead.

The Issues

[29] The issues for determination are:

a. Does the lead exclusion when properly interpreted, clearly and unambiguously apply to the Actions? Has GAIC proven that there is no possibility the Actions will fall within coverage, or is there at the very least, a “mere possibility” that the Actions are covered?

b. If the lead exclusion is found to be applicable, is it a binding term of the insurance contract or unenforceable pursuant to s. 124 of the Insurance Act?

[30] The following were raised as preliminary issues, but can easily be disposed of:

a. Lloyd’s raised the issue of whether GAIC’s evidence of its subjective intent behind the policy wording is inadmissible? GAIC clarifies that its evidence of subjective intent is not submitted to support its interpretation of the policy.

b. GAIC questioned whether these issues are properly the subject of an application as opposed to an action that should be tried? As there are no material facts in dispute that warrant a trial with respect to the issues raised, I find that an application is appropriate, and an action is not required.

Analysis

The Legal Framework

[31] There are general and well-established principles applicable to the interpretation of insurance exclusion clauses and to the duty to defend, which I have considered in my analysis of the parties’ arguments.

[32] An insurer’s duty to defend arises when an action is brought against an insured alleging an act under the policy of insurance and claiming damages that may be payable under the policy: Morrow (Litigation Guardian of) v. Symons, 85 O.R. (3d) 365 (“Morrow”), at para. 16.

[33] The applicable principles related to the duty to defend are not in dispute. Those principles were summarized in Ontario v. St. Paul Fire and Marine Insurance Company, 2023 ONCA 173, at para. 12 as follows:

a. If the pleadings allege facts which, if true, would require the insurer to indemnify the insured for the claim, the insurer is obliged to provide a defence.

b. If there is any possibility, based on a reasonable reading of the policy, that a claim falls within the liability coverage such that there could be coverage the insurer has a duty to defend the insured against that claim. The insurer’s duty to defend is broader than the duty to indemnify.

c. In determining whether coverage is possible, a court must look beyond the labels used to describe the claims and ascertain the substance and true nature of the claim.

d. Any doubt as to whether the pleadings bring the incident [or event] within coverage ought to be resolved in favour of the insured. Coverage clauses should be construed broadly in favour of coverage, and exclusion clauses should be construed narrowly. Where the policy is ambiguous, effect should be given to the reasonable expectation of the parties. [Citations omitted.]

[34] The threshold is low. The “mere possibility” that a claim may succeed for coverage is sufficient to trigger the duty to defend. Traditionally, policies of insurance have been interpreted broadly in favour of the insured to ensure that the purpose for which the insurance is sold is not nullified. Any uncertainty as to whether a claim falls within the policy’s coverage should be resolved in favour of the insured: see Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801 (), at pg. 327; Amos v. Insurance Corporation of British Columbia, [1995] 3 S.C.R. 405 (), [1995] S.C.J. No. 74, at pg. 414, para. 16; and Morrow, at para. 16.

[35] Special legal principles apply to the interpretation of exclusion clauses:

a. Where, as in this case, a claim falls within the insuring agreement, the insurer bears the onus of proof in proving the applicability of an exclusion: Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 (“Progressive Homes Ltd.”), at para. 51.

b. An exclusion clause will not be upheld unless it is drafted with a requisite degree of “precision and clarity”: Thomas J. Donnelly & Craig Brown, Insurance Contract Interpretation (Toronto: Thomson Reuters, 2014), at pp. 157-159.

c. The insurer must show the exclusion “clearly and unambiguously” excludes coverage such that there is no possibility that the insurer will have to indemnify the insured on the claim as pleaded: Progressive Homes Ltd., at para. 51.

d. Consistent with the foregoing principles, Ontario courts have consistently declined to apply exclusions capable of two or more reasonable interpretations: 1599624 Ontario Limited v. Lloyd’s Underwriters, 2008 ONCA 435, at paras. 6-12.

