Canadian Underwriter

Pollution Liability

August 1, 2015   by Greg Meckbach, Associate Editor

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As regulators make environmental contamination guidelines more stringent, an organization that did not cause a pollution problem can still be on the hook for clean-up, experts warn. While fines can be in the millions of dollars, one lawyer cautions that there is no upper limit on the cost of an environmental cleanup.

At the same time, many general liability policies exclude pollution, while underwriters offering coverage, for risks arising from historical contamination, want to know what policyholders’ properties were used for in the past. Pollution liability is a risk faced not only by organizations handling large quantities of hazardous materials, but also by smaller operations, such as maintenance shops and even bakeries, environmental lawyers and underwriters contend.

“Any organization that’s big enough to have a risk manager probably has some sort of exposure to environmental liability,” says Darius Delon, chair of RIMS Canada Council, a committee of Risk and Insurance Management Society Inc. “Never assume that you don’t have an environmental liability exposure.” By day, Delon is associate vice-president, risk services at Mount Royal University in Calgary. His comments are on environmental risk in general, not about his current or previous employers.

For risk managers employed by organizations that own or manage property, contamination caused by a previous user can be a liability. “Those that buy environmental impairment liability should get historical coverage,” Delon recommends. He advises companies to give all environmental site assessments to their insurer “ahead of time so they can vet it and confirm they have historical coverage without any exceptions.”

Land with a gas station is one “obvious” example of environmental risk, but there are less obvious examples, Delon warns. For example, the land may at one time have had a railroad going through it and this could have caused contamination from coal and/or creosote, he suggests.

“It’s the adjacent exposures, the historical exposures, and not just the exposure from 30 years ago when you first built your building, but the exposure from 50 years when you thought it was a greenfield, but it was, in fact a brownfield, and you just don’t know it.”

Sometimes, individual directors and officers can be on the hook for historical contamination, warns environmental lawyer Harry Dahme, a partner with Gowling Lafleur Henderson LLP.

Dahme cites as an example a remediation order – issued in November 2012 by Ontario’s then Ministry of the Environment (MOE) – against 13 former directors of Northstar Aerospace Canada, which used to manufacture parts in Cambridge, Ontario. That site was contaminated by trichloroethylene from Northstar’s own operations and by contaminants from a nearby property.

In June 2012, Northstar was granted creditor protection in Canada under the Companies’ Creditors Arrangement Act and MOE later made claims against the former directors.

Ontario’s Environmental Review Tribunal (ERT) denied the directors’ request for a stay of the MOE order. Instead of seeking judicial review, the directors reached a settlement.


“They settled for $8 million, which is nowhere close to the actual cost of remediation,” Dahme reports. “In some cases, the directors and officers were persons who had absolutely nothing to do with the contamination. One in particular became a director after the contamination occurred and his role was to assist in providing direction on how to fix the problem.”

In most Canadian provinces, Dahme points out, “the legislation says that any person who owns, owned or has or had management or control of an undertaking is a person against whom” a clean-up order could be issued. “Regardless of who is at fault, there is an ability to issue an order against past and present owners, and persons in control.”

The potential costs of environmental clean-up are “unlimited,” warns Alex MacWilliam, a Calgary-based environmental lawyer and partner with law firm Dentons Canada LLP.

“I have had situations where the client was fined a couple of hundred thousand dollars under different pieces of legislation, depending on the nature of the offence, but the clean-up costs have been in the millions, and there has also been civil litigation by landowners or business partners or other companies that are affiliated commercially with our client that has been responsible for the event,” MacWilliam recounts.

Another major case involving environmental clean-up was an unsuccessful appeal, by the City of Kawartha Lakes, of an order from Ontario’s MOE, Dahme notes. Court records indicate that in December 2008, several hundred litres of furnace oil had leaked from a homeowner’s basement, entering the Kawartha Lakes storm sewer system, which drains into the Sturgeon Lake. The homeowners’ insurance coverage reached its limit the following March.

MOE then issued a clean-up order against the city, which the city appealed all the way up to the Court of Appeal for Ontario.

Court records indicate the city argued “that as an innocent owner and as a victim of inaction on the part of others who could have prevented the spill from contaminating its land, it was unfair and unreasonable that it should have to pay the costs associated with remediating the contamination.”

In a decision released in May, 2013, the Court of Appeal for Ontario found that evidence of fault is not relevant in deciding whether a clean-up order against the city should be revoked.

