This document summarizes a court case that examined the application of a pollution exclusion clause in a commercial general liability insurance policy. The court ruled that the key consideration is the true cause of the insured's alleged liability, not the cause of the damage. Even if multiple causes were involved, the exclusion would apply if the liability was caused by an excluded event like the discharge of pollutants. The court determined the insured's liability in this case arose from the escape of pollutants from its property, so the pollution exclusion relieved the insurer of its duty to defend, despite the fire also being a concurrent cause of the damage.

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The Pollution Exclusion – Focus On Causation
By Samantha Ip with assistance by Daniel Paperny
Introduction
The pollution exclusion clause is found in most commercial general liability (“CGL”) policies.
Typically, the pollution exclusion can eliminate an insurer’s duty to defend and indemnify its
insured in cases where the insured’s liability to a third party arises due to the release or escape
of ‘pollutants’.
In the past, many coverage decisions on this exclusion focused on whether the loss was
“sudden and accidental”. Today, the focus of most coverage decisions on this exclusion is on
whether a substance released falls within the definition of “pollutant”.
In its recent ruling in Precision Plating Ltd v Axa Pacific Insurance Co. (“Precision Plating”), the
BC Court of Appeal considered when a pollution in a CGL policy would operate to release an
insurer from its duty to defend its insured in a third party lawsuit. Interestingly, the focus of the
decision was not on the definition of a “pollutant”, but rather on the concept of causation in
the context of exclusion clauses.
Background Facts
The insured company (“Precision”) operated an electroplating business in a multi‐tenanted
commercial building in Surrey, BC. In April 2011, a fire broke out at Precision’s premises (the
“Fire”), triggering a sprinkler system. The water from the sprinkler caused vats of chemicals to
overflow. The overflowing chemicals escaped Precision’s premises and damaged the premises
of the neighboring businesses within the building.
The owners of four neighboring businesses (the “Claimants”) sued Precision, alleging property
damage caused by the chemicals that had leaked during the Fire (the “Lawsuits”).
Precision applied to the courts seeking a judicial declaration that its insurer (“AXA”) was
obligated to defend Precision in the Lawsuits under a CGL insurance policy issued by AXA to
Precision (the “Policy”). AXA argued that it was not under a duty to defend Precision, due to the
applicability of a pollution exclusion clause within the Policy, which excluded coverage for
liability caused by ‘pollutants’.
At trial, the BC Supreme Court ruled that the damage to the Claimant’s property was caused by
the Fire (not pollutants) and AXA was thus obligated to defend Precision in the Lawsuits as the
pollution exclusion did not operate to exclude coverage. AXA appealed.

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The Pollution Exclusion Clause
The relevant provisions of the Policy issued by AXA read as follows:
Coverage: To pay on behalf of the Insured all sums … that the
Insured shall become obligated to pay by reason of liability
imposed by law upon the Insured … for compensatory damages
because of:
(a) bodily injury sustained by any person or persons;
(b) personal injury;
(c) property damage due to an accident or occurrence.
… subject to the limits of liability, exclusions … in the Policy.
Exclusions: Coverage provided by this Policy does not apply to …:
(b)(i) Bodily Injury, Personal Injury or Property Damage
caused by … or arising out of the … discharge, emission,
dispersal, seepage, leakage, migration, release or escape …
of Pollutants:
(1) at or from any premises, site or location owned,
rented or occupied at any time by an Insured
The pollution exclusion wording in this decision is fairly typical of what has been termed the
“absolute pollution exclusion” which insurers developed in the 1980s in an attempt to further
restrict coverage for ever growing environmental claims.
Focus of Analysis – Causation Of Alleged Liability
The claim in question clearly fell within the grant of coverage. The issue at hand was whether
the exclusion pollution applied to relieve AXA of its duty to defend.
AXA refused to defend Precision in the Lawsuits, claiming that Precision’s alleged liability to the
Claimants arose because of the discharge or escape of ‘pollutants’, and that the pollution
exclusion applied in these circumstances and coverage was thus excluded under the Policy.
Precision argued that it had purchased the Policy from AXA to cover itself specifically for
damages caused by fire, and that any liability which Precision may owe to the Claimants
actually arose because of the Fire (covered by the Policy), which subsequently caused the
chemicals to escape. Precision’s focus was on the immediate cause of the damage, ie., the Fire.