[36] In considering whether a claim falls within the insuring agreement, the court must determine the “true nature of the claim” and is not bound by the plaintiff’s choice of labels. The court is tasked with looking beyond the choice of labels in the pleading and examining the substance of the allegations: Non-Marine Underwriters, Lloyd’s of London v. Scalera, 2000 SCC 24, [2000] 1 S.C.R. 551, at paras. 50-52 and 81.

Positions of the Parties

The City and Lloyd’s

[37] The positions of the parties will be more particularly set out throughout this decision. By way of overview, the City and Lloyd’s take the position that there are three reasons as to why GAIC’s position must fail, any one of which is sufficient to trigger a duty to defend:

a. The lead exclusion, when properly interpreted, does not apply to any of the allegations in the Actions because:

i. Applying the analysis of the Court of Appeal in Hemlow Estate, 2021 ONCA 908, the true nature of the claim is for negligence for causing property damages, and not lead;

ii. The part of the exclusion relied on is not clear and unambiguous but rather it is poorly worded and incomprehensible;

iii. The lead exclusion does not apply to the non-lead allegations in any event; and

iv. The lead exclusion does not apply to the Plaintiffs’ mental anguish claims.

b. There is, at the very least, a “mere possibility” that the actions are covered, which is sufficient to trigger the insurer’s duty to defend; and

c. Even if the lead exclusion is applicable, it is not a binding term of the insurance contract and is unenforceable pursuant to s. 124 of the Insurance Act, R.S.O. 1990, c. I.8.

GAIC

[38] GAIC’s position on the applications is:

a. The lead exclusion unambiguously applies to all claims advanced in the Actions. The Actions clearly relate to the City’s efforts to treat the effects of lead.

b. There is no merit to the argument that s. 124 of the Insurance Act precludes GAIC from reliance upon the exclusion because:

i. The Policy’s defence clause is also not contained in the Binder. Take the whole of the Policy or none of it, but the Applicants cannot pick and choose which parts of the policy apply and which of them do not.

ii. The Binder was prepared by the City’s insurance broker, Aon, acting as the City’s agent. GAIC did not prepare the Binder, nor did it send it to the City. Therefore, any omissions in the Binder are not attributable to, and should not bind GAIC.

iii. The Exclusion was negotiated with the City’s agent, Aon. GAIC did not simply make a mid-term change to the Policy’s wording, nor did it unilaterally add the Exclusion after coverage was bound.

[39] All parties agree that if the lead exclusion is found not to apply or to be unenforceable, GAIC has a duty to defend the Actions.

[40] In Progressive Homes Ltd., at paras. 22-24, the Supreme Court of Canada summarized the relevant interpretive principles applicable to the interpretation of insurance contracts as follows:

a. When the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole;

b. Where the language of the policy is ambiguous, and only when there is ambiguity, the courts rely on general rules of contract construction. For example:

i. the courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the policy;

ii. courts should avoid interpretations that give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded; and

iii. courts should strive to ensure that similar insurance policies are construed consistency.

c. When these rules of construction fail to resolve the ambiguity, the policy shall be construed against the insurer. Coverage provisions are interpreted broadly while exclusion clauses narrowly.

[41] It is the insurer’s obligation to prove that the “…words clearly and aptly describe the contingency that has in fact arisen”: Consolidated-Bathurst v. Mutual Boiler, [1980] 1 S.C.R. 888 (), 29 O.R. (2d) 720.

Interpretation of the Exclusion

[42] Based on the foregoing, the first step in the analysis involves determining whether the exclusion is ambiguous. If it is, then I must consider the reasonable expectations of the parties. If it is not, then I proceed to the second step of the analysis, which involves ascertaining the true substance of the claims pleaded and determining whether some of the claims may be covered by the policy, or whether they are excluded: Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159, at paras. 64, 69, and 70.

