Author Michael S. Teitelbaum
In Aviva Insurance Co. of Canada v. Intact Insurance Company, Ontario Superior Court Justice Cavanagh granted Aviva’s request for a declaration that the CGL policy issued by Intact’s predecessor company, Cornhill, to Avondale Stores Limited, effective from 1983 to 1986, is triggered by the allegations made against Avondale in an Ontario Superior Court action brought by Crombie Property Holdings Limited. The underlying action alleged contamination of Crombie’s property as a result of alleged migration of fuel oil from Avondale’s neighbouring property.
His Honour also ordered Intact to defend Avondale and/or participate in the defence of Avondale with respect to the allegations made against it in the underlying action.
His Honour noted that Avondale tendered the underlying action to all of its liability insurers seeking a defence and indemnity. All of the liability insurers with the exception of Aviva denied coverage to Avondale. Aviva has acknowledged that, with the exception of Intact, the other Avondale liability insurers were entitled to take a denial position based upon the language of the pollution exclusions in their respective policies. Aviva acknowledged that it has a duty to defend under the Aviva umbrella policies which were in place from January 15, 1993 to January 15, 1997 because it concluded that, given the allegations in the Statement of Claim in the underlying action, it was unable to determine if the discharge, dispersal or escape of pollutants was “sudden and accidental”. Aviva denied coverage under the Aviva primary policies and the Aviva umbrella policies from January 15, 1997 to January 15, 1999, as those policies contain pollution liability exclusionary wording which, according to Aviva, justify denial of coverage.
Aviva appointed defence counsel to defend Avondale. As of September 29, 2016, Aviva has incurred defence costs totaling $103,939.23 inclusive of HST and disbursements.
Intact’s response was that the damages claimed as described in the Claim in the underlying action are specifically excluded from coverage under all three Cornhill policies. With respect to the Intact 1983-86 Policy, Intact relied upon the environmental liability exclusion. Intact declined to provide a defence.
Given the allegations in the Claim, His Honour found that he did not have to determine “whether the word ‘sudden’, as used in the exception [to the subject pollution exclusion], does or does not have a temporal component. Therefore, I do not find it necessary to decide which of the divergent lines of judicial authority with respect to the interpretation of the term “sudden and accidental” in the exception is correct.” He noted this determination should be made based on a proper evidentiary record.
In respect of apportionment, given both insurers were on risk for a period of four years each, His Honour ordered equal sharing of the defence costs.
His Honour’s Analysis reads:
[19] Whether Intact has a duty to defend Avondale in the Underlying Action depends upon whether it has satisfied its onus of demonstrating that there is no possibility of coverage under the Intact 1983-86 Policy for the claims made against Avondale based upon the allegations in the Statement of Claim because such claims are excluded from coverage by the environmental liability exclusion clause in the Intact 1983-86 Policy.
[20] Whether there is a possibility of coverage under the Intact 1983-86 Policy for property damage arising out of the discharge, dispersal, release or escape of “Contaminants” (as defined in the Statement of Claim) depends upon whether it is possible that the environmental liability exclusion will not apply because it is possible that the exception to this exclusion applies, because the discharge, dispersal, release or escape of “Contaminants” out of which the property damage arises is determined to be “sudden and accidental”.
[21] Intact acknowledges that if there is a “mere possibility” that a claim falls within coverage, it will have a duty to defend and the application will succeed. However, Intact submits that there is no such possibility.
[22] There are divergent authorities in both Canada and the United States concerning whether the word “sudden” as it is used in the exception to the applicable environmental liability exclusion clause in relation to the discharge, dispersal, release or escape of the contaminants means only “unexpectedly” or “without warning”, or whether there is also a temporal component of “briefness”.
[23] There are three cases in Ontario that have addressed the interpretation to be given to the term “sudden and accidental” as it appears in the exception to the environmental liability exclusion clause that has the same language as the clause in the Aviva 1993-97 Umbrella Policies and the Intact 1983-87 Policy. Each of these cases involved leaks from fuel oil tanks.
[24] In Murphy Oil Co. v. Continental Insurance Co., the trial judge found as a fact that water in the well on property owned by the plaintiff in the underlying action was rendered useless for human consumption by reason of the escape of a quantity of gasoline from the area of the underground storage tanks and pipes located on the insured’s premises. The trial judge accepted evidence that the underground installation on the insured’s premises was defective in that there was leakage from a pipe or pipes and that the gasoline which escaped seeped into the well on the adjacent property of the plaintiff in the underlying action.
