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Reasonable Expectations Used to Resolve an Ambiguity in Coverage

The British Columbia Supreme Court, in Precision Plating Ltd. v Axa Pacific Insurance Company 2014 BCSC 602 confirmed the use of the “reasonable expectations” doctrine to resolve an ambiguity in the wording of an insurance policy.

This coverage action stemmed from a fire at the plaintiff’s premises which activated a sprinkler system. Water from the sprinkler system caused chemical vats on site to overflow which resulted in damage to neighbouring premises. Four actions were commenced by occupiers of the neighbouring units for damage caused to their premises as a result of the chemical escape.

The plaintiff’s insurer refused to defend the plaintiff in associated third party actions on the basis that the claims were pollution claims and excluded from coverage.  The insurer conceded that fire damage would be covered, despite the fact that chemicals, smoke and soot were included in the definition of pollution. The court had difficulty with the insurer’s “elastic approach” to interpretation of the exclusion, as a literal application of the exclusion clause would bar coverage against third party claims arising out of many of the usual consequences of fires. The court concluded there was ambiguity in the exclusion clause. The court held that the exclusion would not be applied “where to do so would nullify coverage provided by the policy and would be contrary to the reasonable expectations of the parties”.

The court ultimately ordered the insurer to defend the plaintiff, finding that it could not have been in the objectively reasonable expectations of the parties to exclude coverage for claims arising from the escape of substances caused by a fire.

Case law update by: Caroline Alexander