Pollution Policy Prescription
Environmental damage exclusions in CGL policies highlight the value of separate, claims-made pollution coverage
In the 2011 case ING Insurance Company of Canada v. Miracle (Mohawk Imperial Sales and Mohawk Liquidate), Andrew Miracle, owner of a convenience store and gas bar, learned that the cost for environmental exposures is anything but conventional. Gasoline had escaped from an underground storage tank on Miracle’s property and migrated on to adjacent Crown lands, causing $1,850,000 in damages for loss of property value, costs of conducting an environmental assessment and costs of remediating the property.
Miracle had a CGL policy issued by ING in 2001 to insure his convenience store. In 2002, Miracle opened a gas bar at a second location which was added to the CGL policy. The policy provided broad coverage for bodily injury and property damage, but excluded any damages arising out of “the actual, alleged, potential or threatened spill, discharge, emission, dispersal, seepage, leakage, migration, release or escape of pollutants… at, or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any Insured.” ING denied coverage and Miracle sought relief through the courts.
Relying on the decision in Zurich Insurance Co. v. 686234 Ontario Ltd., an earlier case where an exclusion clause was rendered inapplicable, the trial judge took the exclusion clause in Miracle’s CGL out of play. The trial judge found that Miracle was not an “active industrial polluter” and that it would be inconsistent with the reasonable expectation of the parties to apply the exclusion clause in this factual context. Admittedly, the risk of a leaking gas tank at a gas station would be a risk that one would think Miracle would have been seeking in the first place.
However, the Ontario Court of Appeal overruled the trial decision on appeal. The panel confined the application of Zurich to its particular facts and eliminated the distinction between active and passive polluters.
Justice Sharpe stated that unlike the facts in Zurich, Miracle engaged in an activity that carries an obvious and well-known risk of pollution and environmental damage; that is, the operation of a gas station. In other words, it is not beyond the reasonable expectation of the parties to apply the exclusion clause given its historical purpose and a common-sense assessment of Miracle’s business activity. The historical purpose of the pollution exclusion was to preclude coverage for the cost of government-mandated environmental cleanup under existing and emerging legislation making polluters responsible for damage to the natural environment.
In rejecting the argument that the application of the exclusion clause should be restricted to situations where the insured is engaged in an activity that necessarily results in pollution, Justice Sharpe, relying on the court’s earlier reasoning in R. v. Kansa General Insurance Co., stated that:
Liability insurance is purchased to cover risks, not outcomes that are certain or inevitable. There is a general principle of insurance law that only fortuitous or contingent losses are covered by liability policies…Accepting the argument that the pollution liability exclusion only applies to “active” industrial polluters—those who are already excluded from ordinary liability insurance coverage by virtue of the fortuity principle—would effectively denude the clause of any meaning. In my view, the exclusion clearly extends to activities, such as storing gasoline in the ground for resale at a gas bar, that carry a known risk of pollution and environmental harm.
The passive polluter who permits pollution to take place is just as much a polluter as the active polluter who discharges or causes the discharge of pollution. There is no difference between the passive and active polluter in determining the applicability of the exclusion clause.
For now, it seems the environmental damage exclusion clause has been restored to what insurers had thought would protect their CGL coverage from such non-conventional risks.
Brokers owe a duty of care to their customers to provide not only information about available coverage, but also advice about which forms of coverage they require in order to meet their needs. Environmental insurance policies differ between insurance companies and it is important that brokers understand what coverage is available and what coverage each particular client needs.
A significant proportion of claims against brokers relate to what amount to communication issues. The best protection that brokers have against a “communication claim” is detailed application forms and notes describing their clients’ operations. Frequent reviews with clients regarding their business operations are an excellent preventative measure against such claims.
Any business that carries a risk of environmental contamination should have environmental coverage. Brokers should never assume that the ordinary CGL policy will respond in a particular environmental pollution scenario. Rather, they must be aware of what environmental coverage is actually available and must advise their clients as to what coverage would be appropriate.
Occurrence-Based vs. Claims-Made-and-Reported
Environmental claims often have long tails. A long-tail claim is a term used to describe damages that take a long time to become known, often after a policy period has ended.
Under an occurrence-based CGL policy, if the negligent act giving rise to the damages occurred during the policy period, the insurer is required to indemnify the insured for any damages arising from it, regardless of when the actual claim was made. This type of policy poses serious problems for long-tail claims especially when the insured has repeatedly changed insurance companies. Claims are prone to disputes between insurance companies where the exact timing of the negligence is unknown or where the negligence was of an ongoing nature.
As a result, almost all environmental policies are claims-made policies, which only cover incidents arising on or after the policy’s effective date and which are reported during the term of the policy or any extended reporting period. The policy may contain a “prior acts endorsement,” to respond to incidents that occurred before the policy effective date but after a retroactive date.
Care must be taken in preserving any existing retroactive coverage when moving a client from one claims-made policy to another. Insurers are usually willing, at an additional price, to provide prior-acts endorsements that provide coverage as far back as the existing retroactive date on the claims-made policy that is being replaced.
Furthermore, brokers should advise and inform their clients as to the common exclusions applicable to their policies. A typical environmental policy would exclude damages arising from any known pollution conditions existing prior to the policy effective date unless they are disclosed in the application and underwritten for. Brokers should also investigate whether specific sublimits are applicable to certain types of losses such as on-site cleanup costs. Some policies will limit the restoration costs with respect to on-site cleanup coverage to the actual cash value of the damaged property and exclude any betterment. Finally, not all pollution policies define restoration costs, so it is important that brokers verify that these costs are included in the coverage.
Kirk Boyd is a partner in the Ottawa office of Borden Ladner Gervais LLP. He practises insurance, commercial and professional liability litigation. Kirk can be reached at email@example.com
Copyright 2013 Rogers Publishing Ltd. This article first appeared in the January 2013 edition of Canadian Insurance Top Broker magazine.