



COURT OF APPEAL FOR ONTARIO

CITATION:

Hemlow Estate v. Co-operators General Insurance
    Company, 2021 ONCA 908

DATE: 20211220

DOCKET: C69114

MacPherson, Simmons and
    Nordheimer JJ.A.

BETWEEN

The Estate of John Hemlow,
    Deceased

Applicant (Respondent)

and

Co-operators General Insurance
    Company

Respondent (Appellant)

Robert Dowhan, for the appellant

Curtis C. Zizzo and Branko J. Kurpis,
    for the respondent

Heard: November 5, 2021 by video conference

On appeal from the judgment of Justice James
    R. Turnbull of the Superior Court of Justice, dated January 29, 2021, with
    reasons reported at 2021 ONSC 664.

MacPherson and Nordheimer JJ.A.:

A.

introduction

[1]

Sadly, John Hemlow, an independent mechanical
    contractor, was killed in a workplace accident that also caused extensive
    property damage at the location where he was working. The company that suffered
    the property damage commenced a lawsuit against Mr. Hemlows Estate and the
    company that retained him to do the work.

[2]

Mr. Hemlow had an insurance policy with Co-operators
    General Insurance Company (Co-operators) that excluded coverage for damage
    caused by pollutants. Co-operators took the position that this provision
    applied to the workplace accident and, accordingly, informed Mr. Hemlows Estate
    that it would not defend the claim on behalf of the Hemlow Estate.

[3]

The Hemlow Estate brought an application seeking
    a declaration that Co‑operators had a duty to defend the action against
    the Estate. The application judge granted the application. Co-operators appeals
    from that decision.

B.

facts

(1)

The parties and events

[4]

The late John Hemlow was a sole proprietor who
    carried on business as a mechanical contractor. When he took over his brothers
    business in 2011, he applied for and received a Commercial General Liability (CGL)
    policy with Co‑operators. One of the exclusions in the policy was a Total
    Pollution Exclusion which reads, in part:

This insurance does not apply to:

1)

Pollution Liability

a) Bodily Injury or property damage or
    personal injury arising out of the actual, alleged, potential or threatened
    spill discharge, emission, dispersal, seepage, leakage, migration, release or
    escape of pollutants.

[5]

In a different part of the policy  i.e., not
    connected to the Total Pollution Exclusion  the word Pollutants is defined:

Pollutants means any solid, liquid, gaseous
    or thermal irritant or contaminant including smoke, odours, vapour, soot,
    fumes, acids, alkalis, chemicals and waste.

[6]

In 2015, Rich Products of Canada Limited retained
    Wear-Check, a company that specializes in equipment oil and filter analysis, to
    sample and analyze the mechanical and refrigeration systems at its processing
    facility. Wear-Check subcontracted with Mr. Hemlow to carry out the sampling and
    analysis work.

[7]

During the course of his work, Mr. Hemlow opened
    a valve to a pipe containing pressurized ammonia. The resulting ammonia
    exposure killed Mr. Hemlow and caused significant damage to the Rich Products
    property.

[8]

Rich Products brought an action in negligence,
    nuisance and breach of contract against Wear-Check and the Estate of John
    Hemlow. Co-operators advised the Estate that it would not defend the claim
    against the Estate. The Estate brought an application seeking a declaration
    that Co-operators has a duty to defend the action.

(2)

The application judges decision

[9]

The application judge granted the Estates
    application. He concluded: I am satisfied that Co-operators must defend this
    action on the merits on behalf of its insured, the late John Hemlow.

[10]

The application judge found that Co-operators
    was to defend the action because the word Pollution was ambiguous. He found
    that it was ambiguous because it was left undefined in the policy and could be
    interpreted as including only environmental pollution.

