In O’Byrne et al. v. Farmers’ Mutual Insurance Company (Lindsay), 2014 ONCA 543, the Ontario Court of Appeal has forced an insurer to pay for a fuel oil cleanup after a spill, despite a pollution exclusion clause.
The case involved an “all risks” insurance policy. A tenant inserted a piece of cardboard to bypass a furnace thermostat so that heat would run to a second floor apartment during her absence. This caused the furnace to run continuously at an excessively high temperature, which in turn caused an ignition component to fail, resulting in an overflow of oil to the building’s main floor commercial units.
The insurer argued that the losses should not be covered because of exclusions in the landlord’s insurance policy for pollution, as well as for “mechanical or electrical breakdown or derangement.”
The trial judge held that the exclusion for mechanical breakdown or derangement did not apply and the Court of Appeal agreed. The furnace was well maintained and had no internal problem or defect. The cause of the loss was the tenant’s actions. As for the pollution exclusion, the Court of Appeal held that, on a plain reading of the policy, there had to be another operative exclusion before the pollution exclusion applied. The policy read as follows:
POLLUTION EXCLUSION
This policy does not insure against:
a) loss or damage caused directly or indirectly by any actual or alleged spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of ‘pollutants’, nor the cost or expense of any resulting ‘cleanup’, but this exclusion does not apply:
(i) if the spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of ‘pollutants’ is the direct result of a peril not otherwise excluded on this policy.
(ii) to loss or damage caused by a peril not otherwise excluded under this policy.
b) cost or expense for any testing, monitoring, evaluation or assessing of an actual, alleged, potential or threatened spill discharge, emission, dispersal, seepage, leakage, migration, release or escape of “pollutants”.
(Except limited coverage as provided in Additional Agreement of the Insurer, clause #4)
The Court of Appeal read the provision “in the context of the policy as a whole” and held that:
[50] On a plain reading of the pollution exclusion, there must be another operative exclusion before the pollution exclusion applies. The only other exclusion relied upon by the appellant is the exclusion for “mechanical breakdown or derangement”. Indeed, during oral argument, appellant’s counsel acknowledged that the pollution exclusion would apply in the circumstances of this case only if the mechanical exclusion also applies. As I have already noted, I do not agree that the mechanical exclusion applies in these circumstances. On this basis alone, I would dismiss this ground of appeal.