Pollution Exclusion Clauses: When do Ontario courts allow an insurer to limit recovery for environmental damages?

  • 19 avril 2022
  • Nicole Tzannidakis, Dentons Canada LLP

In the recently released decision in Kin v. Ecclesiastical,[1] the issue before the Ontario Superior Court was determining the coverage of two applicants under two insurers’ policies. The applicants were defendants in a claim brought by the purchaser of a property in Oshawa after discovering two underground oil storage tanks on the property. The claim arose from the fact that the oil storage tanks had not been emptied and removed, as was obligated by statutory regulation. The defendants’ insurers argued that they had no duty to defend, as the damage was cause by pollution, and therefore caught by their polices’ “pollution exclusion clauses”.

Pollution exclusion clauses

Commercial general liability (“CGL”) policies require the insurer to defend the insured against all claims that may be covered by the policy. As environmental liability law evolved, the insurance industry began attempting to limit liability for environmental remediation and associated litigation through the use of  “pollution exclusion clauses” (“PECs”). The type of clause most commonly used is the “absolute pollution exclusion clause”, which attempts to exclude coverage for nearly all types of pollution. Through case law a number of considerations have developed in deciding the applicability of PECs.

Contextual approach

Courts have abandoned a “hyper-literal” approach to PECs, and now use a contextual approach.

Early court decisions interpreted PECs literally, allowing insurers to broadly exclude coverage. However, the courts now take a more contextual approach to the application of PECs. In Zurich Insurance Co. v. 686234 Ontario Ltd. (“Zurich”), Borins J.A. stated that, in assessing the applicability of a PEC, “dictionary literalism is often a poor substitute for connotative contextual construction”. [2]  Since then, the courts have adopted a contextual approach on the basis that “it is against the interests of justice to apply hyperliterally the terms of the exclusion clause without taking into account the specifics of this situation”.[3]