The case involved an "all risks" insurance
policy. A tenant inserted a piece of cardboard to bypass a furnace
thermostat so that heat would run to a second floor apartment
during her absence. This caused the furnace to run continuously at
an excessively high temperature, which in turn caused an ignition
component to fail, resulting in an overflow of oil to the
building's main floor commercial units.
The insurer argued that the losses should not be covered because
of exclusions in the landlord's insurance policy for pollution,
as well as for "mechanical or electrical breakdown or
The trial judge held that the exclusion for mechanical breakdown
or derangement did not apply and the Court of Appeal agreed. The
furnace was well maintained and had no internal problem or defect.
The cause of the loss was the tenant's actions. As for the
pollution exclusion, the Court of Appeal held that, on a plain
reading of the policy, there had to be another operative exclusion
before the pollution exclusion applied. The policy read as
This policy does not insure against:
a) loss or damage caused directly or indirectly by any actual or
alleged spill, discharge, emission, dispersal, seepage, leakage,
migration, release or escape of 'pollutants', nor the cost
or expense of any resulting 'cleanup', but this exclusion
does not apply:
(i) if the spill, discharge, emission, dispersal, seepage,
leakage, migration, release or escape of 'pollutants' is
the direct result of a peril not otherwise excluded on this
(ii) to loss or damage caused by a peril not otherwise excluded
under this policy.
b) cost or expense for any testing, monitoring, evaluation or
assessing of an actual, alleged, potential or threatened spill
discharge, emission, dispersal, seepage, leakage, migration,
release or escape of "pollutants".
(Except limited coverage as provided in Additional Agreement of
the Insurer, clause #4)
The Court of Appeal read the provision "in the context of
the policy as a whole" and held that:
 On a plain reading of the pollution exclusion, there must
be another operative exclusion before the pollution exclusion
applies. The only other exclusion relied upon by the appellant is
the exclusion for "mechanical breakdown or derangement".
Indeed, during oral argument, appellant's counsel acknowledged
that the pollution exclusion would apply in the circumstances of
this case only if the mechanical exclusion also applies. As I have
already noted, I do not agree that the mechanical exclusion applies
in these circumstances. On this basis alone, I would dismiss this
ground of appeal.
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