The Kawartha Lakes decision “is the one that I would consider the most precedent-setting from an underwriting perspective,” says Dennis O’Leary, a litigation lawyer with Toronto-based Aird & Berlis LLP, whose practice areas include environment and transportation.

The City of Kawartha Lakes “was ultimately held responsible to do work to prevent further migration” of furnace oil, O’Leary adds. “That came out of nowhere and that was ultimately sustained by the courts. Here’s somebody that truly didn’t cause the problem and didn’t have control of it in the first instance, but did have in terms of the mechanical means by which it was going to move to the lake. It shows there are situations where it’s hard for you to fully appreciate what the potential risks are.”

One trend affecting pollution risk is that the definition of an “adverse effect,” under environmental protection laws, “is continually being broadened,” O’Leary says.

However, the regulator’s definition of adverse effect “would not necessarily” be defined as a “pollutant” or “contaminant” in a pollution insurance policy, he warns.

“The advice I would give any underwriter is that any substance in a bad circumstance could be found to be a pollutant or contaminant,” O’Leary adds. “It does not have to be hazardous.”

Another trend is frequent changes in regulations stipulating how much concentration of a contaminant is acceptable.

“When it comes to what is an acceptable level for virtually any substance in the groundwater or in soils, there is a continuing trend for science to be able to determine the concentration at ever more minute levels and science to determine that those minute levels could constitute a risk,” O’Leary reports. “So every few years the Ontario clean-up guideline gets updated and you have new numbers that are more stringent.”

That guideline is Ontario Regulation 153/04, a part of the Environmental Protection Act that contains rules on records of site conditions on brownfield properties. That regulation was recently updated, reports Ricardo Philip, product line leader for environmental liability at Markel Canada Ltd.

If a site is contaminated, an insurance professional or risk manager needs to determine how the site conditions could affect risk of property damage and bodily injury, Philip contends.


“We need to know how significant the contamination is and how that contamination would compar
e against the regulatory criteria that is applicable,” Philip advises. “In some cases…we could be talking about both federal and provincial criteria, conservation authorities and other jurisdictions that might have say on various aspects of the impacts. We want to see how severe it is as well. We want to see that in qualitative terms and as much as possible in quantitative terms.”

A Phase 1 site assessment is a common tool used by underwriters, suggests Karim Jaroudi, XL Catlin’s environmental team leader in Toronto.

In Ontario, the Ministry of Municipal Affairs and Housing (MAH) notes that a Phase 1 assessment “explores the likelihood that one or more substances have contaminated all or part of a property.” In such an assessment, “the previous use of the property is reviewed by studying a variety of sources, such as fire maps, aerial photos, directories, maps, and even interviewing past and current owners,” MAH adds, in A Practical Guide to Brownfield Redevelopment in Ontario.

If a Phase 1 site assessment “identifies areas of environmental concern, potential contamination or likely contamination, then what we’d like to see at that point is further environmental site assessments,” Jaroudi reports.

When assessing risk of historical contamination, an underwriter wants to see data on site conditions that is “as recent as possible” so it represents the conditions at the time it is being underwritten, Philip says.

“So you don’t want to see due diligence that’s 10 years old, because the clean-up criteria – the regulatory framework – is a lot more strict now than it was 10 years ago,” Philip advises.

“Something a risk manager can be thinking about, as it relates to historical contamination, is when they are buying an asset, at the time of sale, they may want to seek an indemnification from the seller for historical contamination,” suggests Joe Madigan, XL Catlin’s regional manager for Canada and United States central region.

“So in the event that they are sued in the future, when something is found, the seller would defend them and pay for any damages. That’s something that is becoming a bit more popular, and certainly not something that the seller is offering automatically by any means, but it’s a fantastic tool for the risk manager to use when they can,” Madigan advises.

Mike Mitobe, environmental expert/senior underwriter for Chubb Insurance Company of Canada, advises risk managers to do “appropriate due diligence” before buying or selling property. Mitobe was commenting, in a statement to Canadian Underwriter, on corporations in general, noting that oil and gas operations have additional risk challenges with additional specific underwriting conditions.

“One of the more common mistakes I see when people are making investments in commercial property or industrial property is they cheap out with their environmental consultants and/or lawyers,” reports MacWilliam. “So they may get some quotes from a number of consultants to do the Phase 1 environmental site assessment, or even a Phase 2, and they immediately go to the bottom in terms of the price and quite often you get what you pay for.”

