When Must an Insurer Defend a Company in an Environmental Lawsuit?

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SITUATION

Homeowners sue the contractor who built their homes for structural damage and mould caused by the leakage of water into the houses. The contractor has commercial general liability insurance that covers property damage caused by an “accident,” which the policy defines as “continuous or repeated exposure to conditions that result in property damage neither expected nor intended.”  But the policy doesn’t cover pollution. The contractor asks the insurer to defend it in the lawsuit. But the insurer refuses, arguing that the claims aren’t covered by the policy.

QUESTION

Must the insurer defend the contractor in the lawsuit?

A) Yes, because the claim, if proven, is clearly covered by insurance.
B) Yes, because it’s possible that the claim, if proven, would be covered by insurance.
C) No, because the insurer only has a duty to pay any damages covered by the policy, not to defend the contractor.
D) No, because the contractor must first prove that the pollution exclusion doesn’t apply.

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ANSWER

B.  An insurer has a duty to defend if there’s the mere possibility that a claim falls under the insurance policy.

EXPLANATION

This scenario is loosely based on a recent decision from the Supreme Court of Canada on the interpretation of commercial general liability (CGL) policies. The Court explained that an insurer owes a duty to defend an insured on a claim when the facts, if proven to be true, would put the claim within the scope of the policy’s coverage. The mere possibility that a claim falls within the policy’s coverage is sufficient to trigger the duty to defend, it said.

In this case, the Court concluded that the possibility that the claim was covered by the contractor’s policy was made out. The policy covered property damage—and the homeowners claimed that their homes suffered extensive water damage and mould growth. It’s arguable that this damage was unintended and caused by continuous or repeated exposure to water, which fits the policy’s definition of “accident.” So the Court ruled that the insurer had a duty to defend the contractor.

WHY WRONG ANSWERS ARE WRONG

A is wrong because to trigger the duty to defend, a claim doesn’t have to be “clearly” covered by an insurance policy. There simply has to be the potential for coverage under the policy. And here, it’s possible that the homeowners’ claims are covered by the contractor’s policy.

C is wrong because the benefits of a CGL policy include not only payment of damages for claims covered by the policy but also the insurer’s provision of a defence to such claims. So if the homeowners’ claims are arguably covered by the contractor’s policy, then the insurer has a duty to defend the contractor in the lawsuit against those claims.

D is wrong because the burden isn’t on the insured to prove that an exclusion doesn’t apply. An insured must establish that the claims fall within the policy’s general coverage. Once the insured has done so, the burden shifts to the insurer to prove that the claim is precluded by an exclusion. Here, the property damage, including the mould growth, would arguably fall under the contractor’s insurance given the policy’s broad definition of “accident.” Thus, it’s now the insurer’s burden to prove that the claims, at least as to the mould, fit under the policy’s pollution exclusion.

SHOW YOUR LAWYER

Progressive Homes Ltd. v. Lombard General Insurance Co., [2010] SCC 33 (CanLII), Sept. 23, 2010