Insurance law – Liability insurance – Commercial general liability insurance – Multiple policies – Apportionment and contribution of claim – Third party claims – Pollution exclusions – Occurrence vs. claims based policy – Triggering event – Product liability – Your product exclusion
Daverne v. John Switzer Fuels Ltd.,  O. J. No. 1589, 2015 ONSC 1803, Ontario Superior Court of Justice, March 31, 2015, G. Mew J.
The plaintiffs brought an action against several defendants in relation to a fuel oil leak at their home which allegedly occurred sometime in January 2008. The defendant, McKeown & Wood Fuels Limited (“M&W”) sold the fuel oil tank which leaked to the plaintiffs but was not involved in the transportation of the tank to the residence or the installation of the tank. M&W filed a third party action on March 11, 2012 against a number of insurers seeking a declaration that the insureds were required to provide a defence under three different insurance policies. The coverage issues were determined by way of summary judgment.
The Federated Insurance Company of Canada (“Federated”) insured M&W under a comprehensive general liability insurance policy from 1999 until October 2007. M&W advised Federated of the action on February 11, 2010 and Federated denied coverage by letter dated April 9, 2010. Federated argued the third party claim filed on March 11, 2012 was filed after the one year limitation period in the policy had expired. The limitation period was contained in a statutory condition incorporated into the policy which provided that any action against the insurer must be commenced “within one year next after the loss or damage occurs.” Federated argued that with respect to liability coverage, “loss or damage” referred to the “loss” that occurs when a demand for coverage is made of the insurer and the insurer denies the claim. The court concluded that Federated should not be allowed to rely upon a limitation defence where the result of incorporating a statutory condition designed for first party insurance into a condition covering third party risks would produce “anomalous consequences” similar to those described by the Supreme Court of Canada in KP Pacific Holdings Ltd. v. Gore Mutual Insurance Co., 2003 SCC 25. Further, where there is any doubt or ambiguity about the meaning or applicability of a limitation period, such ambiguity should be resolved in favour of the person whose right is being truncated. In the result, it was held that the limitation period in the statutory condition did not apply to claims made under the commercial liability coverage provided by the policy and that the applicable limitation period was the two‑year period established by the Limitations Act. The third party claim had been commenced less than two years after Federated denied coverage and was not barred by the limitation period.
Federated also argued that its policy did not cover the claims against M&W. The allegations against M&W were that the tank it sold to the plaintiffs in 2000 was not fit for its intended purpose, M&W failed to warn of design problems with the tank, and failed to advise of the possibility of failure. Federated denied coverage on the grounds that its policy was “occurrence based” and the pleadings did not suggest that the plaintiffs suffered any property damage prior to October 25, 2007, which was when coverage under the Federated policy ended. The court held that the mere possibility that the fuel tank had deteriorated over a period of time that may have included Federated’s time on risk was sufficient to trigger the duty to defend. The court also considered the “your product” exclusion in the Federated policy, noting that the exclusion was designed to eliminate coverage for the replacement or repair of the insured’s products. The damage claimed was not damage to the tank itself and was not caught by the exclusion. Further, it was arguable that the allegations regarding M&W’s duty to warn of the risk of deterioration of the tank went beyond the scope of the “your product” exclusion. Accordingly, the allegations against M&W triggered the duty to defend under the Federated policy.
The second policy was a commercial general liability policy issued by AIG Insurance Company of Canada (“AIG”) with the policy period from October 25, 2007 to October 25, 2008. AIG denied coverage on the basis of a pollution exclusion which excluded coverage with respect to “petroleum operations” for any property damage arising out of the release of “‘pollutants’ however caused and whenever happening”. “Petroleum operations” was defined in the policy as including the sale, rental or lease of petroleum tanks. It was held that the exclusion clearly applied to any liability alleged to arise from M&W’s sale of the fuel tank. However, M&W argued that the allegation that it failed to warn of design problems with the tank and to advise of the possibility of failure of the tank were not caught by the exclusion. The court held that once the exclusion had been triggered by the fact that the fuel tank was sold, the wording “however caused and whenever happening” operated to exclude property damage arising out of the release of pollutants. Previous authority established that damages resulting from a failure to warn of the release of pollutants constitute damages arising from the discharge of pollutants and that the insured’s alleged negligence was merely incidental to the primary event of pollution. Therefore, the pollution exclusion foreclosed even the merest possibility of any duty to indemnify M&W under the AIG policy and AIG owed no duty to defend M&W in the action.
The third policy was an ENCON policy subscribed to by a number of insurers. The ENCON policy was a “Contractors’ Pollution Liability Insurance Policy” which incepted on October 25, 2007 and was renewed annually thereafter. The grant of coverage stated that coverage was provided for claims resulting from pollution conditions caused by “covered operations” after the inception of the policy. “Covered operations” were defined as work performed by or on behalf of the insured at a job site for a third party. M&W argued that as “job site” was not defined in the policy, it was open to the court to decide that the term included the place where the sale of the fuel tank took place and also that “work performed” could refer to the physical sale and hand-over of the tank to the plaintiffs. The court held that the plain and ordinary meaning of the words and phrases in the policy did not support such an interpretation. As there was no allegation that M&W performed work at the plaintiffs’ property, the claim simply did not fall within the initial grant of coverage. The sale of the tank by M&W also occurred before the inception of the policy. Furthermore, the policy contained two exclusions which would clearly and unambiguously apply: an exclusion for claims arising from the sale, distribution, design or manufacture of a product unless installed in conjunction with covered operations and an exclusion for any claims arising out of or attributable to warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of your product and the failure to provide sufficient or any warnings or instructions in relation to your product. Therefore, there was no coverage under the ENCON policy.
In the result, M&W was granted a declaration that Federated was required to provide a defence in the main action and the third party claims against the other insurers were dismissed.
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