By Timothy Kevane, Sedgwick New York
An insured’s argument to broadly apply an exception to a pollution exclusion was recently rejected by the British Columbia Supreme Court in Whitworth Holdings Ltd. v. AXA Pacific Insurance Co., 2014 CarswellBC 2648, 2014 BCSC 1696 (Sept. 9, 2014). There, the court was called on to resolve the application of the exclusion to a sequence of events involving excluded pollution and a non-excluded fire peril.
The insured’s commercial building was damaged in a fire. As a result of the fire, chemicals escaped from one of the tenants’ fertilizer, herbicide and pesticide wholesale operation, causing pollution damage. The building was insured by an all-risk property insurance policy. Among other things, the policy excluded coverage for damage or expense arising from the clean-up due to any release of pollutants, but exempted any loss to the property “caused directly by an insured peril … not otherwise excluded elsewhere in the Policy.” The insurer argued that the exception ensures coverage exists for fire damage, but not for clean-up of pollutants contaminating property not damaged by fire. In that case, the cause of the damage was the escape of the pollutants, not the fire.
The insured argued that the exception requires a proximate cause analysis. According to the insured, the “proximate cause” of the pollution damage was an insured peril, the fire. That is, but for the fire, the pollutants would not have escaped. In the insured’s view, any other interpretation would render the exception in the exclusion meaningless, as physical loss caused by fire is already covered regardless of the exception.
The court, however, agreed that the language of the exception – particularly the word “direct” – does not call for a proximate cause analysis. Relying on the British Columbia Court of Appeal’s reasoning that “direct” describes “an event lead[ing] straight or immediately to its consequence,” the court concluded that the fire and the chemical spill were two distinct events, just as the Court of Appeal found two distinct events in a prior case involving damage to pipes by freezing and damage from the discharge of water. Neither could be described as a semantic or specious distinction. The court thus adopted the insurer’s interpretation, rejecting the notion that it creates any redundancy in the policy. To illustrate, the court imagined a reversal of the facts, in which an escape of pollutants subsequently caused fire damage. The exclusion would bar coverage for the fire damage, thus necessitating the exception to reinstate coverage for the covered fire damage. Accordingly, the court upheld the application of the exclusion to bar coverage for the pollution damage where it was not directly caused by the fire.
Please click here for a description of Sedgwick’s Canada Insurance practice. The lawyers in the group are watching coverage decisions and news from Canada for publication on the Insurance Law Blog.