On June 2, 2022, the Supreme Court of Canada refused leave to appeal Hemlow Estate v. Co-operators General Insurance Company, 2021 ONCA 908. In this case, Co-operators denied insurance coverage arguing that the damage in question was excluded as it was caused by “pollutants”. This position was rejected in both the Trial and Court of Appeal decisions where those courts found that there was a duty to defend.
John Hemlow was a sole proprietor who carried on business as a mechanical contractor. In order to insure his business, Hemlowco, Mr. Hemlow took out a Commercial General Liability policy with Co-operators. The policy included a “Total Pollution Exclusion”. Mr. Hemlow discussed the exclusion with his broker, but did not purchase additional pollution coverage. It is important to note that the exclusion itself did not define “pollutants” however it was defined elsewhere in the policy. The “Total Pollution Exclusion” included in the policy read as follows;
This insurance does not apply to:
- Pollution Liability
a) “Bodily Injury” or “property damage” or “personal injury” arising out of the actual, alleged, potential or threatened spill discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”.
b) Any loss, cost or expense arising out of any request, demand or order that any Insured or others 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”.
c) Any fines, penalties, punitive or exemplary damages assessed against or imposed upon any Insured arising directly or indirectly out of the of the [sic] actual, alleged, potential or threatened spill discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants” (para. 12).
Rich Products of Canada (“Rich”) retained Wear-Check Canada Inc. (“Wear-Check”) to sample and analyze oil from the mechanical and refrigeration systems at a Rich facility in Fort Erie, Ontario. Wear-Check subcontracted with Mr. Hemlow to carry out sampling work. Sadly, Mr. Hemlow was killed in a workplace accident while carrying out the duties of the subcontract. Specifically, Mr. Hemlow died due to ammonia exposure when he opened a valve that released pressurized ammonia. This act also caused significant damage to Rich’s property. Rich alleged that the damage to their property was caused by negligence, nuisance, and breach of contract. As such, Rich sought damages from Wear-Check and the Estate of Mr. Hemlow in the amount of $3,000,000.00.
Co-operators took the position that Hemlowco did not have coverage as the damages were caused by a “pollutant” and thus the “Total Pollution Exclusion” applied.
The key issue in this case was whether Co-operators had a duty to defend the claim. Co-operators argued that it did not have a duty based upon the operation of the policy’s “Total Pollution Exclusion” clause. However, the Trial Judge found “that it was possibly within the objectively reasonable expectation of John Hemlow that he was insured” (para. 64). Four factors allowed the Court to reach this reasoning;
- The nature of Mr. Hemlow’s business was known by Co-operators. Mr. Hemlow “reasonably expected coverage for foreseeable and ordinary tort claims that would arise out of his usual business activity” (para. 64).
- The risk of an accidental or sudden event, like what occurred in this case, would ordinarily fall within the policy. The damages were not caused by an act of pollution but rather an incident involving pollution.
- The insurance agent and Mr. Hemlow believed that the usage of the term “pollution” was in reference to damage to the environment.
- “The known risks in John’s particular business of an environmental claim were relatively minimal and did not warrant the expense of pollution coverage.” (para. 64).
The most critical part of the analysis was the conclusion relating to the ambiguity regarding the term “pollution”.
“The definition used by Co-operators of “Total Pollution Exclusion” was misleading in that it not only included an exclusion of events which an average person would associate with pollution, but any accidental occurrence that caused any damage to the customer’s property and which did not lead to environmental pollution as commonly understood” (para. 65).
As such, the Trial Judge ruled that the unnecessary ambiguity of the “Total Pollution Exclusion” clause, and its impact on the realistic expectations of the insured, warrants that Co-operators must defend the action against the Estate of Mr. Hemlow. Further, the Trial Judge stated that “there is a possibility that the Policy will have to respond to the claim by indemnifying the Estate” (para. 71).
Court of Appeal Decision
The Court of Appeal affirmed the Trial Court’s decision and agreed that the definition of “Total Pollution Exclusion” was ambiguous as it could theoretically apply to many things, such as a fire, which one would reasonably expect to be covered by the policy. The term ‘pollution’ could have been interpreted as including only environmental pollution.
However, the Court of Appeal emphasized that the duty to defend arises from, and depends on, the nature of the claim that is plead. The Court of Appeal found that the focus of the dispute should have been on the nature of the claim rather than the interpretation of the pollution exclusion. The damages sought by Rich were for out-of-pocket expenses, business losses, and property damage. Nothing in the Statement of Claim asserted a claim arising out of “pollution”.
The Court of Appeal stated: “Here the claim made falls within the terms of the CGL policy because it is a claim for breach of contract and negligence. The duty to defend therefore arises” (para. 24). The test for whether there is a duty to defend hinges on a finding that there is a ‘mere possibility’ that a claim falls within the coverage. In this case there was a ‘mere possibility’ and thus the duty to defend was triggered.
The wording of the “Total Pollution Exclusion” was ambiguous and the Trial Judge determined that the ambiguity triggered a duty to defend. The Court of Appeal stated that the focus of the inquiry should be on the nature of the claim rather than interpreting a specific exclusion.
Claims regarding alleged negligence are the reason why Commercial General Liability policies are obtained. The fact that a pollutant happened to cause the property damage in question did not change the nature of the claim. Breach of contract and negligence fell within the terms of the policy and as such Co-operators had a duty to defend.