The “absolute pollution exclusion” clause contained within CGL policies has historically been limited 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.”^[1] While the case law is not settled on the matter, it appears the Courts have recently broadened the scope of the absolute pollution exclusion clause, thereby permitting its use in matters that are outside the confines of its historical use in limited situations. This article reviews the factors the Court has considered and the limited instances in which the Courts have permitted the use of the absolute pollution exclusion clause outside of its historical purpose.

In the early 1980s, insurers replaced the “sudden and accidental” pollution exclusion clause with the “absolute pollution exclusion” clause in an effort to broaden the scope of the exclusion to preclude coverage for gradual but unintentional pollution.^[2] While there may be some minor variations within different CGL policies, the “absolute pollution exclusion” clause states the following:

1. Pollution Liability
   • “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:
     1. At or from premises owned, rented or occupied by an insured;
     2. At or from any site or location used by or for an insured or others for the handling, storage, disposal, processing or treatment of waste;
     3. Which are at any time transported, handled, stored, treated, disposed of, or processed as waste by or for an insured or any person or organization for whom the insured may be legally responsible; or
     4. At or from any site or location on which an insured or any contractors or subcontractors working directly or indirectly on behalf of an insured are performing operations:
        1. If the pollutants are brought on or to the site or location in connection with such operations; or
        2. If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify, or neutralize the pollutants.
2. Any loss, cost or expense arising out of any government direction or request that you test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.

“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapour, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

The leading case pertaining to the absolute pollution exclusion clause is Zurich. In Zurich, the Ontario Court of Appeal considered the issue as to whether the pollution exclusion clause within Zurich Insurance Company’s CGL policy bars coverage for damages caused by carbon monoxide poisoning arising from a faulty furnace.

Given the lack of Canadian case law on the issue, the Court of Appeal looked to American case law and academia for guidance. The Court of Appeal cited Professor Stempel, who concluded that the absolute pollution exclusion “bars coverage for classic environmental degradation pollution and not tort claims previously conceded to be within the scope of standard CGL coverage.”^[3]

The American case law is unsettled, resulting in two separate lines of interpretation. The first line of cases interprets the absolute pollution clause literally, thereby broadening its scope of use, resulting in a more extensive application of the exclusion.

The second line of cases interprets the absolute pollution clause narrowly, and in consideration of the exclusion’s historical purpose and use. In doing so, the Courts determined the absolute exclusion clause is ambiguous and does not portray an insured’s reasonable expectations regarding their coverage within the CGL policy.

The Court of Appeal in Zurich preferred the second set of cases in the United States, interpreting the absolute pollution exclusion clause narrowly and in the context of its historical use.  In doing so, the Court of Appeal stated that:

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 policy holders acquiring insurance.^[4]

In construing the absolute pollution exclusion clause narrowly, the Court of Appeal in Zurich found that Zurich Insurance Company could not rely upon the exclusion due to carbon monoxide poisoning from a faulty furnace.

In contrast to Zurich, the BC Court of Appeal in Precision Plating Ltd.^[5] interpreted the absolute pollution exclusion more broadly, ruling in favour of the exclusion clause outside the confines of its historical use.

In Precision Plating Ltd., a fire occurred at the insured’s property, thereby activating the sprinkler systems resulting in large vats containing toxic chemicals to overflow and damage the neighbouring property. The trial Judge followed Zurich and ruled against the use of the absolute pollution exclusion. In doing so, the trial Judge determined that the absolute pollution exclusion clause does not exclude coverage for the escape of polluting substances caused by a fire.^[6]

In overturning the trial Judge’s decision and finding in favour of applying the absolute pollution exclusion clause, the Court of Appeal determined that the trial Judge erred in framing his analysis as a question of causation of the damage rather than causation of the liability. Instead of focusing on the damage arising from the fire, the Court of Appeal considered whether the “pleadings alleged the escape of pollutants as a source of liability, which would then be a cause of the potential “loss” for the insured.”^[7]

The Court of Appeal distinguished the ruling in Zurich on the basis that it was focused on whether the pollution exclusion clause unambiguously applied to the type of pollution at issue (i.e. carbon monoxide).^[8] In contrast, the Court of Appeal’s determination of whether the toxic chemicals stored at the insured’s property as being a Pollutant was not an issue. Instead, 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.”^[9] In doing so, the Court determined that the CGL Policy excludes coverage for any loss arising out of a finding of liability for the escape of Pollutants.^[10] The Court of Appeal found that the insured could not have a “reasonable expectation that it would be indemnified against liability for the escape of chemicals from the vats.”^[11]