[43] The exclusion in its entirety, reads:

This insurance does not apply to:

LEAD

a. All liability or expense arising out of, resulting from, or in any way caused by or related to any actual, alleged or threatened ingestion, inhalation, absorption, or exposure to lead, in any form from any sources; or

b. All liability or expense or other type of obligation arising out of or resulting from, or in any way related to, any:

i. Claim, suit, request, demand, directive, or order by or on behalf of any person, entity, or governmental authority that any insured or others test for, monitor, clean up, remove, contain, treat, detoxify, neutralize, or in any way respond to or assess the effects of lead in any form from any source; or

ii. Claim or suit by or on behalf of any person, entity, or governmental authority for damages or any other relief or remedy because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to or assessing the effects of lead in any form.

[44] Branches (a) and (b)(i) are unambiguous as to their meaning. Branch (a) addresses bodily harm as a result of coming into contact with lead in the ways listed. Branch (b)(i) addresses liability or expenses associated with a demand or requirement that the insured monitor, clean up, remove, contain, treat, detoxify, neutralize, or in any way respond to the effects of lead. Branch (b)(ii) is what the insurer relies on and is more difficult to interpret. Counsel advise that this provision has not previously been considered.

[45] GAIC argues that (b)(ii) unambiguously applies to the Actions on the plain and ordinary meaning of the words used and the clear grammar of the exclusion. Specifically, the exclusion applies to:

a. any “liability…arising out of or resulting from, or in any way related to”

b. a claim

c. on behalf of any person, entity, or governmental authority

d. for damages or any other relief or remedy

e. “because of…treating,…or neutralizing, or in any way responding to or assessing the effects of lead.”

f. Sodium hydroxide was used to treat the water supply for lead.

[46] GAIC’s position is that liability arises because of the City’s mishandling of its effort to address lead in the water supply, which is the core conduct the exclusion bars from coverage.

[47] The City argues that the lead exclusion’s three branches should be interpreted as follows:

Branch (a): where individuals are harmed by lead;

Branch (b)(i): where a claimant is demanding that the insured itself, or someone on the insured’s behalf, remediate or monitor lead [note: “remediate or monitor” include “test for, monitor, clean up, remove, contain, treat, detoxify, neutralize, or in any way respond to or assess the effects of lead”]; and

Branch (b)(ii): where a claimant is seeking compensation from the insured for costs the claimant has incurred or will incur remediating or monitoring lead.

[48] The City asserts that Branch (b)(ii) is aimed at situations where, instead of demanding that the insured perform the remediation or pay to have someone else perform it, the claimant seeks compensation for remediation which the claimant has already performed or will have to later perform. This is reflected in the language as follows:

(b)(ii) Claim or suit by or on behalf of any person, entity or government authority for damages or any other remedy because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to or assessing the effects of lead in any form. [Emphasis added.]

[49] Applying the City’s interpretation of Branch (b)(ii) to an example to illustrate the interpretation, GAIC could rely upon this branch of the exclusion in declining to defend or settle a claim brought by a person or entity who had to remove lead paint from a City owned facility, such as public housing, if the City failed to do so, or by someone who had to monitor or treat their water for lead because the City failed to do so.

[50] GAIC disagrees with this interpretation and argues that it results in a rewriting of the relevant portion of the exclusion. The exclusion’s scope is not limited to reimbursing a claimant for its own costs of “remediating” or “monitoring” lead. The exclusion broadly excludes coverage for any “claim…for damages…because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to or assessing the effects of lead in any form.” There is no basis for inserting additional words requiring it to be the claimant’s efforts in remediating or monitoring lead. It does not matter who did the neutralizing, treating, responding, etc., because the exclusion broadly precludes coverage for any liability “in any way related to” a claim for damages from responding to the effects of lead, in any form.

[51] I find the relevant branch of the exclusion ambiguous. A literal reading of the policy suggests the possibility that the exclusion may be interpreted as broadly as GAIC argues so that it operates as a basket clause of sorts to exclude any claim that is in any way related to the effects of lead. Also plausible, when the exclusion is read as a whole, is the City’s interpretation. The wording of (b)(ii) is unclear and easily lends to these two interpretations.