[11]

The core of the application judges reasons in
    support of this conclusion is found in these passages from his judgment, at
    paras. 62 and 65:

In my view, the pollution exclusion clause is
    worded to protect the insurer from liability for environmental pollution and
    the improper disposal or contamination of hazardous waste. It would have
    taken very little for a clause to be added in the Total Pollution Exclusion
    document signed by Mr. Hemlow to state that the exclusion is not limited to
    environmental claims, but also includes all claims arising from any emission of
    any of the enumerated substances. The insurance industry has been gradually
    rewording these pollution clauses and exclusions over the years, as evidenced
    by the cases provided to this court. However, Co-operators has failed to make
    its intentions clear and easily understandable in this Policy.



The definition used by
    Co-operators of Total Pollution Exclusion was misleading in that it not only
    included an exclusion of events which an average person would associate with
    pollution, but any accidental occurrence that caused any damage to the
    customers property and which did not lead to environmental pollution as
    commonly understood.

C.

issue

[12]

The appellant says that there is a single issue
    on this appeal, which it frames in its factum as: Did the Application Judge err
    in concluding that the Total Pollution Exclusion clause contained in the CGL Policy
    does not apply to exclude Co‑operators duty to defend the Estate in the Rich
    Products of Canada Limited Action?

D.

analysis

(1)

Standard of review

[13]

The law on the standard of review for contract
    interpretation is well-established. Questions of mixed fact and law are
    entitled to deference unless the trial judge made a palpable and overriding
    error. Extricable questions of law are subject to a correctness standard of
    review:
Sattva Capital Corp. v. Creston Moly Corp.
, 2014 SCC 53, at
    para. 53.
Sattva
, at para. 54, specifies that courts should be
    cautious in identifying questions of law in disputes involving contractual
    interpretation.

[14]

For a particular category of contract  namely,
    standard form contracts  the standard of review is correctness:
Ledcor
    Construction Ltd. v. Northbridge Indemnity Insurance Co.
, 2016 SCC 37.
    This is because there is no meaningful factual matrix specific to the
    particular parties to assist in the interpretation process: see
Ledcor
,
    at para. 4.

[15]

In our view, the Total Pollution Exclusion is
    not a standard form contract. We say this for two reasons.

[16]

First, the appellant does not seriously contend
    that a correctness standard should apply based on
Ledcor
. Rather, the
    appellants position is that there are extricable questions of law that the
    application judge got wrong under the
Sattva
standard.

[17]

Second, the Total Pollution Exclusion cannot
    fairly be characterized as a standard form contract. Standard form contracts
    are typically standard printed forms that will often be offered on a take it
    or leave it basis; the potential insured person either agrees to take the
    terms as they are or declines to enter the transaction altogether: see
Ledcor
,
    at para. 25.

[18]

This description does not apply to the Total Pollution
    Exclusion signed by Mr. Hemlow. Initially, Mr. Hemlow and Co-operators were
    discussing a policy with a standard pollution exclusion. He was then asked to
    sign a separate Total Pollution Exclusion. Thus various options were in play;
    it was not a take it or leave it situation. Accordingly, the
Sattva
standard
    of review applies. Unless the appellant can identify an extricable question of
    law, the palpable and overriding error standard applies.

(2)

The merits

[19]

At the outset, it is important to remember that
    an insurers duty to defend arises from the claims as pleaded. McLachlin J.
    made this point in
Nichols v. American Home Assurance Co.
, [1990] 1 S.C.R.
    801, where she said, at p. 810:

However, general principles relating to the
    construction of insurance contracts support the conclusion that the duty to
    defend arises only where the pleadings raise claims which would be payable
    under the agreement to indemnify in the insurance contract.

[20]

The problem in this case is that the parties
    have fixed on their dispute over the interpretation of the pollution exception
    without giving proper consideration to the nature of the claims advanced
    against the Estate. Those claims are founded in negligence, nuisance, and
    breach of contract. There is nothing in the statement of claim that involves,
    or asserts, a claim arising out of pollution as that term is commonly
    understood. Rather, the claim advanced by Rich Products is a straightforward
    claim for damage to its property.

[21]

If the damages to the property of Rich Products
    had resulted from an explosion or a fire caused by Mr. Hemlow, there would be
    no debate over whether he would be entitled to coverage under his CGL policy
    with the appellant. He would be. That result does not change because the
    mechanism causing the damage happens to be a substance that can be labelled as
    a pollutant.