Ontario’s MAH notes that a Phase 2 site assessment provides a “characterization of the location and concentration of one or more contaminants” and the assessment “may include property investigation, sampling and analysis of building materials, stored substances, soil, vapours, groundwater and/or air quality.”

Mitobe suggests that his company would look for “red flags such as historical dry cleaners, gas stations and questionable fill materials that cause concern for historical impacts on the property.”

When covering historical risk, an underwriter would ask, when an insured is “actively purchasing other companies,” whether there is a plan for due diligence, suggests Chuck Hasselback, assistant vice president, environmental at Berkshire Hathaway Specialty Insurance (BHSI). “Is the buyer able to test a site before they sign on the dotted line?” he asks. “And if so, can they share that information with the carrier to get their opinion?”

BHSI started a pollution group about a year ago in Canada, though Hasselback notes that the company is “not generally looking to pick up historical contamination” and it not “actively looking” to insure such risks.

“Historical contamination issues are much different to manage than operation exposures,” writes Mitobe. “With historical issues, due diligence conducted is the key to obtaining the most coverage available in the market and, when in doubt, do the soil and ground water sampling to be certain.”

When assessing the risk of operational releases, Chubb “would look for physical controls such as secondary containment for tanks, physical protection of tanks and spill control equipment on site,” Mitobe notes.

For pollution liability insurance coverage, there are variations among different general liability policies, Philip adds.


“You have one extreme, which would be the total pollution exclusion, which would not deal with any aspect, really of pollution coverage,” Philip says. “Then you have more expanded pollution coverage, on a sudden and accidental basis. Even in some cases, there are some markets who will include elements of gradual coverage in the general liability, but it is not the same thing as a full-blown environmental impairment liability policy,” he says.

Operations facing the risk of spills include manufacturers, logistics, distribution and warehousing, airports and energy producers, says Hasselback.

“My primary business may not be handling oil, gas or chemicals, but I may have a fair amount of that stuff on my site,” he says. “As a manufacturer, I may need a fair amount of oil on my site to run my boiler or whatever process I may have. Just because I’m not in the business of handling petroleum or chemicals doesn’t mean I don’t have decent volume of that stuff on my site.”

In order to manage spills, risk managers needs to ensure they have emergency response plans they can put into effect immediately, Dahme suggests.

“It’s something as simple as, you are using some chemical, so the question is, have you looked at your secondary containment?” he explains. “Are you certain that the vessel size of your secondary containment is adequate? Do you have the appropriate spill response team? Are they able to respond, based on what you’ve got?”

Spills often happen “at the juncture when the liquid product, let’s say, is being unloaded from the conveyance to the storage device,” Jaroudi suggests.

A release could happen with “something just as simple as loading and unloading of product from a tanker, something that happens so routinely,” says Philip. “A valve or a connection or a hose or a tubing doesn’t quite perform or fails, and in a very short period of time, you could end up with a very significant amount of flammable hazardous material all over a site.”

With a spill of gasoline, Philip adds, “you are talking about something that’s flammable, something that poses a significant health hazard and if it were ever to impact the drinking water supply, it would be a pretty significant risk to deal with, and a very expensive one to deal with.”

Maintenance facilities can also have environmental risk, Hasselback says.

“If I have a fueling station, I have a fair amount of petroleum stored at my site,” he notes. “If I’m a tanker company I may have to flush out the inside of my tank because I need to put something else in there for another client. What happens to that rinse water? Where does it go? How am I managing it?”

Another example of a firm exposed to spill risk is a bakery, if it has a tank of vegetable oil, Dahme suggests. “Do you have appropriate secondary containment in the event that the thing spills?” he asks. “If it does spill, is the secondary containment

going to overflow? Is it going to get into a ditch? Is it going to get into a wetland? Are there ducks in the wetland
? Are the ducks going to die because of the oil? It’s that kind of evaluation that needs to take place,” he emphasizes.

If a site is near a “sensitive environmental receptor,” such as a river, stream or wetland, “any release to those kinds of sensitive receptors are going to be amplified in the public’s eye and in the regulator’s eye,” Hasselback warns.

Under the federal Fisheries Act, it is an offence to “deposit or permit the deposit of a deleterious substance of any type in water frequented by fish or in any place under any conditions where the deleterious substance or any other deleterious substance that results from the deposit of the deleterious substance may enter any such water.”

