Do Pollution Exclusion Clauses Work?

Will pollution exclusion clauses stand up in commercial general liability insurance policies? The Ontario Court of Appeal says yes, when they are directed at activities likely to cause traditional soil and water pollution. See ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liquidate, 2011 ONCA 321.

Andrew Miracle ran two gas bars on a First Nations reserve. One of the underground storage tanks allegedly leaked, contaminating nearby federal Crown property. The Attorney General of Canada sued several parties, including the gas bar, for $1,850,000 in damages for the loss in value of its property, the cost of investigation and the cost of remediating the property.

Miracle had purchased a commercial general liability insurance policy from ING, which contained a standard pollution exclusion clause. ING sought a declaration that it was not required to defend the action, because of the pollution exclusion. The federal Crown and one of the other defendants opposed the application, on the basis of a 2002 decision, Zurich Insurance Co. v. 686234 Ontario Ltd. 2002 CanLII 33365 (ON C.A.).

In Zürich, the Court of Appeal had refused to allow an insurer to use a pollution exclusion to deny liability for alleged carbon monoxide pollution from a negligently installed furnace in an apartment building. At the time, Justice Borins said, the historical context of the pollution exclusion revealed that its purpose was "to bar coverage for damages arising from environmental pollution, and not the circumstances of this case in which a faulty furnace resulted in a leak of carbon monoxide". Thus, he held that the exclusion was ambiguous and should be interpreted in favour of the insured. He distinguished a building owner with a defective furnace from a party involved in pollution-creating activity, at para. 38:

There 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...