THUNDER BAY — A judge has ruled the City of Thunder Bay's insurance company must defend the city against multiple lawsuits pertaining to pinhole leaks in water pipes.
The company had maintained it wasn't obligated on the grounds the insurance policy contains a clause that excludes coverage for claims related to lead in the water supply.
The city faces several lawsuits that allege damages resulting from its introduction of sodium hydroxide to the water system in 2018.
It added the chemical in an effort to reduce the amount of lead leaching into the water system from pipes in older parts of the city but stopped the practice two years later after receiving reports of pinhole leaks in copper pipes.
Until January 1, 2020 the city was insured under a general liability policy by Lloyd's.
When Lloyd's announced it would stop underwriting Ontario municipalities, an insurance broker acting as the city's agent arranged for alternate coverage by Great American Insurance Company.
The policy provides coverage of up to $5 million for "bodily injury and property damage liability."
Although the city began receiving reports of pinhole leaks in late 2019, the first statement of claim for damages was filed in October 2020 by the St. Joseph's Care Group, seeking $350,000 for alleged damages at PR Cook Apartments at St. Joseph's Heritage on Carrie Street.
Three other claims were subsequently filed against the city.
City and insurer disagreed on the interpretation of a lead exclusion clause
After GAIC declined coverage for the court actions against the city on the basis the claims were not covered by the policy, the city and Lloyd's both applied to the Superior Court in June 2023 for a ruling that GAIC has a duty to defend the city. Lloyd's also sought an order for GAIC to contribute to the cost of defending the litigation.
In a February 2024 judgment, Justice T.J. Nieckarz ruled that GAIC must defend the city's pinhole leak actions.
Her interpretation of the wording of a lead exclusion clause was central to the outcome of the application.
The clause states:
This insurance does not apply to: LEAD
a. All liability or expense arising out of, resulting from, or in any way caused by or related to any actual, alleged or threatened ingestion, inhalation, absorption, or exposure to lead, in any form from any sources; or
b. All liability or expense or other type of obligation arising out of or resulting from, or in any way related to any:
i. Claim, suit, request, demand, directive, or order by or on behalf of any person, entity, or government authority that any insured or others test for, monitor, cleanup, remove, contain, treat, detoxify, neutralize, or in any way respond to or assess the effects of lead in any form from any source; or
ii. Claim or suit by or on behalf of any person, entity, or governmental authority for damages or any other relief or remedy because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, or neutralizing, or in any way responding to or assessing the effects of lead in any form.
The court found that branches (a) and (b)(i) are unambiguous, but that branch (b)(ii), which the insurance company relied on, is more difficult to interpret.
GAIC argued that the city used sodium hydroxide to "treat" the water supply for lead and that liability arises because of the city's mishandling of its effort to address lead in the water supply, something it maintains is the core conduct barred from coverage by the exclusion.
The city argued, however, that (b)(ii) is aimed at situations where, instead of demanding that the insured perform the remediation or pay someone else to perform it, the claimant seeks compensation for remediation which the claimant has already performed or must perform later.
As an example of the outcome of the city's interpretation, Judge Nieckarz suggested GAIC could use the exclusion clause to decline to defend or settle a claim brought by someone who had to remove lead paint from a city-owned facility, if the city failed to do so, or by someone who had to monitor or treat their water or lead because the city failed to do so.
The company disagreed, maintaining that this interpretation results in a rewriting of the exclusion since its scope is not limited to reimbursing a claimant for its own costs of remediating or monitoring lead but broadly excludes coverage for any claim for damages connected in any way to the city's response to, or assessment of, the effects of lead in any form.
Judge found part of the exclusion clause to be ambiguous
"I find the relevant branch of the exclusion ambiguous," the judge wrote in her decision. saying the two parties' interpretations are both plausible
But she added, "Expanding the scope of the exclusion to exclude coverage for accidental property damage caused by something other than lead while the insured is responding to a potential lead problem strikes me as going beyond the purpose of the exclusion."
Because of the ambiguity of the exclusion, the court found it necessary to resort to contract interpretation principles, specifically the parties' reasonable expectations.
In doing so, it sided with the city and Lloyd's.
"I am satisfied," Judge Nieckarz said, "based on the brief evidence provided by the City, that damage to copper pipes is not an inherent lead-related risk, but rather is a water-related risk. The City provides examples of municipalities that experience pinhole leak issues. In none of those examples was lead mentioned as the cause of the leaks."
She went on to state, "A reasonable policyholder would have understood the clause to exclude coverage for accidental damages directly related to lead and to the City's actions in responding to a lead problem, but not to property damage caused by some other chemical, even if the impetus for using the chemical is to treat the water supply to prevent lead contamination."
The court added that an overly broad interpretation of the lead exclusion clause could have "absurd" results.
It cited the example of a city truck being dispatched to a neighbourhood to test for lead, and accidentally leaking oil onto homeowners' driveways.
"The insurer's interpretation would exclude the damage claim from coverage when in fact lead has nothing to do with the damage claimed, except that the city was 'responding to' or going to the home to test for lead."
Social Services Board has also sued the city over pinhole leaks
The judge's ruling also disclosed that the city has been sued by the District of Thunder Bay Social Services Administration Board for damages to its properties allegedly caused by pinhole leaks.
A statement of claim was filed by DSSAB in December 2021 and seeks damages of $5 million.
A spokesperson for the board declined to comment to TBnewswatch on Monday on the grounds that the matter is still proceeding in court.
In November 2020, a statement of claim was issued with local resident Patricia Stadnyk as the representative plaintiff under the Class Proceedings Act.
This claim is for damages of $350 million, and the case was certified as a class action last year.
A local resident and her insurance company also filed a claim in Small Claims Court in September 2022 for damages of $35,000.
None of the claims in any of the four cases before the courts have been proven.
