Some insurers trying to broaden D&O environmental liability coverage

WINNIPEG — Property losses often result in pollution losses, but there are “barriers” to getting environmental/pollution coverage on primary D&O insurance policies, speakers at RIMS Canada warned this week.

“‘Hazardous substance’ is a catch-all term,” said Justin Perry, vice president and national practice leader for Aon Risk Solutions’ environmental services group. He suggested that the term hazardous substance “needs to be defined” in contracts between organizations, especially when those contracts involve pollution liability.

Perry made his remarks Tuesday during a conference session – titled Environmental Liability in Canada: Finding Solutions – at RIMS Canada’s 2014 conference in Winnipeg.

“It has to be something that you understand, that the two parties entering into the agreement, understand clearly, what is hazardous,” Perry told an audience of about 40 attendees. Examples of agreements, where the definition of “pollution” or “hazardous substance” could be a concern, include landlord-tenant or service contractor agreements, he suggested.

“What we have noticed over the years is … a lot of our clients say, ‘I have never had an environmental issue, we are not a polluting entity, et cetera,'” Perry said. “Any time there is a property failure, a property breach, you are likely going to be facing some sort of pollution release or contaminant release. When you have a property failure, you are likely to have some sort of pollution tied into it.”

Pollution is not always limited to hazardous substances, Perry warned. For example, in some cases, the federal Department of Fisheries and Oceans has deemed silt and sediment running off site, due to heavy rain, to be a “contaminant,” Perry added.

One recent case involving directors and officers’ liability for pollution was an Ontario Ministry of the Environment (MOE) order against former directors of Northstar Aerospace Inc., which operated a factory in Cambridge until 2010, according to court records.

“Operations at the Cambridge Facility historically involved the use of industrial solvents, including trichloroethylene,” according to background information in a July, 2012 Ontario Superior Court of Justice decision on Northstar’s bankruptcy proceedings. “A separate contamination source, not attributable to Northstar Canada or its operations, has also been identified near the Cambridge Facility.”

In 2012, the Ontario MOE issued remediation orders to Northstar. Because the provincial authorities were concerned about Northstar’s ability to reimburse the Ministry of Environment for its cleanup costs, MOE later issued remediation orders to 13 former Northstar directors, including Neil Baker. The former directors asked Ontario’s Environmental Review Tribunal (ERT) for a stay of the MOE order. However, in February, 2013, the ERT dismissed that motion. Instead of seeking judicial review from Ontario’s Divisional Court, Baker and the 12 other former directors reached a settlement with the ERT.

Those individuals “paid $4.75 million of their own money to remediate a site when their company went insolvent,” said Brian Rosenbaum, Aon Risk Solutions’ national director, legal and research practice, at the RIMS Canada conference. Rosenbaum, who spoke at the same session as Perry, added that the former Northstar directors did not have a defence of due diligence available to them under the section of the Ontario Environmental Protection Act which MOE used to issue its remediation order.

In that case, “the (Ontario) Ministry (of the Environment) went a little further, I think, than most of us realize,” Rosenbaum contended. “The fallout from Baker (versus the Ontario MOE) is, even if you weren’t at fault in any way and if you could show you exercised due diligence, you could still have environmental remediation liability.”

He suggested similar events could happen elsewhere in Canada.

“We do not know whether we will see a repeat of this in other provinces,” Rosenbaum said. “We will see whether or not the pressures on the environmental regulators will lead to a similar result, whether or not they have the ability within those (provincial) statutes, to do what the Ministry of the Environment did in Ontario.”

Part of the problem with the Northstar directors is they were not covered by an environmental impairment liability policy, “and their D&O policy had an exclusion in their definition of loss, dealing with remediation costs,” Rosenbaum said.

In the past, Rosenbaum suggested, D&O policies had pollution exclusions, as well as exclusions to coverage for the cost to comply with a government order.

“We have had a very soft market in D&O in the last few years,” he said. “We have seen removal of a lot of these limitations. In many policies now, you do not have pollution exclusions. In many policies now, you have a softened bodily injury or property damage exclusion.”

Many newer D&O policies also do not have an exclusion for the cost to comply with a government order, Rosenbaum added, but he still had a word of caution for risk managers attending the RIMS Canada conference.

“A lot of brokers and a lot of insurance companies have been stating, ‘Yeah, we offer pollution coverage,’ but I am going to tell you right now that there are still barriers that exist and that coverage for the most part on a primary D&O form, is still illusory,” Rosenbaum warned.

“I can tell you there is a movement afoot by a couple of carriers right now to provide Baker type coverage — cost to remediate and legal costs associated to set aside a Ministry of the Environment order — on their primary D&O forms. The forms that I have reviewed by these carriers, I can tell you, they need some work. They haven’t dealt with the property damage and bodily injury exclusion properly and there are a number of other problems, but they are trying.”