In West Van Holdings Ltd. v. Economical Mutual Insurance Co., 2019 BCCA 110 (“West Van Holdings”), a dry cleaning company (the “Insured”) was sued by owners of adjacent properties who alleged that dry-cleaning products had migrated to their respective properties and caused damage, prior to and during the Insured’s ownership of its land. Four separate causes of action were alleged: negligence, nuisance, strict liability and statutory liability under the Environmental Management Act (“EMA”).
The Insured sought a defence to the underlying action from two of its insurers (collectively, the “Insurers”) under different commercial general liability policies issued by the Insurers since 1998. The Insurers denied coverage on the basis of the application of environmental liability or pollution liability exclusions contained within the policies. The Insured applied to Court for a declaration that the Insurers were obligated to provide a defence.
Pursuant to the EMA, a party can be liable for contamination caused by a predecessor third party. The Insured argued that the allegations against it contemplated several sources of liability, some of which were not caught by the exclusions. More specifically, the Insured took the position that the claims brought under the EMA put the Insured at risk of being found liable for remediation costs arising out of: (1) occurrences of property damage that may be solely attributable to them; (2) concurrent acts or omissions committed by them; (3) contributory acts or omissions; and (4) occurrences of property damage that resulted exclusively from the conduct of predecessor third parties, for which the Insured could be retroactively liable by virtue of the EMA. The Insured argued that the exclusions did not apply to coverage for “concurrent liability, contributory liability and/or retroactive liability”. As there was, the Insured argued, at least a “mere possibility” that the claims could be covered under the policies, the Insurers were obligated to defend the Insured in the underlying action.
The Insurers, on the other hand, argued that the claims in the underlying action fell directly and unambiguously within the scope of the exclusions, and that they therefore did not owe the Insured defence or indemnity on the claims against it. The Insurers argued that the true nature and substance of the action were allegations of property damage arising from migrating petroleum products and dry cleaning chemicals, which were clearly pollutants within the scope of the exclusions.
The Court of Appeal held that the policies were occurrence based policies providing coverage for claims alleging property damage occurring during the policy period. The policies were not intended to provide coverage for events which took place long before the policies came into effect. Further, the wording of the exclusion for claims “arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants” was broad enough to include the migration of pollutants from the Insured’s property to the adjacent property. The Court found that the Insured failed to show even the “mere possibility” that the claims fell within coverage.
Having ruled that the Insurers did not owe a duty to defend, the Court, in obiter, went on to address a line of authorities from the lower courts that required insurers to fully indemnify insureds for legal costs when an insured successfully enforces its insurer’s duty to defend in Court. Reprehensible conduct was not required. The Court ruled that there is no principled reason to award costs in a duty to defend case in a manner different than other litigation. If the insurer has breached its duty of good faith or conducts itself in a manner that is worthy of rebuke, it will be sanctioned. If not, an insurer facing a duty to defend claim should be treated no differently than any other litigant who may breach a contract with respect to costs. This decision respecting costs has since been followed by the Court of Appeal in Blue Mountain Log Sales Ltd. v. Lloyd’s Underwriters, 2019 BCCA 240.
While the coverage discussions in West Van Holdings are interesting and useful when defending an insurer taking the position that it does not have a duty to defend, the Court’s comments on costs in such cases are of broader application. The Court of Appeal accurately characterizes special costs as punitive. While obiter, its comments recognize that, absent express or implied terms in the policy intended to award the insured full indemnity for costs incurred in coverage disputes, it is rarely appropriate to penalize an insurer who has made a good faith decision to deny coverage, even in circumstances where a Court later decides that decision was wrong in law.