The Fisheries Act includes, in its definition of fish, parts of fish as well as fish eggs and sperm.

One Canadian firm – Bloom Lake General Partner Ltd. – was fined $7.5 million last year after pleading guilty to 45 charges under the Fisheries Act, Environment Canada states in a press release. Those charges related to releases of mining effluent and ferric sulphate into water.

“For Canada, $7.5 million is a very significant penalty,” MacWilliam says of the Bloom Lake case. “There was a lot of publicity and a lot of comment from the environmental bar about whether this is an indication of a trend. There have certainly been penalties in the low millions before, under the Fisheries Act.”

Cases such as Bloom Lake “have made people sit up and take notice, because there is a greater impetus on the part of regulators, both under federal statutes or provincial environmental legislation, to look seriously at maximum penalties when there have been significant events,” adds MacWilliam.


In Alberta, a fine can be imposed, by the province’s Energy Conservation Resources Board (ERCB), if a spill is not reported or acted on, Delon warns. “One of the things I found is, most people don’t know about the duty to disclose any sort of environmental leak, and what that means – within Alberta,” he says.

“I have found the ERCB to be reasonable,” Delon adds. “They are interested in people reporting and acting on it.”

In Canada, there have been no “significant” civil cases involving environmental contamination where punitive damages have been imposed, MacWilliam notes.

“There is not a lot of jurisprudence in Canada on a lot of environmental issues, just because, as with other areas where there are disputes, an overwhelming number of claims get settled and we don’t really see the courts pronouncing a lot on these sorts of issues.”

Although courts award compensatory damages in lawsuits stemming from pollution, punitive damages would only be awarded in “extraordinary circumstances,” Dahme suggests.

MacWilliam agrees there “is always a possibility” of punitive damages in a civil case. “One area where we have seen lot of activity in the last couple of years and interest about in potential liability is the shipment of crude oil by rail,” he says, citing as an example the tragedy two years ago in Lac-Mégantic, Quebec. On July 5, 2013, a Montreal, Maine and Atlantic (MMA) Railway train – with a total of 72 oil tanker cars – was stopped unattended before midnight near Nantes, uphill from Lac-Mégantic. At about 1 a.m., the train started to move down a 1.2% grade into Lac-Mégantic, picked up speed and 63 tanker cars derailed. Forty-seven were killed.

The following February, a class action lawsuit against dozens of parties was filed by three Lac-Mégantic residents. One question put to the court was whether the defendants “negligently and/or recklessly” caused or contributed to the derailment “and the resulting fire, explosion” and shale liquids spill.

Initially, defendants included MMA, several individuals, Irving Oil Ltd. (the intended customer), World Fuel Services Inc. (the seller), Canadian Pacific Railway Ltd. (which transported the train from North Dakota to Montreal) and several suppliers of rail cars. Canadian Press reported in May that the class action was certified by a Quebec court but the plaintiffs are only able to go after Canadian Pacific and World Fuel.

The allegations have not been proven in court.

“They sued everybody along the chain, from the producers to the railway company that was carrying the crude at the time that went off the tracks in Lac-Mégantic,” MacWilliam says. “I have been kind of using that as a bit of a guide going forward, saying, ‘Well, here are the potential parties involved in these sorts of things that could be sued.'”

Another area with liability risk is asbestos, Delon suggests, warning that general liability policies “usually have an absolute pollution exclusion.”

Environmental impairment liability insurance should be considered by a risk manager of an organization with buildings constructed before 1980 “that have a potential for asbestos in them,” Delon advises, because there is the “potential for release” of asbestos if there is an incident such as a fire or a roof collapse.

In a retail mall, for example, shoppers could, in theory, be exposed to asbestos if construction, renovation or restoration work was not properly completed, Darius contends, adding shoppers could file a lawsuit. This scenario is not highly probable, but still possible, he notes.

“Is it difficult to prove? Totally,” he says. “Is it still a risk? Yes. People need to discriminate between what’s hard to prove as a claim and what’s still a risk.”

Delon advises risk managers to “look for an (environmental impairment liability policy) to pick up specific risks that you think in the past were picked up” by the general liability policy.

“Look at the whole circle of environmental risk that you have,” Delon advises. “I guarantee, if you take a really good look at what could actually happen to your building or property, a sudden and accidental environmental policy will not cover the entire risk that you have. It will just be a little sliver. You need to do an assessment first.”