[52] I accept GAIC’s interpretation of the exclusion in part. I agree with GAIC that a reasonable interpretation could also include claims related to work performed by the City (monitoring, remediating etc.), depending on the nature of the claim. This makes sense when one considers the wording of the policy and the reasonable expectations of the parties. However, for the reasons that follow, I do not interpret the scope of the exclusion as broadly as GAIC seeks to do by exercising the exclusion simply because there is some minimal relationship to lead drawn in the pleadings. Expanding the scope of the exclusion to exclude coverage for accidental property damage caused by something other than lead while the insured is responding to a potential lead problem strikes me as going beyond the purpose of the exclusion.

[53] I agree with the position of the City and Lloyd’s that the wording of (b)(ii) of the lead exclusion is not clear and that it reasonably contemplates claims where the insured accidentally damages property, by some cause other than lead, while responding to a lead problem. This is in contrast to the other portions of the exclusion that are clear. For example, it is clear from the exclusion’s wording that branch (a) contemplates bodily injury caused by lead. It is also clear from the wording that branch (b)(i) contemplates attempts to recoup the costs of “testing for, monitoring, cleaning up, removing, containing [etc.]” lead. The City points to examples raised by GAIC, such as in the Flint water crisis where individuals suffered significant health issues arising out of a failure to properly treat the water supply for lead, and also the paint example whereby in 2014 three American paint manufacturers were ordered to pay more than $1 billion to fund removal of lead paint from homes, as being indicative of the types of situations reasonably contemplated by the other parts of the exclusion (branches (a) and (b)(i)). Branches (a) and (b)(i) make sense in light of these examples, offered as a large part of the impetus for the insurance industry in general to contemplate lead exclusions. Branch (b)(ii) has more than one reasonable interpretation.

[54] The exclusion is, therefore, ambiguous and requires resort to contract interpretation principles, and specifically a consideration of the parties’ reasonable expectations.

[55] In considering reasonable expectations, the City and Lloyd’s argue that this case is analogous to various decisions with respect to pollution exclusions. While the facts of those cases, the policy wording, and the results may differ, the methodology adopted in the analysis is applicable to this case. Those cases make it clear that when the wording of an exclusion is ambiguous, hyperliteral approaches to interpreting insurance exclusions will often give way to an approach that looks at the purpose and common sense meaning of the exclusion to attempt to ascertain the nature of the liability which the exclusion reasonably seeks to exclude from coverage: see ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liquidate), 2011 ONCA 321, 105 O.R. (3d) 241, at para. 18.

[56] The more recent cases of Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908 (“Hemlow”), is illustrative of this analysis. Mr. Hemlow negligently opened a valve to a pipe containing pressurized ammonia, which caused the ammonia to be released and cause significant property damage and caused Mr. Hemlow’s own death. While the court recognized that ammonia was a “pollutant” within the meaning of the policy, the court reasoned that the pollution exclusion did not apply because it was purely coincidental that Mr. Hemlow’s negligent act happened to result in the release of “a substance that can be labelled as a pollutant”: Hemlow, at para. 21.

[57] GAIC argues that the same reasoning does not apply here because Mr. Hemlow’s negligent act of opening a valve to a pipe that happened to contain ammonia is not comparable to the City’s alleged negligence. Here, GAIC argues there is a close connection between the City’s liability-generating conduct and the conduct contemplated by the exclusion.

[58] Hemlow focused on the “thrust of the allegedly negligent conduct,” and found that the thrust did not involve “the handling, or potential discharge, of a pollutant.” In contrast, GAIC argues that the City introduced sodium hydroxide to its water supply precisely because it was undertaking the exact type of endeavour described in the exclusion, namely the treating of, or responding to, the effects of the lead present in the drinking water. GAIC further argues that the alleged actions of the City in creating wide-ranging liability exposure by mishandling its effort to address the lead in its water supply was not a random accident of fate, but rather the core conduct the exclusion bars from coverage. In asking “what is the true source of the liability asserted in the pleadings?”, GAIC argues that it is the City’s alleged negligent attempt to treat the effects of lead in the water supply. While it advocates for a different result, I find that GAIC’s reliance on the exclusion is consistent, and not at odds, with the Hemlow analysis.

