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May 15, 2020

Town of Lincoln Successful Against Insurer

Timothy J. Hill and Brian Chung

The Town of Lincoln (the “Town”), represented by litigation lawyers Tim Hill and Brian Chung, successfully brought an application requiring its insurer, AIG Insurance Company of Canada (“AIG”), to defend it in respect of an underlying damages claim for $1 million by a local winery business. The claim alleged that the plaintiff’s property had been flooded with pollutants from a nearby pumping station owned by the Region of Niagara, and was further aggravated by flooding from a backed-up storm sewer owned by the Town. AIG denied that it had any duty to defend the Town by pointing to a “pollution exclusion” clause in the Town’s insurance policy. That clause, which is broadly worded, precludes any insurance claims made in relation to “pollutants.”

In reviewing the pleadings as a whole, Justice Perell of the Ontario Superior Court of Justice granted the Town’s application agreeing with the Town that there are two branches of the claim. The second branch of the claim, which does not relate to the pumping station that was the source of pollution, dealt specifically with the storm sewer and its state of disrepair. He found that there is at least “some possibility” that the claim falls within the liability coverage and, accordingly, AIG has a duty to defend. In coming to this decision, Justice Perell relied on several appellate-level decisions which affirm the principle that on a duty to defend application, the court must determine the substance and true nature of the claims based on the allegations in the pleadings taking the entire pleading into account. As a result of the decision, the Town was awarded its costs of the application on a full indemnity basis.

In its decision, the Court reinforced the principle that an insurer’s duty to defend is much broader than a determination on coverage under a policy. Courts will read pleadings broadly to determine coverage, and will read exclusion clauses narrowly to determine their application in the present circumstances. In addition, insurers will be held to a very high standard in demonstrating that there is effectively no possibility that the underlying claims will be covered under the policy.

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