The “Sudden and Accidental” Exception: Graham v. Canadian Direct Insurance

01 / 08 / 2008

On August 28, 2007, the B.C. Supreme Court released reasons for judgment in Graham v. Canadian Direct Insurance, 2007 BCSC 1291.

The Graham decision is important because British Columbia courts have rarely addressed the scope of the “sudden and accidental” exception. This exception is often found in older form pollution exclusion clauses (Graham is not a “pollution” case, but uses the “sudden and accidental” exception which is found in pollution exclusions). The case provides a very recent and logical discussion of the scope of such exceptions. Notably, it does not follow approach taken by some American jurisdictions, which in essence replace the word “or” with “and” (i.e., sudden oraccidental).

Graham confirms that to trigger the “sudden and accidental” exception, the release or escape of pollution, water, etc., must be both “sudden and accidental”. Unless the release is both “sudden and accidental”, the exception does not apply, and the exclusion avoids coverage.

In Graham, the insured went on vacation over a weekend. As he was leaving home, he noticed his outdoor sprinkler was turned on. He assumed it was set to “automatic” and that it would therefore turn off by itself. In fact, earlier in the day he had turned it on to “manual” to power wash his driveway. When he left home he failed to turn the system to automatic, and the sprinkler continued operating in his absence. A few days later he returned home to find a sink hole in his lawn and significant damage to the foundation of his house.

Mr. Graham sought coverage from his insurer, Canadian Direct Insurance. The insurer successfully denied coverage on the basis of a water-damage exclusion clause which provided as follows:

We do not insure loss or damage caused by water unless the loss or damage resulted from . . . the sudden and accidental escapeof water or steam from a domestic appliance located outside your dwelling but such damage is not covered when the escape of water is caused by freezing.

In the United States, many jurisdictions find that if the discharge is either sudden or accidental, the pollution exclusion clause does not apply to avoid coverage. However, in light of the Graham decision, British Columbia courts are unlikely to follow that approach.

In considering whether escape of pollution is “sudden”, consider the temporal nature of the escape.

(a) Did the pollutants flow out of a suddenly ruptured pipe? Did pollutants flow because a machine broke down or exploded? If so, the escape may qualify as “sudden”.

(b) Were pollutants discharged continually over a long period? Did the insured pipe pollutants directly into a river over a long period of time? Did pollutants leach slowly out of a holding tank over a long period of time? In those cases, the escape may not qualify as “sudden”.

(c) If the escape is not “sudden”, then the exception is not engaged and the exclusion applies to avoid coverage.

Even if an escape of pollutants is “sudden”, it must also be “accidental” in order to engage the exception to the exclusion clause. Whether the escape is “accidental” may depend upon the insured’s state of mind (although this could be gleaned from circumstantial evidence). Unlike the insuring agreement, the intention is disconnected from the intention to ultimately damage; it is connected only to the intention to release or allow the escape of the substance in question.

(a) Did the insured intend to release pollution into the environment (i.e., piping pollution directly into a river or stream)? If so, the release is probably intended and therefore not an “accidental” release.

(b) Did the insured release the pollutants by mistake (i.e., leak in the seal of a holding tank, even if negligent)? If so, the release may be “accidental”.

Graham emphasizes the need to consider the exclusion clause in the context of all of the underlying facts. Therefore, any claim for coverage will require a detailed consideration of the manner in which pollution was released (temporal: sudden vs. slow prolonged release), and the insured’s practices in relation to the release (intentional vs. accidental).

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