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Insurance - Exclusions. Green Rise Foods Inc. v. N.V. Hagelunie [pollution exclusions]
In Green Rise Foods Inc. v. N.V. Hagelunie (Ont CA, 2026) the Ontario Court of Appeal allowed an insured's appeal, here concerning the "the correct analytical approach to be followed regarding the interpretation and application of the standard form greenhouse insurance policy issued by the respondent to the appellant (“the Policy”) in the context of a claimed loss caused by a series of events".
The court considers insurance interpretation respecting "exception and exclusion clauses in an insurance policy", here pollution exclusions:[60] As recently reaffirmed by the Supreme Court in Emond, per Rowe J., at para. 37: “Where the language of the insurance contract is unambiguous, effect should be given to that clear language, reading the contract as a whole”. If, however, the policy’s language is ambiguous, the court must employ other rules of contractual interpretation to resolve that ambiguity: Emond, at para. 48.
[61] The framework for determining whether there is coverage under an insurance policy generally requires the court to consider:(i) Whether the insured has met the onus of establishing that the loss claimed falls within the initial grant of coverage;
(ii) If the insured meets that onus, whether the insurer can establish that one of the exclusions to coverage applies; and
(iii) If the insurer meets that onus, whether the insured can establish that an exception to the exclusion applies. See Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, at paras. 28-29, 51; Ledcor, at para. 52; and Emond, at para. 33.
[62] In Sam’s Auto Wrecking Co. Ltd. (Wentworth Metal) v. Lombard General Insurance Company of Canada, 2013 ONCA 186, 114 O.R. (3d) 730, at para. 37, Laskin J.A. summarized the principles for interpreting insurance policies and exclusion clauses in particular:The principles for interpreting insurance policies, and in particular exclusion clauses, are well-established. The policy should be interpreted to promote a reasonable commercial result; provisions granting coverage ought to be construed broadly; provisions excluding coverage ought to be construed narrowly; in the case of ambiguity, the interpretation most favourable to the insured should be adopted; and even a clear and unambiguous clause should not be given effect if to do so would nullify the coverage provided by the policy. See also Ledcor, at para. 51; Emond, at paras. 51-66.
[63] This last principle – that “even a clear and unambiguous clause should not be given effect if to do so would nullify the coverage provided by the policy” – is referred to as the nullification of coverage doctrine and was also recently reaffirmed in Emond. As Rowe J. explained, even when the language of a provision is unambiguous, it should not be applied to the extent it would render coverage nugatory: Emond, at para. 66.
[64] These general principles do not expressly explain how to interpret exceptions in the initial grant of coverage, such as the machinery breakdown exception in the present case. In Munro, Brice & Co. v. War Risks Association, [1918] 2 K.B. 78 (Eng.), at p. 88, rev’d on other grounds, [1920] 3 K.B. 94 (Eng. C.A.), the English Court of King’s Bench provided the following guidance about the onus of proof for exceptions:The rules now applicable for determining the burden of proof … may, I think, be stated thus: –
1. The plaintiff must prove such facts as bring him prima facie within the terms of the promise.
2. When the promise is qualified by exceptions, the question whether the plaintiff need prove facts which negative their application does not depend upon whether the exceptions are to be found in a separate clause or not. The question depends upon an entirely different consideration, namely, whether the exception is as wide as the promise, and thus qualifies the whole of the promise, or whether it merely excludes from the operation of the promise particular classes of cases which but for the exception would fall within it, leaving some part of the general scope of the promise unqualified. If so, it is sufficient for the plaintiff to bring himself prima facie within the terms of the promise, leaving it to the defendant to prove that, although prima facie within the terms, the plaintiff's case is in fact within the excluded exceptional class. [65] This passage was cited with approval by the court in Luciani v. British America Ass’ce Co., 1930 CanLII 424 (ON CA), [1931] 1 D.L.R. 166 (Ont. S.C.(A.D.)), at pp. 173-74, and more recently by Gordon G. Hilliker in his text Liability Insurance Law in Canada, 7th ed. (Toronto: LexisNexis Canada, 2020), at § 2.93. It has also been recently applied by the Court of Appeal for British Columbia in Honeywell International Inc. v. XL Insurance Company Ltd., 2024 BCCA 375, 502 D.L.R. (4th) 365, at paras. 23-25. This court, however, has not recently referenced this passage from Munro, nor considered the distinction drawn in that passage between a qualified promise of coverage where “the exception is as wide as the promise, and thus qualifies the whole promise”, and a promise of coverage containing exceptions that leave “some part of the general scope of the promise unqualified”, including in light of the current principles for interpreting insurance policies, such as the nullification of coverage doctrine referenced above in para. 63 of these reasons.
