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The Duty to Defend: Clear Policy Exclusions Prevail

20-Jan-16

By Jennifer Davis and Kathleen Garbutt

The Supreme Court of Canada recently dismissed the application for leave to appeal from the British Columbia Court of Appeal decision Precision Plating v. AXA Pacific Insurance Co (“Precision”).

Precision Plating, who was insured by AXA, operated out of a multi-tenanted commercial building. A fire broke out, which triggered the sprinkler system, filling chemical vats and causing them to overflow. These overflowing vats seeped diluted chemicals into neighbouring businesses, contaminating the surrounding property. As a result, the property owners, whose property was damaged by the chemicals, commenced an action against Precision Plating. Precision Plating then turned to AXA to defend the action and indemnify Precision Plating for any damages awarded to the Plaintiffs.

At the time of the fire, Precision Plating had a Commercial General Liability (“CGL”) policy in place. This CGL policy included an indemnification for the policy holder for damage to a third party’s property along with a standard pollution exclusion. The exclusion provided that coverage would not apply where damage was caused or contributed to by the “discharge, emission, dispersal, seepage, leakage, migration, release or escape at any time of the Pollutants.” Within the terms of the policy, Pollutants included chemicals of the sort that had escaped during the fire.

AXA denied coverage by relying on the pollution exclusion clause. At trial, the Court determined that as the damage to the claimants’ property was caused by fire, the insurer was obligated to defend, and the pollution exclusion did not exclude coverage. In other words, the Court held that the immediate cause of the damage was the fire.

On appeal, the British Columbia Court of Appeal reversed the ruling. The Court determined that the trial judge erred in framing his analysis with reference to the cause of the damage rather than the liability giving rise to the damage. The escape of the pollutants caused the damage, not the fire. As a result of this interpretation and the wording in the CGL policy, AXA was not required to defend the action or indemnify Precision Plating for damages caused by the release of pollutants.

Generally, an insurer’s obligation to provide coverage will be broadly interpreted in favour of the insured. Where a policy is unclear or ambiguous, those uncertainties are generally resolved in favour of the insured. When policy exclusions have been clearly defined, those exclusions will be enforced and the insurer will have no duty to defend or indemnify the insured against claims for damages.

In Precision, the B.C. Court of Appeal determined the pollution exclusion was clear and enforceable. By refusing Precision Plating’s application for leave to appeal, the Supreme Court of Canada has denied them any further opportunity to try and challenge the application of the exclusion to the damages in issue.

Click here for a more detailed summary of the Precision decision.

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