ON Court of Appeal affirms coverage for environmental loss under all-risks policy

On July 11th, 2014, the Ontario Court of Appeal in O’Byrne v. Farmers’ Mutual Insurance Company (Lindsay), dismissed the appeal from the insured’s claim for coverage for fuel oil contamination under an “all-risks” insurance policy.

The decision is of interest because of  the Court’s upholding that the proof of loss requirement was waived, and its comments on how the Supreme Court of Canada’s Derksen case should be interpreted in respect of a multi-causal loss, and how interpretation of the pollution exclusion might differ as between liability and property policies.

The insurer raised three grounds of appeal:

(1) the trial judge erred in refusing to dismiss the action on the basis that the respondents had failed to deliver a proof of loss;

(2) the trial judge erred in failing to apply the “mechanical breakdown or derangement” exclusion in the insurance policy; and

(3) the trial judge erred in failing to apply the pollution exclusion in the insurance policy.

On the proof of loss, the Court held in part that the trial judge’s finding that the adjuster’s letter advising the insured that it was unnecessary to deliver a proof of loss was a written communication on behalf of, and binding on, the insurer.

On multi-causal losses, the Court found that it was incorrect to treat the oil spill here as a multi-causal loss in an effort to come within the Derksen v. 539938 Ontario Ltd.finding that an exclusion can be worded so as to apply to a loss with multiple causes if only one of the causes is contemplated by an exclusion. The Court found that the oil damage was the result of external interference, and not a defect in the furnace, and relying on an earlier decision, (Caneast Foods Ltd. v. Lombard General Insurance Co. of Canada), declined to “give effect to the appellant’s argument on multi-causal loss and the applicability of the mechanical exclusion”.

And, on the application of the pollution exclusion, the Court held that based on its language, it cannot apply unless another exclusion applies, which was not the case here. That said, while noting that nothing further needed to be decided, it disagreed with the approach taken by the trial judge in interpreting the exclusion. The Court noted that the pollution exclusion in this case forms part of an “all-risks” property insurance policy, while the Zurich v. 686234 Ontario Inc. case applied by the trial judge dealt with the standard absolute pollution exclusion in a CGL policy.  The Court observed that this is a material distinction as the Court’s interpretation in Zurich was informed by the underwriting history and American case law dealing with that exclusion, while the interpretation of the pollution exclusion in an “all-riks” property policy “might well engage different considerations” and it did not consider the principles identified in Zurich “as directly relevant to the interpretation of the pollution exclusion in this case”.