A more recent Ontario Court of Appeal case, Hemlow Estate^[12], applied a more similar approach to Zurich than Precision Plating Ltd. in relation to whether the absolute pollution exclusion clause could be relied upon. In Hemlow Estate, the plaintiff was an independent contractor who was performing work at a property owned by Rich Products. During the course of his work, the plaintiff opened a valve to a pipe containing pressurized ammonia, resulting in the plaintiff’s death and significant damage to Rich Products’ property.

The Court of Appeal upheld the trial judge’s decision that Co-operators was unable to rely upon the absolute pollution exclusion clause within the plaintiff’s CGL policy. The Court of Appeal verified that the nature of the claims alleged against the plaintiff within the pleadings pertained to negligence, nuisance and breach of contract. In doing so, the Court focused more so on the claims alleged within the pleadings than the actual cause of the damage. The Court of Appeal determined that the claim of negligence against the plaintiff within the pleadings was precisely the type of claim for which parties obtain CGL coverage, and is the type of risk the plaintiff sought coverage.^[13] The Court of Appeal further found that the “fact the damage causing substance was a pollutant does not change the nature of the claim.”^[14] It does not appear the Court of Appeal considered Precision Plating Ltd. within their analysis or decision.

Arguably, Precision Plating Ltd. has resulted in a broadened scope of the absolute pollution exclusion clause, but only in limited circumstances. It is evident the applicability of the absolute pollution exclusion clause is based upon the unique facts in each case. However, in Precision Plating Ltd., the Court appears to have differentiated the lines of cases between those which consider whether exclusion clause is ambiguous in relation to the pollution in question is considered a “Pollutant” (i.e. carbon monoxide in Zurich), as opposed to cases where it is evident the pollution in question is a “pollutant” contemplated within the exclusion clause. Within the second line of cases, the issue is then whether the source of liability alleged in the pleadings is excluded from coverage due to the absolute pollution exclusion clause.

By differentiating the two types of cases, there now appears to be an argument that the absolute pollution exclusion clause can, in some cases, be applied outside of its limited historical use in circumstances where it is clear the pollution causing the alleged liability (such as toxic chemicals in a vat) is a “Pollutant” within the literal reading of the clause and the reasonable expectations of the insured.

With that being said, as outlined within Hemlow Estate, the Ontario Court of Appeal has continued to maintain a narrow view of the absolute pollution exclusion clause. In doing so, the Court of Appeal focused on the insured’s coverage expectations and the historical use of the exclusion clause instead of applying a literal interpretation of the clause’s wording. Within Hemlow Estate, it appears the Ontario Court of Appeal may have analyzed the issue in a similar manner that was dismissed by the BC Court of Appeal in Precision Plating Ltd. In particular, the Court of Appeal in Hemlow Estate focused on causation of the torts being alleged instead of the substance of the liability that caused the damage. By utilizing the reasoning from the BC Court of Appeal in Precision Plating Ltd., it could be argued that the issue in Hemlow Estate should not have been focused on the allegations of negligence or breach of contract against the plaintiff, but rather, whether the alleged source of liability (i.e. pressurized ammonia) that caused the damage in question was excluded from coverage by the absolute pollution exclusion clause.

It is evident the Courts in Canada remain unsettled pertaining to the application of the absolute pollution exclusion clause outside of its limited historical context. We look forward to seeing how the Courts interpret this exclusion clause in future decisions.

 

^[1] Zurich Insurance Co. v. 686234 Ontario Ltd., 2002 CarswellOnt 4019, para 13 [Zurich]

^[2] Ibid, para 13.

^[3] Ibid, para 15.

^[4] Ibid, para 37.

^[5] Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277 [Precision Plating Ltd.]

^[6] Ibid, para 17.

^[7] Ibid, para 41.

^[8] Ibid, para 53.

^[9] Ibid, para 54.

^[10]Ibid, para 57.

^[11]Ibid, para 56.

^[12] Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908

^[13] Ibid, para 23.

^[14] Ibid.