BCSC finds absolute pollution exclusion inapplicable; insurer must defend claims arising from dispersal of chemicals due to a fire

In Precision Plating Ltd. v. Axa Pacific Insurance Co., the British Columbia Supreme Court held that the absolute pollution exclusion in a CGL policy did not preclude a duty to defend actions by unit owners in a strata complex arising from a fire at the insured’s premises in the complex which allege that chemical fumes and chemicals emanating from Precision Plating’s unit because of or following the fire caused damage to their own units.du

Precision Plating carried on an electroplating business in the commercial strata premises. As a result of the fire, it is common ground that, among other things, the fire activated the sprinkler system at the premises and water from the sprinklers caused chemical vats on site to overflow.

The court relied on and applied the approach taken by the Ontario Court of Appeal in Zurich Insurance Co. v. 686234 Ontario Limited, and held that there was ambiguity in the application of the exclusion in the circumstances, and not affording a defence would be contrary to the reasonable expectations of the parties.

The court reasoned in part:

67 Adopting a similar approach and tracking the same language [as the Zurich decision], I conclude:

(a) pollution that is caused by a fire fails the common sense notion of “pollution” in its ordinary sense;

(b) to apply an exclusion intended to bar coverage for claims arising from environmental pollution to the escape of substances caused by a fire, is to deny the history of the exclusion, the purpose of CGL insurance, and the reasonable expectations of policyholders in acquiring the insurance;

(c) there is nothing in this case to suggest that the damage claimed by the third parties resulted from business activities of the Insureds that made it an active industrial polluter of the natural environment. Put simply, the Insureds did not discharge or release smoke, fumes or chemicals as a manufacturer discharges effluent, overheated water, spent fuel and the like into the natural environment. It was discharged or released as a result of a fire. The history of the exclusion demonstrates that it would produce an unfair and unintended result to conclude, in the context of a CGL policy, that substances that escape due to fire constitute “pollution”.