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[88] Moreover, the Zurich and ING cases are relevant to the coverage analysis in this case insofar as they survey relevant decisions from this court and other jurisdictions and discuss the historical context of the pollution exclusion. The interpretative value of these cases is doctrinal, not textual. Despite the difference in the policy wording, these cases remain instructive in the present case because they articulate a general judicial approach to interpreting pollution exclusions. This includes the treatment of ambiguity in exclusion clauses, the adoption of a narrow rather than a broad reading of exclusion clauses in favour of the insured and, specifically, the interpretation of pollution exclusions in the context of the overall risk allocation of the policy. As a result, they inform the analysis of the Policy in the present case.
[89] For example, in Zurich, this court found that the historical context of the exclusion suggested “its purpose is to bar coverage for damages arising from environmental pollution”: at para. 39. There was nothing in that case “to suggest that the [insured]’s regular business activities place[d] it in the category of an active industrial polluter of the natural environment”, as the insured “did not discharge or release carbon monoxide from its furnace as a manufacturer discharges effluent, overheated water, spent fuel and the like into the natural environment”: at para. 38. Therefore, a “reasonable policyholder would … have understood the clause to exclude coverage for damage caused by certain forms of industrial pollution, but not damages caused by the leakage of carbon monoxide from a faulty furnace”: at para. 39.
[90] It was a necessary step in the analysis that the motion judge consider the purpose of the pollution exclusion and whether the emitted carbon monoxide was a pollutant in the historical context of the exclusion. He also had to grapple with the purpose of the exhaust gas exclusion and explain why the pollution gas exclusion could be read easily beside it. In other words, the motion judge was required to analyze what the exhaust gas exclusion was meant to exclude, if not a pollutant, and what kind of exhaust gases were meant to be excluded other than pollutants. Finally, it was incumbent on the motion judge to consider whether the exhaust gas exclusion was meant to cover gases vented into the greenhouses that were produced as part of the boiler’s operations that malfunctioned (like the carbon monoxide leakage from a faulty furnace in Zurich), as opposed to exterior, industrial pollutants. . MDS Inc. v. Factory Mutual Insurance Company
In MDS Inc. v. Factory Mutual Insurance Company (Ont CA, 2021) the Court of Appeal considered the law applicable to exclusions from an insurance policy:(ii) Canadian law respecting exceptions to policy exclusions
[85] The insured has the onus of proving that an exception to an exclusion clause applies: Ledcor, at para. 52. Exceptions to exclusion clauses should be interpreted broadly: Monk v. Farmers and Muskoka Ins., 2017 ONSC 3690, 70 C.C.L.I. (5th) 94, at para. 132, aff’d 2019 ONCA 616, 92 C.C.L.I. (5th) 84, leave to appeal to refused, [2019] S.C.C.A. No. 384.
[86] Canadian authorities, including those that pertain to all-risk policies, have long held that exclusions for physical damage do not include loss of use or pure economic loss, unless otherwise specifically provided for: Perry et al. v. General Security Insurance Co. of Canada et al. (1984), 1984 CanLII 2146 (ON CA), 11 D.L.R. (4th) 516 (Ont. C.A.) and Sterling Crane v. Penner Brothers Utilities Ltd., 12 C.C.L.I. 97 (B.C.S.C.), aff’d 14 C.C.L.I. 125.