[22]

Mr. Hemlow sought coverage under his CGL policy
    in case he did something in the course of his work that gave rise to a claim
    against him. Put another way, Mr. Hemlow sought coverage from his insurer should
    he happen to be negligent in his work and a claim was brought against him. It
    is of importance to this issue to recognize that Mr. Hemlow was not engaged in
    work that generally involved risks from pollution. That is one factor that distinguishes
    this case from
ING Insurance Co. of Canada v. Miracle
, 2011 ONCA 321
    (
ING
), which we will discuss in greater detail below.

[23]

In this case, it is alleged that Mr. Hemlow acted
    in a negligent manner when he opened a valve and allowed the ammonia to escape.
    His alleged negligence caused damage to the property of Rich Products. It is
    his alleged negligence that is at the core of the claim pleaded by Rich
    Products. A claim arising from negligence is precisely the type of claim for
    which parties obtain CGL policies. It is the type of risk that Mr. Hemlow
    sought coverage for. The fact that the damage causing substance was a pollutant
    does not change the nature of the claim. It also must not be allowed to
    distract from the proper interpretation of the CGL policy nor obscure or
    distort the conclusion as to whether a duty to defend arises.

[24]

We repeat what we said at the outset of our
    analysis. The existence of the duty to defend depends on the nature of the
    claim made:
Prudential Life Insurance Co. v. Manitoba Public Insurance Corp.
(1976), 67 D.L.R. (3d) 521 (Man. C.A.), at p. 524, cited with approval in
Nichols
.
    Here the claim made falls within the terms of the CGL policy because it is a
    claim for breach of contract and negligence. The duty to defend therefore
    arises.

[25]

Given that conclusion, it is unnecessary to
    delve deeply into the debate over the application of the two leading cases
    dealing with pollution exclusion clauses for CGL policies, upon which counsel
    expended most of their efforts. Nevertheless, we will touch on them briefly
    because the results of these two cases tend to prove the point that we have just
    made.

[26]

The first is
Zurich Insurance Co. v. 686234
    Ontario Ltd.
(2002), 62 O.R. (3d) 447 (C.A.) (Z
urich
). In our
    view, that case is similar to the case here, both on its facts and on the
    particular provisions in the insurance policy. In that case, the numbered
    company insured (686) was the owner of an apartment building. 686 was the
    defendant in two proposed class actions in which it was alleged that the
    plaintiffs suffered injuries from carbon monoxide that leaked from the
    buildings furnace. The plaintiffs pleaded that 686 had been negligent in
    maintaining, repairing and keeping the furnace in good condition.

[27]

Zurich
is
    substantially similar to this case on its facts. In
Zurich
, a faulty
    furnace resulted in a leak of carbon monoxide. In this case, there was an
    accidental leak of ammonia from a refrigerator. While both of those substances
    would be considered pollutants, in neither case was the thrust of the allegedly
    negligent conduct the handling, or potential discharge, of a pollutant.

[28]

Second, the definition, coverage and exclusion
    clauses in the insurance policies in the two cases are very similar in their
    scope. The only significant difference appears to be that in the Co-operators
    policy the word odours has been added to the list of Pollutants. This does
    not affect the analysis.

[29]

In fairness, the appellant does not deny or
    attempt to qualify the close factual and legal identity between
Zurich
and this case. Instead, the appellant contends that two subsequent decisions by
    this court narrow the reasoning and potential application of
Zurich
and lead to a different result in this case.

[30]

We have already mentioned one of those cases,
    namely,
ING
.
T
he issue
    in that case was, as in this appeal, an Exclusion under a CGL policy. The
    application judge dismissed
INGs
application for a declaration that it had no duty to defend or indemnify
    Miracle. Relying on
Zurich
, the application judge found that there was
    nothing in Miracles regular business activity, which was operating a gas
    station, that placed it in the category of an active industrial polluter of the
    natural environment. The application judge concluded that since a reasonable
    insured would expect the exclusion to apply to industrial pollution and not to
    a gas leak, the plaintiffs claim did not come within the pollution exclusion.