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The main issue for the Court of Appeal was whether AXA was under a duty to defend Precision
in these circumstances, or alternatively, whether the pollution exclusion operated to relieve
AXA from this duty. In coming to its ruling, the Court of Appeal had to determine whether
Precision’s liability to the Claimants was by caused ‘pollutants’ or not.
The Court’s Ruling
In Precision Plating the Court of adopted a broad approach to its interpretation of the pollution
exclusion. It ruled that in interpreting the pollution exclusion, what matters is the true cause of
the insured’s liability, as opposed to the cause of the damage or potential damage from the
event. The Court of Appeal also found that, where the insured’s alleged liability was caused by
an excluded (or uncovered) loss, the insurer is not under a duty to defend, even if the liability
was concurrently caused by an event that would be covered by the subject policy.
Our Court of Appeal ruled in favor of AXA, finding that the pollution exclusion operated to
exclude coverage in the circumstances because Precision’s liability, as alleged by the claimants,
arose due to the escape of pollutants.
The Court ruled that the Policy (and CGL policies in general for that matter) provided coverage
for the insured’s liability or potential liability to another party, and not necessarily coverage for
damage or potential damage. Reading the coverage and exclusion provisions in the Policy, it
was clear to the Court that the Policy was meant to cover Precision’s liability, not damages. The
Court of Appeal stated that “it is not the true cause of the damage that is relevant, but the true
cause of [Precision’s] liability” that is relevant in determining whether the Policy provides
coverage or an exclusion clause applies. This was a crucial distinction in Precision Plating
because the Court ruled that, while the damage in this case may have been caused by the Fire,
Precision’s liability to the claimants arose specifically because of the escape of ‘pollutants’ from
Precision’s property.
In addition, our Court of Appeal held that when applying an exclusion clause contained within
an insurance policy, coverage was to be excluded under the policy where the damage or liability
arose from an excluded event, regardless of whether the excluded event was the sole or
concurrent cause. This meant that, even if the release of pollutants was a concurrent cause
(along with the Fire) of Precision’s liability, coverage would be excluded by operation of the
Pollution Exclusion. The Court held that so long as the liability was “caused by, resulting from,
contributed by, or aggravated by” an excluded event, then coverage was excluded under the
policy.
Our Court of Appeal concluded that the pleadings of the claimants specifically alleged liability
for the release of pollutants, and that this type of liability was explicitly excluded by Pollution
Exclusion. Thus, AXA was not under a duty to defend or indemnify Precision for its losses.

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Not The First Decision To Consider Causation In This Context
Precision Plating reminds of the importance of pleadings in coverage analysis. This decision
stands primarily for the principal that in interpreting the pollution exclusion, one must look at
the cause of the insured’s alleged liability, rather than the cause of the damage at issue, to
determine whether the exclusion applies. This is so even when the causes being considered are
sequential.
There are not too many pollution exclusion cases in Canada which focus on the issue of
causation. One such decision is the 2001 decision of the Ontario Court of Appeal in Trafalgar
Insurance Co. of Canada v. Imperial Oil Ltd. (2001), 57 O.R. (3d) 425 (C.A.) (“Trafalgar
Insurance”), which considered whether there was an intervening act which broke the chain of
causation. In that decision, a contractor was hired by a responding insurer to clean up property
damage which included an oil spill. The plaintiffs sued this contractor for the remediation,
alleging that the contractor failed to carry out the remedial work properly resulting in
exacerbation of personal injuries perpetuated by the original contamination event. The
contractor’s CGL insurer denied coverage to the contractor on the basis of the pollution
exclusion. The Ontario Court of Appeal held:
Hope [the contracator] was neither an active nor a passive
polluter in respect of the original spill, for which it had no
responsibility. Hope’s alleged failure to remediate the situation in a
timely manner constitutes an independent act, which occurred after
the original discharge and therefore constituted an independent
cause of the plaintiffs’ loss. There is no claim made against Hope
for damage caused by the original escape, nor could there be. The
claim against Hope does not arise out of the original escape of the oil
but out of its later action in failing to clean up the oil and prevent
future damage beyond the time when the situation should have
been remediated. Therefore the damage allegedly caused by Hope’s
negligence does not arise out of the escape, discharge, dispersal
or release of a pollutant as prescribed in the clause (at para. 72).
The Ontario Court of Appeal found that the pollution exclusion did not apply in that case to
exclude coverage because the pollution exclusion did not apply to contamination which pre‐
existed the insured’s work on site. The contractor’s work was an “independent act” which was
not a part of the causative chain of events that led to that plaintiff’s loss.
Applying the logic of our Court of Appeal in Precision Plating to Trafalgar Insurance, one could
say that the exclusion clause did not operate because the insured’s liability related to negligent
workmanship in the remedial work as opposed to escape of “pollutants”.
The Court of Appeal’s ruling in Precision Plating is of importance to both insurers and insureds
when entering into and enforcing Commercial General Liability policies which have exclusion
clauses. By concluding that CGLs provide coverage for an insured’s liability (rather than for
damages) the Court in Precision Plating placed an emphasis on the “true cause” of the alleged
liability of the insured in determining whether coverage is provided or excluded under a policy.

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It is the cause of the insured’s liability to third parties which determines whether coverage is
provided under a CGL, not the cause of the damage.
While many courts have adopted a more restrictive approach to the interpretation of exclusion
clauses, the Court of Appeal in Precision Plating adopted a broad approach to interpreting and
applying exclusion clauses incorporated in insurance policies. This Court ruled that, if the
damage or liability is caused by both a covered event and an excluded event concurrently,
coverage is still excluded under the policy. This aspect of the ruling is especially advantageous
for insurers seeking to rely on the application of exclusion clauses in order to avoid their duty to
indemnify or defend its insured. Where an event contemplated in an exclusion clause, such as
the release of pollutants, is even a concurrent, aggravating or contributing cause (among other
causes which may be covered) of the liability or damage, the exclusion clause will operate to
exclude coverage under the policy.