British Columbia Insurance Blog

A pollution exclusion clause may not apply to damages resulting from a deliberate act

A pollution exclusion and a mechanical/electrical breakdown exclusion in a policy of property insurance did not operate to exclude coverage for damage to the insured property resulting from an oil spill that was contained within the building and was caused by deliberate damage to a furnace causing the oil to overflow.

O'Byrne v. Farmers' Mutual Insurance Co., [2012] O.J. No. 2056, May 8, 2012, Ontario Superior Court of Justice, J.R. Sproat J.

The plaintiffs were the owners of a commercial building insured under a policy of property insurance issued by the defendant, Farmers’ Mutual Insurance Company (Lindsay) (“Farmers”).  On March 13, 2005 oil leaked from a second floor furnace causing damage to the building. The oil leak was caused by paper stuffed into part of the furnace to bypass the automatic thermostat, presumably by a tenant. This eventually wore out the ignition mechanism on the furnace and caused oil to overflow when oil continued to be pumped into the furnace but was not ignited. Farmers’ denied coverage for the loss on the basis of a pollution exclusion and at trial also argued that coverage was excluded on the basis of an exclusion for loss caused by mechanical or electrical breakdown or derangement.

The oil leak occurred on the second floor of the building and did not spread outside the building. Previous caselaw established that the wording of the pollution exclusion indicated that the exclusion is directed towards pollution that results in “traditional environmental contamination”. The exclusion in this case could be reasonably interpreted in favour of the plaintiffs as applying only to exclude traditional environmental contamination. As the oil had remained within the building, it did not amount to traditional environmental contamination and coverage was not excluded.

The exclusion for damage caused by “mechanical or electrical breakdown or derangement” did not apply. The authorities established that the exclusion applied to damage resulting from a failure of equipment that is due to some internal problem or defect in the machine itself. In this case, the furnace did not have any internal problem or defect, rather, the eventual breakdown and resulting oil spill were caused by damage to the furnace caused by the tenant. The plaintiffs’ action was allowed and damages for the costs of repairing the building and business interruption and loss of rental income were assessed.

This case was digested by Emily M. Williamson and edited by David W. Pilley of Harper Grey LLP.

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