[31]

The distinction between
ING
and this
    case, however, arises from the nature of the claim advanced. Indeed, the
    decision in
ING
reinforces the point we made at the outset about the
    importance of the claim as pleaded. In rejecting the application judges
    reasoning and conclusion, Sharpe J.A. said, at para. 22:

Unlike
Zurich
, in this case, the
    insured was engaged in an activity that carries an obvious and well-known risk
    of pollution and environmental damage: running a gas station.
Indeed, the statement of claim is framed as a claim for damage
    to the natural environment caused by a form of pollution
Such a claim
    fits entirely within the historical purpose of the pollution exclusion, which
    was to preclude coverage for the cost of government-mandated environmental
    cleanup under existing and emerging legislation making polluters responsible
    for damage to the natural environment: See
Zurich
, at para. 13.
    [Emphasis added.]

[32]

As will be apparent, the facts in the present
    case are very different from those in
ING
and thus properly lead to a
    different result.

[33]

The damages sought in the Statement of Claim in
ING
were to cover the loss in value of the plaintiffs adjacent property, the costs
    of conducting an environmental assessment, and the costs of remediating the
    property  all because of the gas that leaked onto the plaintiffs property.
    Accordingly, the claims fit comfortably within the historical purpose of the
    pollution exclusion.

[34]

The situation is very different in this appeal. In
    this case, what is sought by Rich Products is damages for out of pocket
    expenses, business losses and property damage (reasons at para. 21). In other
    words, the facts in this case, unlike
ING
, do not fit within the
    historical purpose of the pollution exclusion, which is to mitigate coverage
    for the cost of government-mandated environmental cleanup: see
Zurich
,
at para. 13 and
ING
,
at para. 22. In this case, there is no suggestion
    that any government-mandated cleanup is in play.

[35]

The second case the appellant relies on to
    suggest that
Zurich
should not govern this appeal is
OByrne v.
    Farmers Mutual Insurance Company (Lindsay)
, 2014 ONCA 543. We can deal
    with this case briefly. In that case, in an
obiter
statement in the
    penultimate paragraph of her judgment, van Rensburg J.A. said, at para. 53:

I do not necessarily agree with some of the
    trial judges other conclusions regarding the policy that are premised on
    the
Zurich
case. For example, he found that the pollution
    exclusion should be read as applying only to traditional environmental
    contamination and that the exclusion would not operate because the oil spill
    was contained within the building and had not spread to the natural environment
    outside the building.

[36]

The appellant latches onto this passage to suggest
    that the language of
Zurich
is too broad and needs to be narrowed to provide
    coverage to insureds only if their conduct led to direct damage to the
    environment.

[37]

We do not accept this submission. The policy in
OByrne
was an all risks property insurance policy. The present appeal involves the
    interpretation of an exclusion clause in a CGL policy. This difference is
    material: see
OByrne
, at para. 52.

[38]

In the end, it is important to recognize, as the
    application judge did at para. 50, that on a motion to determine if the
    insurer has a duty to defend the applicant will succeed if there is a mere
    possibility that a claim falls within the coverage under the policy: see
Progressive
    Homes Ltd. v. Lombard General Insurance Co. of Canada
, 2010 SCC 33, at
    para. 19.

[39]

Recalling that
Sattva
cautions against
    too quickly or easily identifying questions of law in disputes involving
    contractual interpretation, we conclude that there is no palpable and
    overriding error in the application judges conclusion relating to the coverage
    and exclusion issue in this case.

E.

Disposition

[40]

We would dismiss the appeal. We would award the
    respondent its costs of the appeal fixed at $15,000 inclusive of disbursements
    and HST.

Released: December 20, 2021 J.C.M.

J.C.
    MacPherson J.A.

I.V.B.
    Nordheimer J.A.

I
    agree. Janet Simmons J.A.