[59] I accept the City and Lloyd’s arguments that GAIC’s interpretation of the exclusion is not what was contemplated by the parties for the following reasons:

a. Based on the nature of the policy, a reasonable policyholder would expect that the policy insured the very risk that occurred. There is no suggestion that this is the type of claim that municipalities or other insureds regularly face, although it is one that they do have exposure to given the municipalities’ role in managing water systems. The City argues that pinhole leaks are risks to which municipalities are exposed regardless of the presence of lead in the pipes or the addition of sodium hydroxide, and for which they would reasonably expect coverage under their CGL policies. I am satisfied, based on the brief evidence provided by the City, that damage to copper pipes is not an inherent lead-related risk, but rather is a water-related risk. The City provides examples of municipalities that experience pinhole leak issues. In none of those examples was lead mentioned as the cause of the leaks. A reasonable policyholder would have understood the clause to exclude coverage for accidental damages directly related to lead and to the City’s actions in responding to a lead problem, but not to property damage caused by some other chemical, even if the impetus for using the chemical is to treat the water supply to prevent lead contamination.

b. GAIC’s affidavit evidence provides some insight into the historic purpose of the lead exclusion provisions. GAIC advocates for an interpretation of the exclusion that goes well beyond the mischief it was intended to address.

In GAIC’s own factum it was stated that the “relevant part of the Exclusion is reasonably understood as a comprehensive list of the ways in which one might attempt to address the hazards posed by lead.” While subjective intent is not relevant to the objective reasonable expectations analysis, in the context of considering the historic concerns that resulted in lead exclusions being adopted into CGL policies, this statement confirms that it is “hazards posed by lead” that are excluded. The liability alleged does not pertain to the City’s actions in addressing the hazards posed by lead, but rather the City’s actions in introducing sodium hydroxide in the water system, which is alleged to be a known corrosive agent for copper pipes.

c. The overly broad interpretation advocated for by GAIC could have absurd results. For example, if in responding to a claim that there is lead in water in a particular area, a City truck is dispatched to a neighbourhood to test for lead and then accidentally leaks oil all over the driveways of the homes which the truck stops at and causes damage to the homeowner’s property, the insurer’s interpretation would exclude the damage claim from coverage when in fact lead has nothing to do with the damage claimed, except that the City was “responding to” or going to the home to “test” for lead. The liability would not arise from the City’s testing or responding to the lead, but under GAIC’s interpretation of the exclusion, it was the reason the truck was in the driveways and therefore there is no coverage. In my view, this goes well beyond what would have been reasonably contemplated by a lead exclusion. While the policy itself is broad enough that such an interpretation would not effectively nullify the coverage bargained for, it would significantly increase the City’s potential liability and decrease the value of the policy to the municipality. Interpretations that give rise to unrealistic results or that were not in the contemplation of the parties should be avoided in favour of interpretations that produce commercially sensible results: see Progressive Homes Ltd., at para. 23; Sam’s Auto Wrecking Co. Ltd. (Wentworth Metal) v. Lombard General Insurance Company of Canada, 2013 ONCA 186, at para. 37.

[60] Solely for the purpose of the duty to defend, I find in favour of an interpretation of Branch (b)(ii) of the lead exclusion that is broader than what the City and Lloyd’s suggest, but that it does not extend as broad as GAIC claims so as to exclude claims for property damage incurred incidental to the treatment for lead, in circumstances when lead was not the cause of the damage.

[61] In light of my findings, there is no need to resort to the use of the contra proferentem doctrine.

Is there a mere possibility of coverage?

[62] I now must apply the policy provisions to the claims to see if there is a possibility that some of the claims may be covered by the policy. Again, this requires ascertaining the substance and true nature of the claims pleaded.

[63] As the Court of Appeal for British Columbia noted in Precision Plating Ltd. v. Axa Pacific Insurance Company, 2015 BCCA 277, at para. 54:

[54] The issue was the alleged source of liability according to the pleadings, and whether that alleged liability was excluded from coverage by the Pollution Exclusion.

