On Friday April 5, 2019, the British Columbia Court of Appeal published its Reasons for Judgment in West Van Holdings Ltd. v. Economical Mutual Insurance Company, 2019 BCCA 110. In a decision that will have significant implications for insurers, the Court:
- Confirmed the primacy of the pleadings when determining whether or not an insurer owes a duty to defend and found that the pollution exclusion clauses in common use in CGL policies in Canada were unambiguous and effective to exclude coverage; and
- Effectively reversed the jurisprudential trend in the BC Supreme Court to award special costs or full indemnity for legal fees incurred where an insured successfully litigates a coverage action.
This case concerned whether two insurers, who were on risk for different policy periods, owed a duty to defend an insured in respect of an underlying action claiming damages for migration of pollutants from the insured’s land onto an adjacent property. Importantly, the pleadings in the underlying action cited provincial environmental legislation as a legal basis. This legislation purports to hold current landowners liable for acts by predecessor owners or operators of lands from which pollutants escaped. In both the Supreme Court and the Court of Appeal, counsel for the insured landowner argued that the inclusion of this legislation as a legal basis in the pleadings distinguished this case from others where substantially similarly worded pollution exclusion clauses were held to unambiguously exclude coverage. Counsel for the insured landowner argued that the pleading of this legislation in the underlying action implied a claim against the insured for the escape of pollutants caused by acts of predecessor owners or operators of the insured’s lands and that the pollution exclusion clauses were ambiguous as to whether they applied to oust coverage for such a claim.
The Court of Appeal found as follows:
- the inclusion in the pleadings of provincial environmental legislation as a legal basis did not give rise to a claim for the escape of pollutants caused by the acts of predecessor owners or operators of the insured’s lands;
- such a claim does not fall inside the policies’ initial grants of coverage, because the claim would relate to “occurrences” that took place before the commencement of the policies’ respective policy periods; and
- the pollution exclusion clauses were not ambiguous and did exclude coverage for the claims in the underlying action relating to alleged migration of pollutants and acts by the insureds occurring during the respective policy periods.
The BC Court of Appeal reaffirmed the primacy of the pleadings in the underlying action when determining whether or not a duty to defend is owed. Reading the pleadings as a whole, the Court found, “there is no suggestion in the NOCC that a third party predecessor owner or operator contaminated the Lands. Absent such an allegation, there is no possibility that West Van is exposed to liability because of the actions of a third party.” The Court of Appeal’s reasoning serves as an emphatic reminder that, in the context of determining whether a duty to defend arises, BC Courts must look strictly to the language actually used in the pleadings in the underlying action and not import allegations into the pleadings that simply are not there. This is especially important given the proliferation of environmental legislation that sometimes purports to impose retroactive and absolute liability on landowners whose property has at some time been a source of pollutants.
The Court of Appeal then moved on to determining whether those remaining claims that fell within the initial grants of coverage were excluded by the pollution exclusion clauses. Here, it is important to note that the CGL policies used different forms over the years the insurers were on risk. The pollution exclusion clause in the later forms appeared to use somewhat broader language. The insured argued that because the earlier pollution exclusion clause did not include the word “migration” (the later one did), the earlier pollution clause was ambiguous insofar as it was intended to exclude coverage for property damage arising out of the migration of pollutants. The Court of Appeal found:
[57] With respect, I cannot agree. The policies that contain Exclusion #1 must be interpreted without reference to other policies that contain Exclusion #2. Exclusion #1 excludes all claims “arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants.” The phrase “arising out of” is broader than “caused by”: Amos v. Insurance Corp. of British Columbia, [1995] 3 S.C.R. 405 at para. 21.
[58] In this case, the NOCC in the Underlying Action alleges that contaminants “have been used, kept, disposed of, handled or treated on the Adjacent Lands in a manner that caused or allowed the Contaminants to be discharged or deposited into, or to escape and enter the soils and groundwater of the Adjacent Lands and Lands”. It is further alleged that the defendants failed to prevent the escape of the Contaminants. In my view, Exclusion #1 captures the allegations in the NOCC and clearly and unambiguously excludes those claims from coverage.
Having found that the insurers did not owe a duty to defend, the Court of Appeal could have stopped there by simply reversing the Chambers Judge’s costs order. However, the Court of Appeal used this case as an opportunity to reverse a line of authorities in lower court decisions in BC that required insurers to fully indemnify insureds for legal costs where the insured was successful with its duty to defend action.
The Court of Appeal determined that “an award of special costs in the absence of conduct deserving of rebuke in a duty to defend claim” is not consistent “with the guiding principles upon which costs awards are made” and there is “no principled reason to award costs in a duty to defend case in a manner different than other litigation.” The Court went on to state unequivocally that a number of recent BC Supreme Court decisions in which special costs were awarded against insurers that unsuccessfully defended duty to defend suits were all wrongly decided and should not be followed. In reaching this conclusion, the Court of Appeal reasoned that there were no express or implied terms in the insurers’ policies requiring the payment of special costs. The Court of Appeal explained that the obligation of utmost good faith implicit in every insurance contract provided an adequate mechanism by which an insured could seek redress from an insurer’s denial to defend where the insurer breaches the duty of utmost good faith. The Court also reasoned that by awarding special costs against insurers regardless of their conduct, the incentive for insurers to resist claims in a manner consistent with the duty of utmost good faith would be diminished.
This decision of the BC Court of Appeal will allow insurers to breathe a little easier in defending coverage litigation. The Court’s approach in determining the “true nature or substance” of the claim found in the pleadings in the underlying action affirms that in determining whether there is a duty to defend, the pleadings and the claims actually pled are paramount in determining coverage. This strongly suggests that, absent deficient or substantially unclear pleadings, an insurer is entitled to make a coverage decision based on the claims and allegations that are actually contained within the four corners of the pleadings without fear that other claims and allegations will be read into the pleadings in an effort to find coverage. In appropriate cases, insurers can now, at least in BC, defend claims seeking a declaration of a duty to defend without the spectre of a special costs or indemnity award being ordered against them for all legal fees incurred by the insured that is seeking determination respecting the duty to defend.
To view the decision, please click here.
