Pollution exclusions and proximate cause

Summary

In Brian Leighton (Garages) Ltd v Allianz Insurance Plc [2023] EWCA Civ 8, an exclusion clause for damage caused by pollution or contamination did not apply where damage to a pipe caused the contamination which forced the closure of a business.

Background

Brian Leighton (Garages) Ltd (BLG), a business trading in and repairing vehicles and operating a petrol station, was insured under a Motor Trade Policy with Allianz which covered various risks, including for material damage and business interruption.

A fuel leak in June 2014 contaminated the premises to the extent that the risk of fire required the business to be closed. The leak was apparently caused by a sharp object piercing a section of pipe which connected underground fuel tanks to the fuel pumps.

BLG claimed under the Policy, and Allianz denied cover on the basis that the loss was excluded. The Policy covered “damage …by any cause not excluded”. Damage was defined as "accidental loss, destruction or damage to Property Insured", and Exclusion 9 to the s.1 Material Damage cover excluded “[d]amage caused by pollution or contamination”.

BLG argued that the losses should be covered under the Policy because although the effect of the leak was pollution or contamination, the cause of the damage was the sharp object which punctured the pipe in the first place.

At first instance, Allianz’s construction of the Policy, namely that Exclusion 9 applied, was accepted.

Court of Appeal decision

By a majority judgment, the Court of Appeal overturned the High Court’s decision, holding that the Exclusion 9 did not apply, therefore Allianz was liable under the Policy. The proximate cause of the damage was primarily the rupture of the pipe, not the leaked fuel.

Key points from the judgment include:

• By reference to the authorities:
• The words "caused by" are generally accepted to refer to the “proximate cause”. An insurer is only liable “for losses proximately caused by a peril covered by the policy”.
• The proximate cause of the loss is not the last cause of the loss, but the dominant, effective or efficient cause. There may be more than one proximate cause of a loss.
• Where there are concurrent proximate causes, one an insured peril and the other excluded, the exclusion prevails.
• The requirement of proximate causation is based on the presumed intention of the contracting parties. The presumption can be displaced if a proper interpretation of the policy indicated that it “provides for some other connection between loss and the occurrence of an insured or excepted peril”.
• Exclusion 9 was to be read as a whole. In addition to the exclusionary wording, the second part of Exclusion 9, described as the “write back” of cover, specified circumstances where the exclusion did not apply. Although Males LJ dissented, the majority felt that the “write back” was intended to apply to damage otherwise excluded, but where pollution or contamination is a proximate cause, and did not displace the presumption.
• The Policy covered all risks of material damage unless excluded, and “it is not inherently surprising in such a policy that an exception should have a narrow scope of application”.

Popplewell LJ, giving the majority judgment, emphasised that an objective interpretation of the insurance contract, namely what a reasonable person would have understood the language of the contract to mean, had to include the relevant commercial context. The insured under the Policy was a business which included a petrol filling station, for which the risk of fuel leakage “is amongst the most obvious risks … against which the operator of the business would naturally desire cover.” This is perhaps the key to the majority decision.

Comment

The issue of proximate cause became a key focus in the FCA Test case, when in the context of business interruption cover for losses sustained during the Covid-19 pandemic and related lockdowns it was held that every case of coronavirus in the UK was a concurrent proximate cause of the national response, with no need to satisfy a “but for” test of causation.

Pollution exclusion clauses are also a particular focus at present, given their potential use in relation to damage resulting from climate change, so any focus on their interpretation is of interest to those drafting and interpreting liability policies. In the US several insurers are defending claims following their refusal to cover climate change defence costs under liability policies on the basis that pollution exclusions apply.

On a more granular level, the judgment reminds us that if the parties intend for an exclusion clause to be construed more widely, and apply beyond the proximate cause, this should be stated clearly in the policy, making clear, for example, if an exclusion clause applies to direct or indirect damage. It is important to note too that, in seeking to ascertain the presumed intention of the draftsperson, the courts may compare language used in a disputed clause to the language used elsewhere in a policy. In the BLG case, the use elsewhere in the Policy of the phrase “directly or indirectly caused by pollution of contamination” suggested (albeit approached cautiously by the court, as the different sections of the policy operated independently), that the policy draftsperson intended a looser connection between the pollution and the damage than that argued for by Allianz. Policy draftsmen should ensure that any differences in language are intentional, and insureds should understand the implications of different words and phrases used.