Canadian Underwriter

In pollution claim, ‘sudden’ could mean several months, court finds

June 8, 2021   by Greg Meckbach

Print this page Share

Insurance coverage for a “sudden and accidental” release of diesel fuel can include a discharge that continued over several months, the Nova Scotia Court of Appeal has ruled in a commercial coverage dispute.

As a result of Zurich Insurance Company Ltd. v. Halifax Regional Municipality, released June 3, three insurers (the other two being Royal & Sun Alliance Insurance Company of Canada and Arch Insurance Canada Ltd.) may have to pay hundreds of thousands to the Halifax municipal government under a policy covering pollution clean-up.

“The ordinary meaning of ‘sudden and accidental’ is something that is abrupt, unexpected and unintentional,” Chief Justice of Nova Scotia Michael Wood wrote for the appeal court in its unanimous ruling.

Halifax’s transit system operates about 200 diesel-powered city busses that get refuelled at a depot in Burnside, about 10 kilometres north of downtown Halifax near the interchange of highways 111 and 118. Zurich, RSA and Arch wrote the “decontamination expense (pollution clean up)” extension on a subscription basis for the regional municipality. That policy was in effect in early 2014. The pollution clean-up extension has a $1-million limit and a $100,000 deductible.

The 2014 pollution incident leading to the claim is estimated to have cost the municipality about $2 million.

In April 2014, the Halifax Water Commission discovered red-dyed diesel fuel along an embankment beside the bus depot’s property line, and in a ditch along Highway 111. Five years earlier, Halifax Transit had been storing fuel in two underground storage tanks with a capacity of 46,000 litres each. The city decided to replace those with two above-ground storage tanks.

The transit agency initially kept the underground storage tanks as a backup fuel system in case of a problem while the new above-ground system was being commissioned, Justice Robert Wright of the Nova Scotia Supreme Court wrote in a ruling released in 2020. So the underground storage tanks remained connected to the fueling stations by way of a supply line and a return line. A hand-turned shutoff ball valve was then connected to the supply line on each fueling station. In the end, the underground storage tanks, which were removed in early 2013, were never used after the above-ground tanks were commissioned.

Meanwhile, the hand-turned valve that was used to supply diesel from the old underground tanks was not removed when the underground tanks were removed in 2013. As discovered by the investigation after discovery of the pollution in May 2014, it turns out that the hand-turned valve, for reasons that are not clear, was somehow opened in early 2014. The supply line pipe that was previously connected to the underground storage tanks was still in place, but it was cut and left uncapped after the storage tanks were removed. So the investigators discovered that diesel fuel was being pumped into an excavated sump-pit. Investigators estimated about 200,000 litres had leaked between January and April 2014.

In May 2014, the city notified its insurers, who later denied coverage.

The policy wording stated:

“We will pay for the reasonable and necessary additional expense(s) that you actually incur to clean-up, remove and dispose of ‘contaminants,’ that are in amounts or concentrations that exceed allowable levels or concentrations established under government authority, from land or water on the “premises,” resulting from the sudden and accidental actual, not suspected, discharge, release, escape, dispersal, seepage or migration of such ‘contaminants’ occurring at ‘premises.’”  

The insurers argued in court that neither an intermittent release of fuel, nor a four-month continuous event, fall under the definition of “sudden.”

The appeal court disagreed.

“There is no time frame identified expressly, or by implication, in the decontamination coverage provision. In its ordinary meaning, a sudden and accidental event can continue for a significant period of time. For example, a dam might unexpectedly fail causing the downstream area to be flooded. The flood could last for days or weeks before it subsides as water flows through the damaged dam. An ordinary person would say that the flood was sudden and accidental,” Chief Justice Wood wrote for the appeal court.

The city acknowledged that there could be no reasonable expectation of coverage had the loss been caused by the gradual deterioration or breakdown of infrastructure through corrosion, rust, metal fatigue, or similar means.

The end result of the June 2021 Appeal Court ruling is the same as the end result of the 2020 Supreme Court of Nova Scotia ruling. The insurers could have to pay up to $1 million, minus the deductible, depending on the ultimate cost of the clean-up.

However, the Appeal Court ruled that Justice Wright erred in finding the policy wording was ambiguous. Instead, the Appeal Court found the policy wording unambiguously provides coverage in the circumstances of the large diesel contamination incident in Halifax in 2014.

Neither the insurers nor Halifax Regional Municipality were able to find as a precedent any Canadian case directly on point with both the policy wording and surrounding facts, Justice Wright noted in his 2020 ruling.

“It appears therefore that the use of the ‘sudden and accidental’ exception to the environmental liability exclusion clauses contained in CGL policies was discontinued in Canada in 1985.

In the property insurance policy before the court, the same policy wording resurfaced within an optional extension of coverage rather than as an exception to a pollution liability exclusion clause, as in the former CGL policies.  There is no evidence before the court as to the extent to which this policy wording is currently in use in policies of property insurance. “There is certainly a dearth of reported cases on the subject,” Justice Wright wrote.

Feature image via

Print this page Share

1 Comment » for In pollution claim, ‘sudden’ could mean several months, court finds
  1. Frank Cain says:

    A student of insurance will learn that an insured occurrence is not just any happening, but an “accident”, including accidental or unintended injury or damage taking place over an extended period of time instead of all at once. “Accident” is specifically defined as a sudden, unexpected event causing injury or damage traceable to a definite time and place.

    Occurrence is defined as “an accident, including continuous or repeated conditions, which results in bodily injury or property damage neither expected not intended from the standpoint of the insured.

Have your say:

Your email address will not be published. Required fields are marked *