Insurance for Polluters – A Public Policy Perspective

05 / 27 / 2008

In the following entry I consider whether commercial general liability (CGL) policy coverage should be afforded to the active long-term industrial polluter. Relying upon “public policy”, I outline arguments against coverage for such polluters.

While many old form CGL policies may be brought into play in relation to long-tail pollution claims (i.e., pollution releases spanning many years), certain key elements are typically present in all such policies. There must be (i) an “accident” or an “occurrence”, (ii) which causes “property damage” during the policy period, and (iii) a legal obligation upon the insured to pay damages in relation to the property damage. In other words, a third party must sue the insured for damages alleging that the insured is responsible for property damage which occurred during the policy period.A preliminary question is whether the traditional release of pollutants as a byproduct of industrial operations really constitutes an “accident” or “occurrence” potentially triggering coverage. In this entry I consider the issue from a public policy perspective: should we allow polluters to obtain coverage from their CGL policies?

Often, the industrial polluter discharged its waste byproducts directly into the environment for a variety of reasons: it was entitled to do so pursuant to government permit; the cost of treating waste prior to release would be too costly; lack of control equipment at the time of release; or belief by the industry that the release would not cause the sort of harm subsequently revealed by progress in environmental science. Regardless of the industry’s rationalization for discharging pollutants into the environment, the discharge is generally intentional and not an “accident”. The costs arising from this intentional act are essentially costs of doing business. As explained below, there are good reasons to prohibit such industrial polluters from accessing their CGL policies to obtain indemnity for their industrial activities.

From a public policy perspective, allowing insurance coverage to extend to the long-tail industrial polluter defeats a primary goal of our Canadian environmental legislation. This goal seeks to dissuade industry from engaging in polluting activities by imposing upon polluters the direct and immediate costs of pollution. In so doing, Canadian legislation compels industries to pay more attention to the need to protect ecosystems in the course of their economic activities. This goal has been called the “polluter pays” principle.

The Supreme Court of Canada recently drew attention to this feature of Canadian legislation in Imperial Oil Ltd. v. Quebec (Minister of the Environment):

The Quebec legislation reflects the growing concern on the part of legislatures and of society about the safeguarding of the environment. That concern does not reflect only the collective desire to protect it in the interests of the people who live and work in it, and exploit its resources, today. It may also be evidence of an emerging sense of inter-generational solidarity and acknowledgement of an environmental debt to humanity and to the world of tomorrow (114957 Canada Ltee (Spraytech, Societe d’arrosage) v. Hudson (Ville), [2001] 2 S.C.R. 241, 2001 SCC 40, at para. 1, per L’Heureux-Dube J.).

… To encourage sustainable development, that principle assigns polluters the responsibility for remedying contamination for which they are responsible and imposes on them the direct and immediate costs of pollution. At the same time, polluters are asked to pay more attention to the need to protect ecosystems in the course of their economic activities.

If an insurer shoulders environmental cleanup cost, the polluter deflects those costs to someone else, and avoids repercussions associated with its failure to “pay more attention to the need to protect ecosystems.” (per L’Heureux-Dube J. in Spraytech). The insured industry learns nothing, except that it can gain economically by avoiding the expenses incurred in treating its pollutants or minimizing discharge. Its insurers will simply shoulder the burden should it be required to clean its pollutants from the environment.

Despite the force of this argument, it has been rejected in at least one American decision: AIU Insurance Co. v. Superior Court (FMC Corp). However, the Court’s reason for rejecting the public policy argument do not apply in British Columbia as they related to an express American legislative mandate allowing insurance coverage for polluting activities. In this regard, the California Supreme Court held as follows:

Although one can readily conceive of arguments for and against permitting insurance against the costs of rectifying pollution, at the outset we note that such arguments are not pertinent to either of our inquiries in this case. Both CERCLA and the Hazardous Substance Account Act expressly permit responsible parties to insure against the costs of relief available under the legislation. . . . Thus, because Congress and the Legislature already have made the relevant public policy determinations, the issue before this court is not whether CGL policies may provide the coverage sought, but whether they do provide it according to their terms. The answer is to be found solely in the language of the policies, not in public policy considerations.

Unlike the U.S. Congress and state legislatures, the British Columbia legislature has not expressly permitted insurance against the costs of rectifying pollution.There is nothing new about prohibiting insurance coverage on public policy grounds, and Canadian courts have refused to allow insurance coverage to extend to insureds for public policy reasons.

Of particular interest and applicability is the public policy rationale relied upon to avoid coverage for punitive damage claims. This rationale was outlined in Fiske v. Hartford Insurance Co. of Canada. The Court refused to allow coverage for a punitive damages claim, holding as follows:

I have concerns that allowing insurance coverage to extend to awards of punitive or exemplary damage may reduce the intended effectiveness of such awards. I have concerns that interpreting insuring agreements in such a way is contrary to important principles of public policy.