[25] The trial judge in Murphy considered whether the exception to the environmental liability exclusion provision in the applicable policy applied. The trial judge concluded that if a leak occurs in a pipe, it occurs suddenly in the sense that at one point in time the pipe is not defective and at another point in time there is a leak in the pipe. The trial judge decided that, in this context, it was not necessary to consider the cause of the leak. The trial judge decided, therefore, that the exception to the environmental exclusion clause applied.
[26] The second Ontario case that addressed the exception to the environmental exclusion clause based upon a sudden and accidental discharge of fuel oil is Zatko v. Paterson Spring Service Ltd., 1985 CarswellOnt 796 (Ont. S.C.). In Zatco, there was a settlement with the defendant’s insurer but additional property damage was discovered later, and the plaintiffs sued the defendant for damages resulting from the subsequent property damage. The defendant brought a third party claim against its insurer for indemnification for liability for damages caused by the subsequent property damage. The trial judge decided both (i) whether the defendant was liable to the plaintiffs for damages caused by a flow of oil from property occupied by the defendant, and (ii) whether the defendant was entitled to indemnification from its insurer. The insurance policy had the same environmental liability exclusion provision as the provision in the Aviva 1993-97 Umbrella Policies and the Intact 1983-86 Policy.
[27] In Zatko, the trial judge found that the oil drained out of the tank over a considerable period of time and gradually, through the action of water, moved towards, onto and under the plaintiffs’ property. The trial judge, at para. 33, cited a U.S. case that followed one line of the divergent authorities and concluded that there was “no doubt” that the original escape of oil was sudden and accidental and that the original property damage (that was the subject of the settlement) was covered by the insurance policy. The trial judge held, however, that because the plaintiffs knew about the leak that resulted in the original dispersal, the subsequent property damage was not accidental. The third party claim against the defendant’s insurer was dismissed.
[28] The third Ontario case that addressed this exception to the environmental exclusion clause is BP Canada Inc. v. Comco Service Station 1990 CarswellOnt 637 (Ont. S.C.). This decision was made on a motion for an order declaring that a third party insurer is obliged to defend claims made against its insured.
[29] At the hearing of the motion in BP Canada, an affidavit was admitted into evidence on consent of the parties. The motion judge, Sutherland J., accepted, for purposes of the motion, that the gas had leaked from a cracked coupling in the storage system on the defendants’ property, that the coupling had been defective from the time of its installation, and that the leak had been going on for a considerable although unspecified period of time. Sutherland J. considered the meaning of the term “sudden and accidental” as it is used in the environmental exclusion clause. He reviewed the U.S. authorities as well as the Murphy and Zatko decisions in Ontario and concluded that the word “sudden” means something more than “undesired, unintended and unexpected”. Sutherland J. decided that the term “sudden and accidental” definitely includes a temporal element and is clearly not to be extended to include unintended consequences that are not sudden.
[30] In each of the three Ontario cases where the court considered the meaning of the word “sudden” as it is used in the exception to the environmental liability exclusion clause, there was evidence (and, in BP Canada, also the agreement of the parties) concerning the cause of the oil leak. In contrast, the Statement of Claim in the action brought by Crombie against Avondale does not allege facts that would allow one to know whether it is alleged that the escape of Contaminants onto the Source Property was caused by something such as, for example, an accidental puncture or rupture of the underground fuel oil tank during construction, or an accidental spill of fuel oil from a delivery truck, which would have resulted in the escape of Contaminants onto the Source Property over a short period of time, or by another cause that would have resulted in a slow and gradual escape of Contaminants over an extended period of time. The Statement of Claim also does not allege when the escape of Contaminants occurred.
[31] It is therefore possible, depending upon the evidence tendered in the Underlying Action and the findings at trial, that the court could decide that fuel discharged, dispersed, released or escaped onto the Source Property over a short period of time before it migrated to the Contaminated Property.