[87] In Perry, at p. 9, this court considered coverage “for injury or damage to the person or property of another”. “Property” was defined to include profits, earnings and other pecuniary interests, and expenditures and charges, but only to the extent expressly provided in the contract. The court determined that the coverage could not “be interpreted to mean economic loss unrelated to physical damage to property”: at p. 13.
[88] In Sterling, at paras. 6 and 16, the Supreme Court of British Columbia considered an all-risks policy which covered “all risks of direct physical loss of, or damage to the insured property”. The plaintiff sought payment for loss of income from the insured property while it was being repaired. The court rejected this claim on the basis that it was not “direct physical loss”.
[89] Second, where a policy is intended to include not only physical but economic losses, insurance policies have specifically defined property damage to include “loss of use”: International Radiography & Inspection Services (1976) Ltd. v. General Accident Assurance Co. of Canada (1996), 1996 ABCA 363 (CanLII), 193 A.R. 1 (C.A.), at para. 16. See also ARG Construction Corp v. Allstate Insurance Co. of Canada (2004), 2004 CanLII 34997 (ON SC), 73 O.R. (3d) 211 (S.C.), at para. 30; Canadian Equipment Sales & Service Co. Ltd. v. Continental Insurance Co. (1975), 1975 CanLII 670 (ON CA), 59 D.L.R. (3d) 333 (Ont. C.A.), at p. 6; Fridel Limited v. Intact Insurance Co., 2018 ONSC 5923, at para. 6; Hamel Construction Inc. v. Lombard Canada Ltd., 2004 NSSC 42, 221 N.S.R. (2d) 191, at para. 13, aff’d 2005 NSCA 69, 232 N.S.R. (2d) 128, leave to appeal refused, [2005] S.C.C.A. No. 284; Progressive Homes, at paras. 10 and 30; Simcoe & Erie General Insurance Co. v. Royal Insurance Co. of Canada (1982), 1982 CanLII 1099 (AB QB), 36 A.R. 553 (Q.B.), at para. 38.
(iii) The interpretation of similar provisions by American and British courts
[90] Appellate courts in both the United States and the United Kingdom have also concluded that physical damage exceptions to exclusions do not include loss of use.
[91] For example, in Hamilton Die Cast, Inc. v. United States Fidelity & Guaranty Co., 508 F. (2d) 417 (7th Cir. Ct. App. 1975), at pp. 420, the Court of Appeals for the Seventh Circuit held, “[i]dled machinery is not injured or destroyed tangible property and, therefore, there is no ‘property damage’ within the coverage of the policy.” Similarly, in MRI Healthcare, the Court of Appeal of California held that a “physical” damage exception to exclusion does not cover claims where “the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property”: at p. 779, citing Couch on Insurance, loose-leaf, 3d ed. (Thomson Reuters, 2010) at s. 148:81 (footnotes omitted). Thus, the fact that a machine was turned off and could not be turned back on was not “direct physical loss”.
[92] In Pilkington United Kingdom Ltd. v. CGU Insurance Plc., [2004] E.W.C.A. Civ. 23, [2005] 2 All E.R. 283, at paras. 33-35, the Court of Appeal for England and Wales (Civil Division) agreed that coverage under a policy for “physical damage to physical property” “is confined to liability for the physical consequences and does not extend to ‘mere financial consequences’”.
(iv) Analysis of the interpretation of the exception to exclusion from coverage for corrosion and conclusion
[93] The Supreme Court held in Ledcor, at para. 52, citing Progressive Homes, at paras. 26-29 and 51, that: “the insured has the onus of first establishing that the damage or loss claimed falls within the initial grant of coverage. The onus then shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer is successful at this stage, the onus then shifts back to the insured to prove that an exception to the exclusion applies.” Although exceptions are interpreted broadly, particularly in all-risk policies, this does not mean that clear wording should be altered.
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