[64] GAIC argues that each of the underlying Actions seeks to impose liability on the City arising out of, resulting from, and related to, a claim by a person or entity because of steps the City took to treat, neutralize, and/or respond to the effects of Lead in the water system.

[65] Specifically, the Stadnyk action alleges that in or about 2015 or 2016, the City introduced pilot projects involving properties located within Thunder Bay to have water treated with sodium hydroxide to respond to the potential leaching of lead, and then in 2018 the City introduced sodium hydroxide into the City’s general water supply. The sodium hydroxide is alleged to have caused copper pipes to oxidize or corrode, deteriorate, and leak. This caused property damage for the class members. GAIC points to paragraphs 6 and 9 of the Statement of Claim that specifically refer to the water supply being “treated with” and “treated by” sodium hydroxide to address the potential for lead. I also note paragraph 4, which alleges that the plaintiff’s plumbing systems have been damaged as a result of the introduction of sodium hydroxide. Paragraph 7 alleges that sodium hydroxide is a known corrosive of metals, including copper, and that there were other more appropriate steps that the City could have taken to address any concern about lead in pipes other than sodium hydroxide. The allegation is that the City was negligent in its operation of the water system, and also breached express or implied contracts with the class members. In paragraph 19 it is alleged that despite discontinuing the use of sodium hydroxide, the City continues to fail to address the damage caused thereby.

[66] In the St. Joseph’s action, the plaintiff alleges that in 2018, the City introduced sodium hydroxide into the City’s water system as a corrosion inhibitor to respond to elevated lead levels in the drinking water. This plaintiff also alleges that the sodium hydroxide caused the pinhole leaks in copper water pipes across the city, such that it suffered property damage at multiple sites. It further alleges that a consultant concluded that the cause was “likely” the sodium hydroxide. Negligence is alleged to arise out of the City’s “careless” depositing of sodium hydroxide into the water systems when it knew or ought to have known it would interfere with the normal operation of the water system, a failure to properly inspect and monitor the pipes after the introduction of sodium hydroxide, a failure to take preventative measures to avoid pinhole leaks, and other related claims.

[67] In the DSAB action, the plaintiff alleges that in 2018, the City introduced sodium hydroxide into its water system as a corrosion inhibitor to respond to elevated lead levels in its drinking water. The plaintiff alleges that the sodium hydroxide caused pinhole leaks to develop, resulting in property damage to various properties it owns or operates. Specifically, GAIC refers to paragraph 4 of the Statement of Claim, which alleges that the introduction of sodium hydroxide was to “reduce lead levels…” . In paragraph 5 of the Statement of Claim the plaintiff alleges that there were other options available for the treatment of any lead concerns that did not necessitate the introduction of sodium hydroxide.

[68] In the Northbridge action, the same allegations were made as with the other actions. Specifically, the plaintiff in paragraph 6 of the Statement of Claim alleges that the City added sodium hydroxide into the municipal water supply. The difference with the Northbridge claim is that there is no mention of lead as being the reason why sodium hydroxide was introduced to the water system.

[69] In light of these pleadings, I must determine the true source of the liability that the plaintiffs assert. Is it liability arising out of, or resulting from the City’s actions in treating, neutralizing, or in any way responding to or assessing the effects of lead, or is liability alleged to arise from something else?

[70] I find that the Actions allege liability grounded primarily in negligence, but also breach of contract alleged to have been caused by the City’s actions in putting sodium hydroxide in the water. The primary concern is the alleged negligent management of the municipal water supply by the choice of sodium hydroxide, which is alleged to have caused leaks in the copper pipes. The allegations are that the City knew or ought to have known about the effects of sodium hydroxide, and should not have introduced it into the water supply. The Actions do not allege that the City was negligent in treating, neutralizing, or otherwise responding to the effects of lead. The negligence and alleged breach of contract has nothing to do with lead. While the purpose of adding the sodium hydroxide was to respond to elevated levels of lead, the act of treating the water for lead or whether it was effective (for example) is not where the negligence is alleged. The substance of the factual allegations contained in the underlying pleadings have nothing to do with lead, except in a very incidental way. As was the conclusion in many of the pollution exclusion cases cited, the fact that the damage causing substance (sodium hydroxide) was used to treat lead does not change the nature of the claims made and make the liability about lead. None of the plaintiffs in the Actions allege negligence in the City’s remediating of the effects of lead. They allege negligence arising out of the effects of sodium hydroxide on copper pipes given the corrosive properties of this substance.