[32] Intact submits that, in its Statement of Claim, Crombie uses the term “migrate” repeatedly and that the meaning of this term is equivalent to the meanings of the words “drift”, “wander” or roam”, all of which stand in contrast to terms such as “burst”, “rupture”, “torrent”, “surge” or “rush”, none of which is used in the Statement of Claim. Intact submits that the true nature and substance of Crombie’s claim, as shown by its repeated use of the term “migrate”, is that there was a gradual movement of pollutants over the Source Property and eventually onto the Contaminated Property. Intact submits that these are the precise circumstances in which the environmental liability exclusion clause is meant to apply. [33] In my view, the submission by Intact concerning the use of the term “migrate” in the Statement of Claim does not address the main area of contention in respect of the interpretation to be given to the word “sudden”, that is, whether in relation to the escape of Contaminants “into or upon land, the atmosphere or any water of any description no matter where located or how contained” (the language in the environmental liability exclusion clause), the meaning of this word should include a temporal component of briefness. While the damage to the Contaminated Property may have been slow and gradual because of migration of contaminants from the Source Property over a period of months or years, the exception may still apply, in my view, if the discharge, dispersal, release or escape of Contaminants onto the Source Property was accidental and happened over a brief period of time. Such a determination is possible whether or not the word “sudden” as used in the exception, properly interpreted, has a temporal component.
[34] In Murphy, the trial judge addressed the submission that the discharge, dispersal, release or escape of a petroleum product was not “sudden” because the product found its way into the well on the plaintiff’s property only gradually. He wrote, at para. 6:
It must be borne in mind that upon a close reading of this clause it is the emission that must be sudden and accidental, not the damages resulting therefrom, in order to afford the plaintiffs coverage under the policy. Let us consider a situation when the cause of the emission was an explosion and not leakage. Clearly the explosion would be sudden. Let us further suppose that the explosion did not cause immediate contamination but as a result thereof the petroleum product which escaped seeped into a well over a period of time. Could this defendant then be heard to say that the damages were only caused gradually and that there is no coverage under the policy? If that is what was intended by the clause now being considered, than the language used is quite inadequate to express it. Based upon this reasoning, it is possible that the word “sudden” as used in the exception will be held to relate to the discharge, dispersal, release or escape of contaminants out of which damage to property arises, and not to the damage to property arising therefrom.
[35] Intact’s submission in relation to the use of the word “migrate” in the Statement of Claim does not address the initial escape of Contaminants, as pleaded in paragraph 21 of the Statement of Claim, “from the Service Station and underground tanks into the natural environment” of the Source Property, but focuses exclusively, incorrectly in my view, on the pleaded allegations that Contaminants had migrated and continue to migrate from the Source Property onto the Contaminated Property. It is not possible to know from the allegations in the Statement of Claim how or when the Contaminants escaped onto the Source Property including, in particular, whether such escape occurred over a brief period of time or over an extended period of time.
[36] I have concluded that Intact has not satisfied its onus to demonstrate that all of the claims made against Avondale are excluded from coverage by the environmental liability exclusion clause in the Intact 1983-86 Policy because it is possible, based upon the evidence to be adduced and the findings to be made at the trial of the Underlying Action, that the exception to the environmental liability exclusion clause will be held to apply. The same approach was followed by Dunphy J. in Aquatech Logistics v. Lombard Insurance Co., 2015 CarswellOnt 14289 who concluded, at para. 33, that “it would be mere speculation to assert what facts the plaintiffs may succeed in proving at trial”, where the exact means by which the incident was caused was not pleaded and remained for the plaintiffs to establish.
[37] My conclusion does not depend on whether the word “sudden”, as used in the exception, does or does not have a temporal component. Therefore, I do not find it necessary to decide which of the divergent lines of judicial authority with respect to the interpretation of the term “sudden and accidental” in the exception is correct. This interpretation should be made based upon a proper evidentiary record: Privest Properties Ltd. v. Foundation Co. of Canada Ltd., 1991 CarswellBC 142, at paras. 309-310.
Apportionment of Defence Costs
[38] Where there are multiple insurers whose duty to defend is triggered by allegations in the Underlying Action, the insurer that accepts the duty to defend may compel a contribution to defence costs from any other insurer which improperly denies the duty to defend. The respective obligations of the insurers, while not a matter of contract, are governed by principles of equity and good conscience: Broadhurst & Ball v. American Home Assurance Co., 1990 CarswellOnt 638 (C.A.), at para. 41. [39] Aviva submits that I should determine an appropriate apportionment of defence costs between Aviva and Intact, which is a matter of equity. Aviva submits that the apportionment of defence costs is not determined by a simple formula, nor by the application of principles of time on risk, although these are factors that can be considered. Aviva submits that both it and Intact provided coverage for approximately the same length of time (four years), and it would be reasonable to apportion defence costs equally based upon the relative exposure and time on risk of Aviva and Intact, respectively.
