Executive Summary: Key Legal and Evidentiary Issues

• Proper characterization of the effective cause of loss where multiple events (boiler defect, monitor failure, carbon monoxide emissions) formed a chain or concurrent causes.
• Allocation of the burden of proof on the parties regarding the machinery breakdown exception in the initial grant of coverage and the factual causes of the boiler and monitor malfunctions.
• Interpretation and interaction of the machinery breakdown exception in the coverage grant with the exhaust gas, pollution and machinery breakdown exclusions in the exclusions section.
• Application of the nullification of coverage doctrine to prevent exclusions or exceptions from effectively stripping away core greenhouse crop and business interruption coverage.
• Correct legal test for causation in “series of events” insurance cases, distinguishing between chain of causation and concurrent causes using common-sense, “effective cause” principles.
• Appropriateness of summary judgment and boomerang summary judgment where significant factual disputes exist about causation, policy interpretation and onus of proof, necessitating a full trial.

Factual background and the greenhouse operation

Green Rise Foods Inc. purchased a large greenhouse tomato operation in Ontario on 1 February 2021. The facility relied on boilers both to heat the greenhouses and to generate carbon dioxide-enriched flue gas to speed photosynthesis and promote plant growth. When operating efficiently, the boilers produced flue gas containing carbon dioxide and low, safe levels of carbon monoxide, which were cooled and dried in a condenser unit before being distributed into the greenhouses. A Sercom monitor installed on the condenser was designed to measure carbon monoxide levels in the flue gas and trigger alarms and venting if levels exceeded the safe threshold. Since 2016, inspection, maintenance and repair of the boilers had been handled by Powerhouse Boiler & Combustion Ltd. Shortly before Green Rise bought the operation, Powerhouse inspected the boilers and found them to be functioning safely, but there was no evidence that the monitor itself was examined at that time.

The greenhouse policy and key coverage structure

Upon acquiring the operation, Green Rise obtained a standard form greenhouse horticultural insurance policy from N.V. Hagelunie. The policy included standard and extended property coverage as well as crop and business interruption coverage. Under the structure of the policy, crop and business interruption coverage applied only if the damage-causing event was covered under the standard property coverage grant. The core standard property coverage insured accidental physical loss of or damage to specified greenhouses, commercial buildings, inventory and agricultural produce, subject to conditions that the items be listed on the declarations, be at the risk location, and “unless the loss or damage was caused by machinery breakdown.” This final phrase operated as an “exception” built into the initial grant of coverage. The policy contained a definition of “machinery breakdown” as accidental loss resulting from inherent vice and/or any other internal cause to machines or equipment while they were in use or ready for use. There was also a separate machinery breakdown exclusion section, which used that definition but applied it in three specific situations: machinery breakdown on crop, machinery breakdown to moving work equipment, and machinery breakdown due to standstill or maintenance.

Exclusions for exhaust gas, pollution and machinery breakdown

Beyond the initial coverage grant, the policy contained a list of “excluded perils and cover limiting conditions” that applied to all coverages. Three exclusions were central: exhaust gas, machinery breakdown and pollution/contamination. The exhaust gas exclusion broadly stated that the insured was “never insured for any loss or damage” caused by, arising from or in connection with “any exhaust gas.” Pollution and contamination were also excluded, but with exceptions where pollution was caused by an otherwise covered event under the policy or by smoke and/or soot from an insured event at the risk location. “Pollution” was defined broadly to include damage or loss arising from the discharge or escape of “smoke, vapours, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants” into property, land, the atmosphere or water. The term “exhaust gas” itself was not defined anywhere in the policy wording.

The loss event and claim for tomato crop damage

On 23 February 2021, Green Rise began to see signs of serious damage to its tomato plants across the greenhouse operation. After several weeks of investigation, on 17 March 2021 the company discovered that one of its boilers had malfunctioned because an internal burner diffuser had become displaced. The displacement caused the boiler to emit excessive levels of carbon monoxide into the flue-gas stream. Those unsafe levels then entered the greenhouses through the carbon dioxide flue-gas distribution system. At the same time, the Sercom monitor failed to perform its safety function; it did not detect the excessive carbon monoxide and did not trigger an alarm or venting. Both parties accepted that if the monitor had functioned properly, the excessive emissions would have been discovered before the tomato plants were poisoned. Green Rise ultimately lost approximately 23 acres of tomato plants. On 19 March 2021, the insured submitted a claim under the policy for this crop loss. Three days later, a crop expert retained by the insurer inspected the greenhouses, concluded that the loss was caused by excessive toxic gases, including carbon monoxide, and recommended that the entire crop be removed; he did not inspect either the malfunctioning boiler or the monitor.

