A recent case in the English Court of Appeal, BLG v Allianz, provides guidance on how to apply these exclusion clauses: does pollution or contamination need to be the actual cause of the damage in order for cover to be excluded, or is it enough for them to be part of the story?
Brian Leighton (Garages) Limited (BLG) owned a petrol station. A leak occurred in a section of pipe that connected one of the underground fuel tanks to the fuel pumps. The leak was caused by pressure from a sharp object on the pipe. Within a few days, the fuel leak contaminated most of the business premises and several parts of the premises were at immediate risk of catching fire and exploding. The business had to be closed for health and safety reasons.
BLG sought cover for the damage to the premises under a material damage and business interruption policy it had taken out with Allianz Insurance Plc (Allianz). Allianz refused to indemnify BLG on the grounds that an exclusion applied. The exclusion provided that the policy did not cover:
Damage caused by pollution or contamination, but We will pay for Damage to the Property Insured not otherwise excluded, caused by:
- pollution or contamination which itself results from a Specified Event
- any Specified Event which itself results from pollution or contamination.
“Specified Event” was defined to mean an event such as fire, lightning, an earthquake, or a water leak.
It was common ground that no specified event had occurred in this case. The key question was whether the starting words of the exclusion applied: was there “damage caused by pollution or contamination”? The English High Court had held that there was, so the exclusion applied. BLG appealed.
On appeal, BLG argued that the exclusion did not apply. The words “caused by” in the exclusion clause meant that cover was not excluded unless pollution and contamination was the “proximate cause”1 of the damage. While the consequences of the petrol leak might have been pollution or contamination, the proximate cause of the damage was the sharp object puncturing the pipe. As a result, BLG argued that the exclusion did not apply and Allianz was liable under the policy.
In response, Allianz argued that the exclusion applied where pollution or contamination formed any part of the chain of causation resulting in the damage. The proximate cause test did not apply because the expression “caused by” in the exclusion indicated a causation requirement looser than proximate cause. Here, the sharp object caused the leak, and the leak caused contamination, which caused damage. Cover was therefore excluded because contamination formed part of the chain of causation.
The exclusion did not apply
The Court held, by a two-to-one majority, that the exclusion did not apply. BLG had cover under the policy.
All three Judges wrote separate judgments, reflecting the difficulty in interpreting this particular exclusion clause. The majority held that:
- In general, an insurer is only liable for losses proximately caused by a peril covered by the policy.
- This presumption can be displaced by the wording of the particular policy (e.g., by using the phrase “directly or indirectly caused”). However, there was nothing in the words of this particular policy or the wider commercial context to suggest that this presumption should be displaced.
- As to the commercial context, BLG was an SME whose business included a petrol station. The risk of a fuel leak was one of the most obvious and significant risks facing a business like BLG, and an SME in BLG’s position would be likely to seek cover for fuel leaks. This supported the view that cover for fuel leaks would only be excluded if pollution or contamination was the proximate cause.
- In addition, it was reasonable to assume that policy holders like BLG would have advice from brokers who would know about the proximate cause test, and the words that are used in an insurance policy incorporate that test. The wording “caused by” usually means proximate cause, and this would have been known to both BLG and Allianz, who should be taken to have intended that the proximate cause test would apply in the exclusion.
The dissenting Judge concluded that the exclusion did not only exclude cover where pollution or contamination was the proximate cause of the loss. That was not the most probable interpretation and not what would be understood by the reasonable policyholder. Rather, the ordinary policyholder would draw three important conclusions from reading the policy:
- First, the “escape of water from any tank apparatus or pipe” was a specified event but the escape of fuel from a tank was not. This suggests a deliberate contrast between how these two kinds of events are to be treated under the policy; water leaks are covered, but fuel leaks are not.
- Second, fire and explosion were included in the list of specified events. These are the most obvious consequences of a fuel leak that a policy holder in BLG’s line of business would be concerned about and would desire cover for. Given that a fire or explosion caused by a fuel leak would be covered as a specified event, it would be commercially understandable if the policy did not also cover contamination in the absence of a specified event.
- Third, where there is a specified event, it does not matter whether the damage is caused by pollution or contamination which results from a specified event, or if a specified event is the consequence of pollution or contamination. Both are covered as a result of subclauses (a) and (b) of the exclusion. This suggests that the causation language in the exclusion does not import the proximate cause test.
Ultimately, the dissenting Judge said, it makes sense as a matter of ordinary language to say that the damage caused to BLG’s property was "caused by pollution or contamination". While the pollution and contamination was not the proximate cause of damage, the pollution and contamination was the consequence of the punctured fuel pipe, and ultimately was what resulted in the business being forced to close. The exclusion should therefore have applied (but, in accordance with the decision of the majority, it was held not to apply).
This case reaffirms a few fundamental points in relation to the interpretation of insurance policies:
- First, when determining whether the policy provides cover for a particular event or damage, it is important to identify what standard of causation the policy requires under its insuring clause as well as any relevant exclusions. Is it a test of proximate causation, or some other standard? Do different standards apply under different parts of the policy? The answer to these questions will often require a close analysis of the words used in the policy.
- Second, the answer to whether there is cover may depend on how you characterise the cause of the damage. In this case, it was agreed to be the puncturing of the pipe. But what if it was the leak? Or the spread of petrol into the building? Ultimately, causation requires a common sense approach – but this means that reasonable minds can differ on the answer.
- Third, in recent cases, the UK courts have emphasised the importance of what an ordinary person or SME would think when reading their policy. While that approach does not always sit easily next to the Courts’ reliance on historical principles of insurance law when interpreting policies (e.g., the proximate cause test), it emphasises that the best guide to what a policy means is the ordinary meaning of the words used in the policy.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.