To summarize, drawing from Canadian environmental legislation, the Supreme Court of Canada has expressed an important public policy principle: assigning to polluters the responsibility for remedying pollution in order to encourage polluters to pay more attention to the need to protect the environment. Canadian courts have shown a willingness to disallow insurance coverage to support “important principles of public policy” (Fiske). Hence, courts may validly prohibit polluters from accessing CGL insurance coverage.

Even if the “polluter pays” principle is not relied upon to avoid coverage without further inquiry, the principle should at least inform consideration of coverage under CGL policies. In particular, the principle comes into play when we consider the initial coverage trigger. The CGL insuring agreement requires that property damage be caused by “accident”, otherwise there is no coverage: “To pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages because of property damage caused by accident.”

An “accident” is a fortuitous event: something unlooked for, unintended and unexpected. In Canadian Indemnity Co. v. Walkem Machinery and Equip. Ltd.,Pigeon J. held that “no dictionary need to be cited to show that in everyday use, the word is applied as Halsbury says in the passage above quoted, to any unlooked for mishap or occurrence.” And, per Robertson J:

The word ‘accident’ is not a technical legal term with a clearly defined meaning, and in the policy here it is to be read in its proper and ordinary sense. That sense is expressed in these definitions: “Any unintended and unexpected occurrence that produces hurt or loss” and “an undesigned, sudden and unexpected event”. Injuries are accidental or the opposite, for the purpose of indemnity, according to the quality of the results rather than the quality of the causes.

The issue was discussed earlier by the Ontario Court of Appeal in Crisp v. Delta Tile & Terrazzo Co, [1961] O.W.N. 278 (Ont. C.A.). In that case, dust from terrazzo grinding in a basement permeated the rest of the house, causing damage. The Court of Appeal, per Aylesworth J.A. held as follows (at 279):

In our view, on the particular facts of this case, there was no accident within the meaning of that word as it appears in coverage B of the policy. That which happened, in our opinion, was the natural, foreseeable and probable consequence of the defendant’s acts. The defendant should have foreseen that such natural and probable consequences would ensue because the defendant and the defendant’s workmen, on the evidence, had actual knowledge of what would happen if the precautions, which they failed to take, were not taken. There was, in this sense, a deliberate courting of the risk with knowledge of the risk, there was an element of reckless conduct in the sense that they could not have cared whether or not the dust damage would ensue when they proceeded with the work in the way they did with the knowledge which they had. As I have said, the facts being such as I have described, we are all of the view that the defendant has failed to bring itself within the insuring clause to which I have referred.

The converse of an accident is a deliberate act. In Sansalone v. Wawanesa Mutual Insurance Co. (1997), 185 D.L.R. (4th) 57 (S.C.C.), the Supreme Court used language similar to that relied upon by the Ontario Court of Appeal in Crisp and held as follows:

. . . when the risk of injury is inherent in the insured’s deliberate act so that the injury is the natural and probable consequence of the act, the intention to commit the act is the intention to cause the injury, and the claim is therefore excluded from coverage.

In Sansalone,the Supreme Court was discussing the intentional act exclusion. But the exclusion clarifies the requirement that property damage be caused by accident. Therefore, the Supreme Court’s reasoning applies to the insuring agreement. Thus, in Canada under CGL policies, property damage is not caused by “accident” if the property damage was the natural and probable consequence of the insured’s act.

While there will be exceptions, it is probably fair to say that most industrial polluters will have an extremely difficult time convincing a court that they did not deliberately release pollutants into the environment; and that at the time of the release they did not appreciate that the natural and probable consequence of that act would be to pollute the environment (for example, a smelting company’s deliberate release of mine waste directly into a river). If the release was permitted, the industry might not have expected a cleanup demand by the very government that permitted the release. The industry might not have appreciated the enormous impact its pollution release was having upon the environment. But the focus of the inquiry is the intent of the insured’s actions, not the precise scope of the harm that actually manifests.

If the public policy rationale holding polluters responsible for their own activities is kept in mind, Canadian courts may well conclude that an industry’s discharge of pollutants into the environment fails to qualify as an “accident” under standard CGL policies. At minimum, a presumption ought to apply against an industrial polluter, a presumption that the environmental impact or “property damage” arising from its long-term industrial operations was not caused by accident but is the natural and probable result of the industrial activities. Adopting this approach accords with the insuring agreement’s requirement that property damage be caused by “accident”; and it furthers public policy objectives seeking to modify polluting activities by holding polluters responsible for their own acts.

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