[40] Intact submits that apportionment of defence costs need not be addressed on this application and, if Aviva is successful, the parties may agree on the amount of contributions to be made to the expenses for defence costs already incurred and to the additional costs going forward, failing which resort may be had to the court. Further, Intact submits that it is unable to make an informed decision on the reasonableness of the defence costs incurred to date because the invoices provided by Aviva are redacted, and omit a description of the services provided. [41] With respect to the question of apportionment of the costs already incurred by Aviva and the defence costs going forward, both the Intact 1983-86 Policy and the Aviva 1993-97 Umbrella Policies provide coverage for defence costs in four policy years. In my view, given these circumstances, the most equitable apportionment is that each of Aviva and Intact should share equally in the obligation to provide a defence to Avondale. Accordingly, Aviva should be reimbursed by Intact for one-half of the expenses for defence costs already incurred by Aviva (subject to satisfaction by Intact of the reasonableness of the charges or, if necessary, determination by the Court of the amount to be reimbursed). The expenses for defence costs going forward should be paid equally by Aviva and Intact. [42] Aviva has introduced evidence that it has incurred defence costs in the amount of $103,939.23 to date, inclusive of HST and disbursements. The descriptions of the services provided by the law firm in the invoices that were put into evidence are redacted in their entirety. Only the date of the service, hours, hourly charge and the initials of the lawyer are shown. I have no reason to question the reasonableness of the charges, but I accept that Intact should have more information about the services provided before it agrees, or is ordered, to pay one-half of the charges for defence costs already incurred by Aviva.
Disposition
[43] For the foregoing reasons, I make an order:
- declaring that the Intact 1983-86 Policy is triggered by the allegations made against Avondale in the Underlying Action and requires Intact to participate in the defence of Avondale with respect to the allegations made against it in the Underlying Action;
- declaring that Aviva and Intact shall share equally in the costs of defending Avondale with respect to the allegations made against it in the Underlying Action and directing Intact to contribute equally with Aviva to payment of expenses incurred for defence costs of the Underlying Action going forward; and
- adjourning the portion of the application whereby Aviva requests an order directing Intact to reimburse it for Intact’s proportionate share of all expenses and defence costs incurred by it to date, in order to enable Intact to obtain information with respect to the services provided by the law firm that is representing Avondale in the Underlying Action. Counsel are directed to contact my assistant within 30 days to schedule a date for the hearing of this portion of the application, if necessary, or as I expect, to advise that this remaining portion of the application has been resolved.
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About the Author
Michael S. Teitelbaum practices civil litigation with particular emphasis on insurance coverage and policy interpretation on behalf of both insurers and insureds. He provides insurance coverage and policy drafting advice to, and engages in all forms of dispute resolution, including litigation, on behalf of commercial and governmental institutions. He also focuses on professional liability, governmental liability, products liability, environmental law, personal injury, and defamation matters. Michael has appeared before all levels of the Ontario courts and various administrative tribunals.
He is certified by the Law Society as a Specialist in Civil Litigation. He is Peer Rated as Martindale-Hubbell Distinguished for High Professional Achievement and High Ethical Standing. He has been selected by his peers for inclusion in The Best Lawyers in Canada in the field of Insurance Law, beginning with the 2009 edition, and including the 2017 edition, and in the 2011 to 2016 Canadian Legal Lexpert Directory as a leading practitioner in “Litigation — Commercial Insurance”. He has been listed in the 2015 and 2016 editions of “Who’s Who Legal: Insurance & Reinsurance”, and in the Insurance & Reinsurance chapter of “Who’s Who Legal: Canada 2016”, which identify a select group of lawyers with expertise in representing insurance underwriters and corporate insurers, among others, regarding the resolution of insurance disputes.
Michael heads the firm’s Insurance Coverage Counsel Group, and also acts as the firm’s Knowledge Management Partner.
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This article was originally published in in Duty to Defend web “BLAWG” of Hughes Amys LLP. It is intended for general informational purposes only and not to provide specific legal advice. This article does not constitute legal or other professional advice and no lawyer-client or other relationship is created between the reader and Hughes Amys LLP or its lawyers.