[71] I use the following analogy in the event my reasoning is not clear. The difference in my mind is this: unlike Flint, Michigan (to use one of GAIC’s stated impetus for the lead exclusion provisions throughout its policies) where it may have been alleged that city did not properly treat lead in the water and health issues arose, here there is no allegation that the City was negligent in treating, neutralizing or otherwise responding to the effects of lead. It was negligent because the method it chose is alleged to have caused leaks in pipes and property damage. This is unrelated to the effects of lead. If the allegation was that sodium hydroxide was ineffective in treating the effects of lead and therefore the negligent choice of this treating agent caused damage to the claimants, that would be an allegation I would be prepared to find comes within a reasonable interpretation of the lead exclusion.

[72] If I am wrong as to my interpretation of the exclusion and/or my conclusion that the substance of the allegations was not directed at the treatment of lead, but rather the addition of a chemical property to the water supply that caused pinhole leaks, I would still find that there is at least a mere possibility that the claims could fall within the coverage.

[73] I accept the City’s argument that the allegations in the Actions are unproven. Therefore, even if I were to accept GAIC’s interpretation of the lead exclusion, there is at least the mere possibility that a court may accept that the alleged damages to the plaintiffs’ pipes occurred, but not find a causal link between the introduction of sodium hydroxide into the water supply and the pinhole leaks. In other words, it is open to a court to find that something caused the pinhole leaks, but it was not sodium hydroxide and/or not caused by the City.

[74] I further agree with the City that this conclusion does not require resort to ‘fanciful thinking’. It is a possible outcome of the litigation that the plaintiffs fail to establish causation. The City points to pinhole leak concerns in other jurisdictions that are unrelated to any apparent connection to lead. The City’s evidence suggests the possibility of various causes for pinhole leaks. The Stadnyk, St. Joseph’s and DSAB actions leave open the possibility of causes other than sodium hydroxide, although I acknowledge that the primary allegations are that the sodium hydroxide caused the pinhole leaks. The St. Joseph’s and DSAB plaintiffs allege they have retained experts who have concluded the sodium hydroxide to be the likely cause of the pinhole leaks. I do note that in each case the pinhole leaks are alleged to have appeared after the introduction of sodium hydroxide. Despite this, even absent the articles presented by the City, I have nothing before me to suggest that causation will not be a live issue in the Actions such that there is at least a mere possibility that the claims will come within the terms of the policy.

[75] For the foregoing reasons I find that there is at least a mere possibility that the relevant portion of the lead exclusion does not apply, and that the claims in the Actions fall within the terms of the policy. The duty to defend is triggered.

Does s. 124 of the Insurance Act preclude GAIC from relying on the lead exclusion?

[76] The City argues that the lead exclusion is not an enforceable term of the contract between the parties for two reasons:

a) Pursuant to the law of contract, GAIC was not permitted to unilaterally add the lead exclusion partway through GAIC’s performance of the contract; and

b) The lead exclusion is unenforceable pursuant to s. 124 of the Insurance Act in any event.

[77] However, I do not need to decide this issue given my conclusion that:

a) the lead exclusion does not extend to the claims of liability in this case; and

b) there is a mere possibility of coverage.

[78] In the event I am incorrect in my findings with respect to the interpretation of exclusion and the mere possibility of coverage, I would find the exclusion unenforceable.

[79] The City argues that the insurance contract offered to it in the December 20, 2019 Proposal in exchange for a premium of $979,000, did not make any reference to the lead exclusion. That proposal was accepted by the City on December 23, 2019. Coverage was subsequently bound, with the Binder that was issued, making no reference to a lead exclusion. A binding contract was formed. That contract did not provide for a policy with a lead exclusion clause. On the strength of that contract, the City paid the premium in full. Four months after the delivery of the Binder, and after payment of the premium, the policy wording was provided with the lead exclusion.

