December 2, 2012 by Greg Meckbach, Associate Editor
Anyone considering serving as a director or officer of an organization that owns, occupies or manages property would be well-advised to do some research on the property itself and the potential liability for environmental contamination, some experts suggest. They further warn typical third-party or commercial general liability (CGL) insurance policies tend not to cover historical contamination on one’s own property.
A director or officer could be liable both in cases where the contamination occurred before he or she assumed the role, or while holding the role, explains David Estrin, an environmental lawyer and partner at Gowlings’ Toronto office. “The recent decisions by the Ontario Environmental Review Tribunal (ERT) and by the courts are certainly tending to the direction that officers and directors should be very concerned about responsibility for historical contamination as well as for making sure that they are taking steps to prevent new contamination arising,” Estrin says.
He has appeared before several tribunals in Ontario, including the ERT, a quasi-judicial body that hears applications and appeals under the Environmental Protection Act as well as several other provincial statutes.
One case before the tribunal, in which Estrin was not involved, was Currie v. the Director, Ministry of the Environment (MOE). That case involved a former resin manufacturing facility in the community of Cayuga, approximately 40 kilometres south of Hamilton.
After at least 21 years of issuing orders against St. Lawrence Resins and various numbered firms and individuals involved with the property, in 2010, MOE ordered the three former directors to undertake remediation work at the property. All three appealed to the tribunal, but lost their bid to have the orders overturned.
Rosalind Cooper, a partner with Fasken Martineau in Toronto, represented one of the aforementioned directors, Donald Rickerd. The other two, represented by separate counsel, were John Currie and Robert Labatt.
During the International Sites and Spills Expo, held November 7 to 8 in Mississauga, Ontario, Cooper told attendees Rickerd had “extremely limited contact with the company,” only visited the site once, was not involved in environmental matters, and did not know how the business operated.
ERT records indicate that Rickerd was chairman of St. Lawrence Resins in 1995 and that MOE officials had visited the site as early as 1989, noting that liquids were leaking from barrels stacked outside. Rickerd testified a different firm occupied the property after 1998, but in 2008, he was nonetheless subject to an MOE order.
“It was essentially an investment that he had been persuaded to make by some friends who said, ‘Let’s go in together and fund this company and hope it will be profitable,’” Cooper related at Sites and Spills. The venture never was, she said, adding that Rickerd lost a great deal of money. When he finally walked away from the business and the company sold the property, “they thought they’d never have to deal with this site again. Lo and behold, a number of years later, here’s an order saying, ‘You three have to clean it up at whatever cost.’”
Cooper reported she has received many calls from people who were thinking of or had assumed a directorship or a position as an officer of a company.
“There are some serious concerns about the fact that they could be held personally liable or responsible for cleaning up a property,” she said.
Cooper noted there is no maximum limit on costs for a corporation, or for a director or officer, who has been issued a clean-up order from MOE. Provincial charges may result in fines, for which there are maximums. In the case of a clean-up order, however, the person or organization that has been subject to the order is responsible for the entire cost, she explained.
Many parties who have been hit with clean-up orders appeal to the ERT, arguing that the contamination was not their fault.
CHANGE OF DIRECTION
In the past, Cooper told expo attendees, her opinion was that the tribunal seemed more interested in hearing arguments that someone served with an order should not have liability imposed on them, but this changed in 2009 when MOE ordered the City of Kawartha Lakes to remediate the discharge of furnace oil, originating from a private home. Initially, it was the owner who was served with an order. But since the clean-up cost exceeded the limit on his insurance, MOE then issued an order to the municipality, which the city appealed and lost.
In essence, the city argued it was not at fault because the oil came from a private residence. Cooper reported the tribunal ruled that questions of whether one party is more at fault than another “are suited to another forum,” such as a civil court.
The court’s direction “overturned all the advice” Copper said she had been giving clients, which was that they could argue fairness before the ERT. “This is particularly frightening for companies who had either occupied or had charge, management or control of properties in the past and then sold those properties or no longer lease them,” she suggested during her presentation.
Although not commenting specifically on the cases cited by Cooper, Estrin says MOE usually issues orders against corporations before naming directors or officers. However, there are two situations where directors and officers could be named: the first is where ministry officials believe the corporation is “essentially a shell and does not have assets,” and the second is where MOE officials are concerned “the company is going to be very difficult about the situation” and the MOE wants to get “more appropriate attention” to the order from a director or officer, he adds.
“Oftentimes, individual officers and directors may choose to concede that something ought to be done and offer to have action taken, which could be quite expensive. Of course, if the ultimate financial burden is overwhelming on the individuals, they will fight it,” or file an insurance claim, Estrin says.
Noting that he is unfamiliar with the specific clauses in D&O insurance policies that would apply to environmental clean-up orders of an organization’s own property, “normally, third-party liability coverage is not going to be available when the contamination is on the insured’s own property and the issue is cleaning up the insured’s property, where the order is normally issued,” Estrin explains. “If there is going to be insurance coverage for this kind of thing, it has to be specifically coverage that’s clearly set out in the directors’ and officers’ policies or some other policy that the owners of that property or the managers of that property have obtained. General liability and third-party liability won’t do it,” he cautions.
Most CGL policies cover some form of pollution, says Gary Hirst, national director of brokerage firm Burns & Wilcox Canada. That said, CGL usually covers “sudden and unforeseen” pollution rather than pollution caused by contamination over time, Hirst adds.
Consider as just one example a restaurant owner who hires a contractor to collect fat and grease for reprocessing. In this scenario, company directors should ensure the contractor carries appropriate insurance since, without that, the business could be responsible for any related clean-up costs.
“If the corporation doesn’t carry the right sort of liability coverage, then, of course, the directors do then have an exposure, because they’re the ones that actually bought the insurance policy in the first place,” Hirst points out. “We have quite a few directors and officers approaching us wanting to really understand wh
at their exposures are as a director,” Hirst adds.
To reach that understanding, Hirst says that a director needs to have knowledge of law, insurance and the company’s operations.
A prospective director should also ask to see the Phase 2 environmental site investigation report, Estrin says. Under Ontario law, this assessment is intended, among other things, to determine the location and concentration of contaminants and to obtain information about environmental conditions.
“The standards in Ontario have been becoming more stringent over the last few years, so an investigation and report done five years ago or even three years ago, which says the site met standards then, may not be reflective of today’s standards,” Estrin explains. That being the case, the best advice “would be to make sure that such a study done by such a qualified person is a very recent one,” he adds.
“Aside from insurance — to the extent that you can get insurance for historical contamination liability — the best approach is to not become an officer or director unless [you are] satisfied that appropriate due diligence investigations have been carried out on the property to identify pre-existing liabilities and the company had adequate resources in place to deal with those.”