Contamination Revealed

Plaintiffs are increasingly seeking damages for injuries to land arising from contamination. Environmental litigation is receiving more attention and will be the subject of an upcoming appeal to the Supreme Court of Canada in the 2006 New Brunswick case, Cousins v. McColl-Frontenac Inc. For insurance carriers, there are several considerations in the context of pollution claims brought against their insureds.

Initially, insurers and their coverage counsel must consider the issue of coverage. They must determine whether or not there is prima facie coverage for the claim; then they must consider whether any of the exclusions, including a pollution exclusion, might apply. It is imperative that coverage counsel consider the effect of the reporting requirements in the policy or in any applicable statute.

Occurrence-based CGL policies normally provide that the insured must report as soon as practicable any occurrence or incident that might result in a claim to the insurer. The significance of this requirement might be considerable if one considers the insured’s potential liability for the contamination of real property. Take, for example, an insured that has knowledge of a significant hydrocarbon escape from its property but fails to notify the insurer (or any other party) of the escape for several days, weeks or months. The contaminant may be permitted to escape to neighbouring properties during that time, infiltrating not only the soil but also possibly wells and watercourses. By failing to comply with the provision requiring prompt reporting, an insured may significantly increase its own and the insurer’s exposure.

Despite the insured’s imperfect compliance with a reporting provision, however, it may still be able to look to the insurer for indemnity, as well as a defence, in light of the relief from forfeiture provisions of the various Insurance Acts. For example, s. 110 of the New Brunswick Insurance Act says: “Where there has been imperfect compliance with a statutory condition as to proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss insured against, and a consequent forfeiture or avoidance of the insurance, in whole or in part, and the court deems it inequitable that the insurance be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it deems just.”

EXPANDING RELIEF FROM FORFEITURE

Although s. 110 speaks of statutory conditions, case law has expanded the applicability of relief from forfeiture provisions to contractual requirements. In the Supreme Court of Canada decision in Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co. Ltd., the court considered a relief from forfeiture provision. A claim was made against Falk Bros. Industries Ltd., but it failed to provide notice of the claim until 28 days after the expiry of the period for notice set out in the bond. The matter involved s. 109 of the Saskatchewan Insurance Act, which allowed a court to relieve an insured against forfeiture. The Supreme Court of Canada found that s. 109 of the Saskatchewan Insurance Act extended to contractual as well as statutory conditions.

In Falk Bros., the Supreme Court stated the courts are guided by equitable considerations in deciding whether to grant relief from forfeiture. The test to be applied is whether, in all of the circumstances of the case, it is just and equitable that relief be granted. In Can. Equipment Sales & Service Co. v. Continental Insurance Co., Ontario’s Court of Appeal noted the two factors most often considered by courts in granting relief from forfeiture are good faith on the part of the insured and a lack of prejudice to the insurer. “Section 103 is an ameliorating clause,” the appellate court found. “It is not to be used to allow contracts entered into in good faith to be broken with a careless disregard for the rights of the insurer so as to cause actual or potential injury to the insurer’s position. On the other hand it should not be so encrusted with authorities as to become a circumscribed rule of law rather than a principle of equity to be exercised with judicial discretion.”The Ontario Appeal Court went on to note it had reviewed dozens of cases “…and it has become clear that recourse to s. 103, and its counterpart in other jurisdictions with relation to other types of insurance, has always depended on the particular facts of the case, and on whether there was clearly some actual proven prejudice to the insurer, or potential prejudice which could not be quantified after the event.” In addition, the court noted, “regard was had to the conduct of the insured, whether he had, for example, deliberately misled or lied to the insurer. There is no suggestion in this case that the plaintiff has been guilty of bad faith or deliberate misrepresentation or concealment.”

REPORTING CONTAMINATION

Courts will normally grant the relief sought provided there is no bad faith on the part of the insured or prejudice to the insurer. The factual considerations of a particular case will dictate whether or not a court will grant relief from forfeiture. The court will consider whether or not the insurer has been prejudiced by the imperfect compliance; if the answer is in the affirmative, the court will not normally grant the relief. It has been held an insurer will be prejudiced if the insured’s breach causes the insurer to lose “a realistic opportunity to do anything that it might otherwise have done” in responding to the claim.

In the context of contamination of real property, an insured’s delay in reporting an occurrence that might result in environmental damage could be significant. It is possible that if a spill or other escape had been reported on the day it occurred, the insurer could have taken remedial measures to restrict the effects of the occurrence. For this reason, the reporting requirements of a policy should be carefully scrutinized in considering coverage for a pollution claim. It would seem that if an insurer can demonstrate the late reporting prevented it from intervening and lessening the effects of the contamination, real prejudice will have been shown to exist and relief from forfeiture would not be granted. The evidentiary basis for such an argument will in all likelihood require expert evidence from someone — such as a hydro-geological engineer, for example — to confirm the contamination might have been contained, and therefore the damage reduced, if remedial steps had been taken when the insured became aware of the occurrence.