Denial of coverage by the insurer

By letter dated 24 March 2021, Hagelunie denied coverage. It attributed the loss to incomplete combustion of the boiler, causing emissions of various toxic exhaust gases including carbon monoxide, and took the position that the loss was “caused by a machinery breakdown” involving both the burner and the carbon monoxide monitor. It said that damage to crop due to machinery breakdown was covered only in specified circumstances (climate damage, water, nutrition or light damage or operational delay registered and alarmed), and that this special coverage did not extend to “damage due to incorrect flue gasses.” The insurer also relied expressly on the exclusion for “exhaust gasses in general.” In a subsequent letter on 17 August 2021, Hagelunie reiterated and expanded its denial, invoking the machinery breakdown exception, the exhaust gas and other exclusions, and asserting that the boiler and monitor breakdowns were caused by lack of maintenance, even though it had not inspected them or asked for maintenance records. As to the monitor, it further suggested that “incorrect settings, programming, operation, composition, dosage, installation and alarm threshold” were also excluded and could be potential causes of the failure.

Proceedings before the motion judge and boomerang summary judgment

Green Rise commenced an action for breach of contract, seeking indemnity under the policy for the tomato crop loss. It brought a motion for partial summary judgment, asking the Superior Court to declare that it had coverage and that the insurer was liable to indemnify it. The motion judge correctly recited the law on summary judgment, including the obligation on parties to put their “best foot forward,” and noted that partial summary judgment can, in appropriate cases, result in “boomerang” summary judgment in favour of the responding party. He also referred to the standard form insurance interpretation principles from the Supreme Court’s decision in Ledcor and to the usual onus structure: the insured must first show that the loss falls within the initial grant of coverage, the insurer must then prove that an exclusion applies, and the insured may then rely on an exception to the exclusion. However, he did not expressly address who bore the burden of proof with respect to the machinery breakdown exception embedded in the initial grant of coverage. On causation, the motion judge accepted that the loss resulted from an agreed chain of events: the boiler malfunction led to excessive carbon monoxide emissions, which went undetected because the monitor also malfunctioned, and those emissions then poisoned the tomato plants. He summarized this by finding the “direct cause” of the loss to be the excessive carbon monoxide created by the malfunctioning boiler and undetected by the malfunctioning monitor. Relying primarily on that characterization, he held that the exhaust gas exclusion provided a complete answer to Green Rise’s claim because the policy broadly barred coverage for any loss “caused by, arising from, or in connection with any exhaust gas,” and he treated carbon monoxide as plainly an exhaust gas. In the alternative, he found that the boiler and monitor failures were “machinery breakdowns” as defined in the policy and that the machinery breakdown exception in the standard property coverage removed the loss from the initial grant of coverage. On that basis, he dismissed the insured’s motion and, by way of boomerang summary judgment, dismissed the entire action with substantial costs in favour of the insurer.

Causation in series-of-events insurance cases

On appeal, the Ontario Court of Appeal focused first on the correct causation framework in insurance cases where a loss arises from a series of events. It emphasized that in such cases courts must identify the “effective cause” of the loss, sometimes called the “proximate cause,” which does not mean the last cause in time but the cause that is proximate in efficiency. The court distinguished between “chain of causation” cases, where one factor in a sequence is the effective cause, and “concurrent cause” cases, where two or more independent causes together are effective causes of the loss. Applying these principles, the Court of Appeal held that the motion judge erred in principle by treating the immediate poisoning of the tomato plants by carbon monoxide as the sole cause of loss without properly analyzing whether the effective cause lay earlier in the chain (for example, in the boiler malfunction, the monitor malfunction, or the reasons those devices malfunctioned), or whether there were concurrent effective causes. The trial judge on a full record would need to decide, using common-sense causation, whether this was a chain case with a single effective cause or a concurrent cause case with multiple effective causes, and then tie that causation finding to the policy wording.

