Why Buy Environmental Insurance

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by: Carl Spensieri | Vice President, Environmental at Berkley Canada (a W. R. Berkley Company)

Canadian businesses need to carefully evaluate and manage their environmental risks?   If you own property or a business in Canada, here are three reasons you should consider environmental insurance as part of your risk management strategy.

1. Paying Twice and Increased Quantum of Liability

Canadian attorneys have expressed surprise with respect to the recent Ontario Court of Appeal decision in Midwest Properties Ltd. v. Thordarson [2015 ONCA 819].   In this case, the corporation, as well as the sole principal of the corporation, were held liable for remediation costs of $1.3M.  In arriving at its decision the Court focused on the statutory clause found in section 99 of the Ontario environmental Protection Act.   While the defendant has sought leave to appeal this decision, the case currently establishes two new and important environmental risks that brokers and insureds need to be aware of.

Double Jeopardy may not apply to environmental liability

In this case, the Court elected to award the plaintiff damages equal to the estimated cost of cleanup without any conditions.   As such, the plaintiff has no obligation to spend the award on cleanup.  This creates a situation (albeit unlikely) where the defendant pays twice for cleanup costs.   Here is how this unlikely scenario occurs.  Independent of the civil action, the Ontario Ministry of Environment and Climate Change issued an order against the defendant to clean up the plaintiff’s site.   Despite the civil award, the Ministry does not have any legal obligation to rescind or amend the order.  Should the plaintiff elect not to clean up and if the Ministry feels that the contamination poses a threat to human health or the environment, the Ministry may seek to enforce the order despite the fact that the defendant has already paid $1.3M in damages (effectively making the defendant pay twice).

Increased Quantum of Liability

The second risk highlighted by this decision is that the quantum of damages can be equal to cleanup costs even when the cleanup costs exceed the value of the contaminated property.  While this decision may not surprise some readers (the purpose of section 99 is to make the polluter pay for cleanup), it is important for brokers and insureds to understand the implications.   This decision makes it clear there are now two paths by which a plaintiff can bring an action against a polluter: a traditional tort claim for negligence/nuisance; or a claim for cleanup costs.   Traditional negligence/nuisance awards are based on the plaintiff’s actual losses (for example: loss of use, diminution in property value).  Now that the precedent of claiming for and being awarded cleanup costs has been established, expect plaintiffs to pursue whichever avenue results in the largest quantum of liability.

2. Regulatory orders

Canadian Directors and Officers have long known they can be held liable for environmental cleanup costs.  This risk was dramatically underscored in Baker v. Director, Ministry of the Environment.   Recently, regulators across Canada have started to make greater use of remedial orders against a broader group of individuals thought to have care, custody or control of a polluted site.   For example, in McQuiston v. Ontario (MOECC), the Ministry has issued an investigation and cleanup order to the following entities associated with a contaminated property:  a petrochemical company (including the officers and directors) that was a tenant on the property; the former and current property owner; a British resident who inherited the petrochemical company; a Canadian accountant who accepted a power of attorney to sell the property; and the listing real estate brokerage (including the officers and directors) retained to sell the property.

As this order is currently under appeal with the Environmental Review Tribunal of Ontario, we do not know how liability will be apportioned for each of the named entities.   What should be clear to brokers and insureds is that owning property or offer services with respect to real estate transactions can result in entirely unforeseen environmental liabilities.

3. Requirement to Disclose

Across Canada, many provinces are modernizing their environmental regulatory regime.   While modernization of legislation is generally welcomed, brokers and insureds need understand and identify the new risks that accompany the new legislation.   The duty to report when contamination is discovered is an example of a new risk emerging across Canada.   In Manitoba, Prince Edward Island and Saskatchewan new in-force legislation require owners of land to report the discovery of contaminants.  While many Provinces also impose reporting requirements, there generally needs to be evidence of, or a reasonable presumption of, adverse effect.  In the aforementioned Provinces, the duty to report is triggered by the discovery of a contaminant at a concentration exceeding the established generic property use standard.  As such, brokers and insurers need to be aware of the fact that due diligence investigations could trigger a duty report which may then give rise to increased regulatory scrutiny or cleanup orders.

Given the changing landscape in Canada, brokers should be having regular conversations with their clients and highlighting these new environmental risks, strategies to mitigate them and available insurance solutions.   For more information on how the environmental team at Berkley Canada can help your clients please contact us at +1 416.594.5019 or cspensieri@berkleycanada.com