Great American Insurance Ordered to Defend City

Thunder Bay – NEWS – In a recent ruling, the Ontario Court of Appeal affirmed a lower court’s decision that an insurance company, Great American Insurance Company (GAIC), must defend the City of Thunder Bay in multiple lawsuits concerning pinhole leaks in the city’s water pipes.

This case revolves around the interpretation of an exclusion clause in the city’s insurance policy and highlights the importance of clear language in such contracts.

Background of the Case

The lawsuits against the city allege that the introduction of sodium hydroxide into the water supply to combat lead corrosion led to widespread pinhole leaks and subsequent property damage. GAIC denied its obligation to defend or indemnify the city, citing an exclusion clause in the policy pertaining to lead.

They argued that since the sodium hydroxide was used to mitigate lead-related issues, the exclusion applied.

The Crux of the Matter: Ambiguity in the Exclusion Clause

The exclusion clause in question contained multiple sections, with one section (b)(ii) being particularly contentious. This section excluded coverage for claims related to “testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to or assessing the effects of lead.”  

The court found this clause to be ambiguous, meaning it could be reasonably interpreted in more than one way. The city argued it applied only to situations where claimants sought compensation for lead remediation they had already undertaken. GAIC, however, interpreted it as a broad exclusion for any claim related to lead, including property damage caused by the city’s efforts to control lead levels.

Court Findings and Implications

Both the application judge and the Court of Appeal agreed that the ambiguity in the exclusion clause favored the city. Established legal principles dictate that any ambiguity in an insurance policy must be interpreted in favor of the insured party. Furthermore, the insurer bears the onus of demonstrating that an exclusion clearly and unambiguously applies to the situation at hand.

This decision underscores the importance of clarity in insurance policies, particularly when drafting exclusion clauses. Insurers must ensure that the language used is precise and leaves no room for multiple interpretations. Failure to do so may result in a duty to defend, even in cases where the insurer believes coverage should be excluded.

Sodium Hydroxide and Lead Control

It’s important to note that the City of Thunder Bay introduced sodium hydroxide into its water supply as a corrosion control measure. Lead pipes, commonly used in older infrastructure, can leach lead into drinking water, posing a significant health risk. Sodium hydroxide increases the pH of the water, making it less corrosive and reducing the amount of lead that leaches from the pipes.

While this measure is effective in reducing lead contamination, it has been linked to an increased occurrence of pinhole leaks in water pipes. This unforeseen consequence has led to the legal battle with GAIC and highlights the complexities of managing aging infrastructure and ensuring safe drinking water.

Here is the text of the court decision:

COURT OF APPEAL FOR ONTARIO

CITATION: Thunder Bay (City) v. Great American Insurance Company, 2024 ONCA 837

DATE: 20241113

DOCKET: COA-24-CV-0250

Pepall, Nordheimer and Zarnett JJ.A.

BETWEEN

The Corporation of the City of Thunder Bay

Applicant (Respondent)

and

Great American Insurance Company

Respondent (Appellant)

AND BETWEEN

Lloyd’s Underwriters

Applicant (Respondent)

and

Great American Insurance Company* and
the Corporation of the City of Thunder Bay

Respondents (Appellant*)

Mark Barrett, for the appellant

Gord McGuire and Sean Blakeley, for the respondent, The Corporation of the City of Thunder Bay

Joyce Tam and Thomas J. Donnelly, for the respondent, Lloyd’s Underwriters

Heard and released orally: November 12, 2024

On appeal from the judgment of Justice Tracey Nieckarz of the Superior Court of Justice, dated February 20, 2024, with reasons reported at 2024 ONSC 1085.

REASONS FOR DECISION

[1]          Great American Insurance Company appeals from the judgment of the application judge who found that the appellant had a duty to defend the respondent, The Corporation of the City of Thunder Bay (“the City”), with respect to certain proceedings, which we describe below.

[2]         The City has been sued in a number of proceedings that allege that the City’s introduction of sodium hydroxide into the City’s water supply has caused widespread property damage and other losses, for which the City is alleged to be liable in negligence and other causes of action. From 2017 to 2020, the City had a general liability insurance policy issued by Lloyd’s. Thereafter, the City was similarly insured by the appellant.

[3]         The appellant contends that it does not have a duty to defend the City against these claims because the insurance policy contained an exclusion for claims related to the effects of lead. It is contended that the City introduced sodium hydroxide into the water system to counter the effects of lead.

[4]         The application judge gave detailed reasons for her conclusion that the appellant had a duty to defend. In particular, the application judge found that at least one part of the lead exclusion was ambiguous and that there was at least “a mere possibility” that the exclusion did not apply to the claims. The application judge relied on the decision in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, [2010] 2 S.C.R. 245, where Rothstein J. said, at para. 51:

Having found that the claims in the pleadings fall within the initial grant of coverage, the onus now shifts to Lombard to show that coverage is precluded by an exclusion clause. Because the threshold for the duty to defend is only the possibility of coverage, Lombard must show that an exclusion clearly and unambiguously excludes coverage (Nichols, at p. 808).

[5]         The appellant has failed to show any error in the application judge’s analysis and conclusion in this regard. We agree that one section of the lead exclusion provision is ambiguous and consequently, on the principle enunciated in Progressive, the appellant must defend the City with respect to these claims.

[6]         In light of our conclusion on the main issue, it is unnecessary for us to address the argument that the lead exclusion is unenforceable pursuant to s. 124 of the Insurance Act, R.S.O. 1990, c. I.8.

[7]         The appeal is dismissed. The respondents are entitled to their costs of the appeal. As agreed between the parties, the costs for the respondent Lloyd’s are fixed on a partial indemnity basis in the amount of $16,500, inclusive of disbursements and HST and the costs for the respondent City are fixed on a substantial indemnity basis in the amount of $30,000, inclusive of disbursements and HST.

“S.E. Pepall J.A.”

“I.V.B. Nordheimer J.A.”

“B. Zarnett J.A.”