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Pollution Exclusion in D&O Policy Considered
Published in the April 2007 issue of Litigation Notes - View Article
The Ontario Superior Court of Justice recently decided a case said to be the first case in Canada dealing with the application of a pollution exclusion clause in a Directors and Officers (“D&O”) liability policy in the context of securities litigation.
In June of 1997 Boliden Limited made an initial public offering, offering its shares to the public at $16.00 each. Boliden indirectly owned shares of a company with mining operations in Spain. The prospectus contained certain information relating to the Spanish operation. In April of 1998 a tailings dam collapsed at the mine in Spain, releasing seven million cubic meters of toxic waste and contaminating ten thousand hectares of land. The cost of remediating the damage was estimated to be $250 million and the mine lost tens of millions of dollars in production revenue. By November of 1998 Boliden’s shares had dropped from their offering price of $16.00 to $5.35 each.
Shareholder class actions were commenced in Ontario and British Columbia, which were ultimately settled. Boliden sought to recover its defence costs, in excess of $3 million, from its D&O insurer, Liberty Mutual Insurance Company (“Liberty”). Liberty denied coverage on the basis of an exclusion in the policy which excluded coverage for costs respecting a claim “…for and in respect of a pollution loss”. A “pollution loss” was defined as meaning “…a loss resulting from or attributable to or in any way involving, directly or indirectly, the actual alleged or threatened seepage, discharge, dispersal, release or escape of pollutants…”.
Justice Newbould reviewed the principles relating to the insurer’s duty to defend: “(1) An insurer’s duty to defend is governed by the pleadings in the underlying litigation. The duty to defend should, unless the contract of insurance indicates otherwise, be confined to the defence of claims that may be argued to fall under the policy, and the widest latitude should be given to the allegations in the pleadings to determine whether they raise a claim within the policy. Where it is clear from the pleadings that the suit falls outside of the coverage of the policy by reason of an exclusion clause, the duty to defend does not arise. (2) Coverage provisions in insurance policies should be construed broadly in favour of the insured and exclusions should be interpreted strictly and narrowly against the insurer. Where there are ambiguities, the reasonable expectations of the parties are to be given effect. (3) If there is ambiguity in a provision in an insurance contract, the contra proferentem doctrine resolves the ambiguity against the insurer”. He then went on to consider Canadian and American caselaw dealing with the pollution exclusion. Courts have been reluctant to apply the pollution exclusion in circumstances where to do so would effectively nullify the insurance coverage. Newbould, J pointed out that such would not be the case in this circumstance since the D&O policy covered “a broad range of wrongful acts and a misrepresentation case involving underlying pollution problems would be but one of many claims that could fall within the policy”. He pointed out that some American cases have applied a “but for” test in determining whether an exclusion clause should apply. In other words if no claim would have been made “but for” the underlying pollution, the exclusion clause applies. However, Canadian courts have not adopted this test but rather have adopted a test requiring a continuous chain of causation, unbroken by a new act of negligence.
Newbould, J. went on to parse the definition of “pollution loss” beginning with the words “resulting from”. He concluded that the loss did not result from the pollution, but rather from the misrepresentation by the directors and officers. While acknowledging that it could be argued that without the discharge of pollution there would have been no litigation, this would have been to use the impermissible “but for” analysis. He felt that the same reasoning applied to the words “attributable to”.
He went on to analyze the words “in any way involving, directly or indirectly”. In this regard Newbould, J. concluded that some of the allegations in the statement of claim with respect to the misrepresentations made by the directors and officers related to submissions with respect to material facts relating to seepage and leakage from the tailings pond consequently fell within the exclusion.
The policy contained an allocation clause which provided that if there were a claim that involved a loss that was covered by the policy, together with a loss that was not covered by the policy, 80% of defence costs would be allocated to the covered loss. He therefore concluded that Liberty was liable to Boliden for 80% of its defence costs.
Boliden Ltd. v. Liberty Mutual Insurance Company, 2007 CanLII 11309