[80] The City argues that this case is akin to Innes Cor International Ltd. v. American Home Assurance Co. et al. (1974), 2 O.R. (2d) 64, 42 D.L.R. (3d) 46 (Ont. C.A.) () (“Innes”). In Innes, the plaintiff arranged insurance on the lives of four named corporate executives. The insurer issued a binder covering the accidental death of the employees. There was no limitation of liability. The policy wording that was subsequently provided contained a clause restricting coverage to “full time active salaried employees.” When one of the executives died, the insurer denied liability on the basis of the restriction. The trial judge held that because the restriction was not contained in the binder, the insurer could not rely upon it. The Court of Appeal dismissed the insurer’s appeal, confirming that the insurer could not unilaterally change the commitment that was made.

[81] Section 124 of the Insurance Act provides that all terms and conditions of the contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, failing which no condition modifying or impairing its effect is valid to the prejudice of the insured.

[82] A binder of insurance is a “contract of insurance” within the meaning of s. 124(1). Any changes to the contract cannot be made by the insurer without the agreement in writing of the insured: Sagl v. Cosburn Griffiths & Brandham Insurance Brokers Limited, 54 C.C.L.I. (4th) 236, rev’d on other grounds, 2009 ONCA 388 (), at para. 113.

[83] The City argues that the attempted mid-term introduction of the lead exclusion was not agreed to in writing, therefore it was non-compliant with the requirements of s. 124 and unenforceable.

[84] In Lalani Properties et al. v. Intact Insurance, 2022 ONSC 6883, the insurer made purported amendments to a property insurance policy partway through the policy term. The property was destroyed by fire and the insured argued that the new terms were unenforceable pursuant to s. 124 of the Insurance Act. Vella J., agreed.

[85] I do not disagree with the legal principles as stated by the City. I do disagree with the characterization of the insurer’s actions as trying to change the policy mid-term. GAIC communicated to Aon early in the negotiations of the contract of insurance that a lead exclusion was to be included in the policy. In these circumstances I would have been inclined to find that fault lies with Aon, who was the agent of the City, and therefore the City is bound by the actions of its agent. However, when the proposal for insurance was prepared by Aon, it was reviewed and approved by GAIC. There is no evidence that GAIC instructed Aon to change what had been prepared to include the lead exclusion before delivering the proposal to the City, and then subsequently when binding.

[86] I do not agree with GAIC’s submission that the proposal also did not contain a duty to defend and therefore if the lead exclusion is unenforceable, so is the provision outlining the defence of claims. This is a common provision in insurance contracts. The proposal outlined where the policy differed from the City’s previous policy, and the defence provisions were not specified. Again, GAIC reviewed and approved early drafts of the proposal. I also note that there is no dispute with respect to this provision and no evidence that it was ever contemplated that there would be no duty to defend.

Order

[87] I have not dealt with the allocation issue raised by Lloyd’s. GAIC argues it is premature, and likely something that can be agreed upon by the parties once the duty to defend issue is determined.

[88] For the foregoing reasons an order shall issue as follows:

a) Declaring that GAIC is obliged pursuant to the Canadian Public General Liability Policy bearing Policy No. 2480436 to defend the Actions.

b) If GAIC and Lloyd’s cannot resolve the issue raised by Lloyd’s with respect to allocation of defence costs, the issue may be returned before me for determination.

c) If the parties are unable to agree on costs:

d) The City and Lloyd’s shall deliver their submissions, limited to 5 pages each, double-spaced, not including bill of costs, relevant correspondence/offers, and caselaw, no later than March 15, 2024, failing which costs shall be deemed to have been resolved.

e) GAIC shall deliver its response no later than April 12, 2024, similarly limited to 5 pages, double-spaced.

f) Any reply shall be delivered no later than April 22, 2024, limited to 2 pages, double-spaced.

Released: February 20, 2024