Onus and findings regarding the machinery breakdown exception

Turning to the machinery breakdown exception in the coverage grant, the Court of Appeal pointed out that the motion judge did not properly deal with who bore the onus to prove that the exception applied. This was a critical step because, depending on that allocation, the insurer might have been required to show on evidence that the boiler and monitor failures resulted from inherent vice or some other internal cause, as defined. The appellate court also found that the motion judge had not made the necessary factual findings on what actually caused the boiler diffuser to become displaced or what caused the monitor to fail. There was evidence suggesting more than one possibility: an expert for the insurer suggested end-of-life failure of electrical components, but his own report acknowledged that an electrical surge could be the cause, while the Powerhouse tradesperson who inspected the monitor after the incident considered an electrical surge or spike more likely and thought ordinary end-of-life failure inconsistent with the monitor still being lit but unable to reset. The admissibility and weight of that evidence, and the ultimate factual findings as to cause, were held to be matters for trial. Because the parties and the motion judge had not squarely addressed the burden of proof on the machinery breakdown exception or resolved these causal questions, the Court of Appeal treated them as genuine issues requiring a trial rather than issues suitable for summary disposition.

Interpretation of exhaust gas and pollution exclusions

The Court of Appeal then addressed the exhaust gas and pollution exclusions for guidance to the trial court. It held that the motion judge’s approach to these clauses contained legal errors and was not entitled to deference. Although he had described the exhaust gas exclusion as clear and unambiguous, his reasoning depended heavily on the factual evidence of witnesses that carbon monoxide was “exhaust gas,” which suggested that the term was not self-evident from the policy text alone. The appellate court noted that the judge had not properly interpreted “exhaust gas” in the context of the policy as a whole and of how the flue-gas system operated in this greenhouse: the carbon monoxide at issue entered the greenhouses through a dedicated carbon dioxide distribution system rather than via ordinary boiler exhaust venting, and both safe and unsafe levels of carbon monoxide were present. The question of whether “exhaust gas” captured all such emissions or only the toxic ones, and how that term interacted with the defined concept of “pollution,” required a careful policy-wide analysis that had not been undertaken. The court also held that the motion judge had erred in dismissing prior pollution exclusion authorities as irrelevant merely because they were “duty to defend” cases. Those decisions, which examined the historical purpose of pollution exclusions and favoured narrow readings that targeted industrial environmental pollution rather than everyday operational mishaps, were relevant as interpretive guidance. The trial judge would need to consider that context, determine whether the carbon monoxide in this scenario counted as “pollution” under the policy definition, examine whether any exception to the pollution exclusion applied, and explain how the exhaust gas exclusion and pollution exclusion were intended to work together rather than rendering coverage illusory.

Concurrent causes and the scope of exclusions

The Court of Appeal further highlighted that, even if carbon monoxide were ultimately found to be one of several concurrent effective causes of the loss and to fall within the exhaust gas exclusion, that would not automatically mean that coverage was entirely ousted. Relying on Supreme Court authority, the court underlined that where a loss results from concurrent causes—some within coverage and some subject to an exclusion—the effect of an exclusion depends on its specific wording and must be interpreted narrowly and in favour of the insured in case of ambiguity. An insurer seeking to exclude coverage entirely in such a scenario must clearly state that if any effective cause is an excluded peril, all coverage is barred, even if another covered peril also caused the loss. The policy here required that kind of close interpretive work, which had not been done at first instance. Similarly, the machinery breakdown exclusion in the general exclusions section still had to be considered in its own right, especially in relation to “machinery breakdown due to standstill or maintenance,” because the insurer had relied in correspondence on alleged lack of maintenance, while the insured contested that this exclusion applied. Those questions, too, were reserved for trial.

Outcome of the appeal and monetary consequences

In the end, the Court of Appeal concluded that the motion judge’s interpretation of the policy and his causation analysis were legally flawed and that too many genuine issues of material fact and mixed fact and law remained unresolved for summary judgment to be appropriate. The appellate court therefore allowed Green Rise Foods Inc.’s appeal, set aside the dismissal of the action and the associated costs order, and remitted the entire coverage dispute to be decided at a full trial on a complete evidentiary record. The only monetary determination made at this stage was a disposition on appeal costs: the court ordered N.V. Hagelunie to pay Green Rise Foods Inc. an all-inclusive amount of CAD $70,000 for its costs of the appeal. The amount of any eventual damages or indemnity under the insurance policy itself, and any costs of the proceedings below, were left for determination by the trial judge and therefore cannot yet be quantified from the decisions currently available.