September 2017   |   By Indrani Nadarajah

Environmental insurance policies are now widely available in Canada. While there are problems with wordings in many of those policies, the portfolio is evolving with more targeted products becoming available to address the changing liability landscape. Meanwhile, a parliamentary review of the Canadian Environmental Protection Act has just been completed, confirming that the country’s main pollution laws are outdated, and the courts have been leaning towards a more generous interpretation of current legislation in order to better protect the environment. Environmental activism is not affecting the insurance portfolio yet as actions thus far have been targeted at prospective projects, but as stakes rise, this may change.

Environmental insurance has been available in this country for a while, with insurers relying on foreign policy wordings without necessarily ensuring their offerings cohere with the Canadian regulatory environment, explains Carl Spensieri, Vice President, Environmental Insurance at Berkley Canada.

“Most of the policies currently available in the Canadian marketplace originate from parent companies based in the US or Europe, where environmental regulations are much tougher. It doesn’t always make commercial sense for the overseas-based insurers to tailor their wordings specifically to the market here, given that the size of the environmental insurance portfolio in Canada is only about $150 million, about 10 times smaller than the estimated $1.5-$2 billion market in the US,” Spensieri explains.

A complicating factor for the environmental portfolio is that unlike many developed jurisdictions, Canada is not regulated by prescriptive environmental standards. Rather, there are guidelines. (There are, however, exceptions such as when a former industrial site is to be converted to residential use. In these situations, requirements are very explicit.)

It is this difference that creates a misalignment between policy wordings and cover intent, Spensieri explains. The guidelines that stand in lieu for regulation, rather than allowing for greater latitude during cleanup, often pose problems for both the insured and the insurer when a claim is made.

For example, a policy may state that the insurer will foot the cost of cleaning up a polluted site to the standard “as required by law,” but what happens when the law is silent on the matter?

The claim is often denied, which then forces the insured to petition a regulatory authority to issue a cleanup order. Canadian regulators, however, are very hesitant to offer specific advice or issue orders. “In Canada, we have the underlying philosophy of the polluter pays principle. But if the property you pollute is your own, there is rarely any requirement to remediate,” Spensieri points out. A regulator, however, will take action (including issuing an order) if the pollution seeps or affects a neighbouring property not owned by the polluter, or a public natural resource.

This lack of clarity has served to dampen the environmental insurance market, with some insurers electing to only offer policies which respond to cleanup when legally required.

David V. Tupper, a partner at Blake, Cassels & Graydon LLP in Calgary, notes that the courts have yet to give clear direction in an area which affects commercial and general liability (CGL) policies. CGL policies have a 120-hour provision within which the insured has to report the pollution to the insurer. Only then can the provision for cover be triggered. However, whether the 120-hour provision is an absolute requirement has not been clarified by the courts, with no resolution of this matter in terms of reported decisions, says Tupper.

Tighter regulations looming?

After a 15-month review of the Canadian Environmental Protection Act (CEPA), a parliamentary committee report submitted in June 2017 confirms that Canada’s main pollution prevention and toxics law is outdated and needs a comprehensive overhaul. Among its 87 recommendations, the report proposes to improve protections from industrial chemicals like phthalates and bisphenol A, by requiring industry to prove safety before use. Canada’s current law does not require producers to scientifically justify the use of certain highly toxic chemicals. The committee has also recommended lowering the threshold for bringing an environmental protection action, despite strong opposition from certain industry groups.

The Ministers of Health and Environment and Climate Change have 120 days from the date of submission to publish a response.

Last year, the Canadian government finalized the Multi-Sector Air Pollutants Regulations (MSAPR). This is the first time Canada has implemented nation-wide compulsory air pollutant limits on major industrial facilities. It is also the first regulation that addresses Base-level Industrial Emissions Requirements (BLIERs), one element of Canada’s Air Quality Management System, a collaborative approach to air quality management involving all levels of government.

The Department of Environment and Climate Change Canada is also honing in on non-compliant companies and individuals. A case in point is the dry cleaning industry. Convicted dry cleaners are now facing hefty fines regardless of their prior history of compliance with the CEPA. In February 2016, an Edmonton dry cleaner was handed a four-month conditional sentence for not complying with the Tetrachloroethylene Regulations. Last month, Dalex Canada Inc. was fined $100,000 after the company pleaded guilty in the Ontario Court of Justice to one count of contravening the same regulations.

Evolving portfolio

According to Tupper, there are three broad developments in environmental liability insurance that have occurred over the last five years.

1. Environmental impairment liability policies (EIL)

EIL policies cover third party exposures for the manufacturing or servicing industries. They cover first party cleanup expenses and pollution from waste material, as well as third party cleanup expenses, bodily injury and property damage arising from a pollution event.

“EIL policies are usually not tied to sudden accidental release of pollutants, but most do provide broad coverage for businesses after extensive due diligence by the insurers," says Tupper. "EIL policies also have strict limits.” Such policies tend to focus on non-legacy, light hazard, and fixed site exposures. They typically avoid known contamination conditions.

Strategic Underwriting Managers for example, bills its EIL policy as an endorsement that is meant to address the gap created by the pollution exclusion in CGL policies.

2. D&O insurance and environmental liability

The second development in environmental insurance arose out of a recent case in Ontario.

The decision in Baker et al. v. Director, Ministry of the Environment cast a pall over Canadian boardrooms when the former directors and officers of Northstar Aerospace, Inc. and its parent, Northstar Aerospace (Canada) Inc., were held personally liable by the Ontario Ministry of the Environment (MOE) for contamination at the insolvent company’s former manufacturing and processing facility in Cambridge, Ontario.

The environmental contamination arose from the migration of trichloroethylene from the site to nearby residential properties. Northstar began a voluntary remediation of the site in 2005 but after it began to encounter financial difficulties, the MOE issued a remediation order in March 2012 to secure continued performance of the work. Following the sale of substantially all the company’s operating assets (other than the site) in July 2012 under the Companies’ Creditors Arrangement Act (CCAA), no personnel or resources were left to continue the work. Due to human health concerns, the MOE took the extraordinary step in August 2012 of undertaking the remediation work itself.

When the stay of proceedings under the CCAA expired in October 2012, the MOE issued a remediation order against certain directors and officers of the company. The directors and officers appealed to the Ontario Environmental Review Tribunal, pointing out that some of them were not on the board when the contamination occurred and they had had no specific responsibility for environmental matters. The MOE counter- argued, pointing out that the directors and officers had allowed the company to file for CCAA protection and stop remediation activities, which therefore made them responsible for remediation under the Ontario Environmental Protection Act. The ERT agreed with the MOE’s argument and ordered the directors and officers to foot the bill so that remediation work could continue until the appeal process was completed. The directors and officers were forced to pay approximately $800,000 for the interim work and subsequently reached a settlement with the MOE, where eight of the individuals paid a total of $4.75 million.

“It’s not surprising that this case created a significant concern among directors and officers that they would be pursued for environmental cleanup," says Tupper. "And what’s happened in the last few years - a focus on D&O insurance and the environmental provision."

Some D&O policies have been revamped to include environmental cover. For example, last September, RSA Insurance introduced a policy called “Ironclad," which the company describes as a comprehensive Side A DIC (Difference in Conditions) insurance policy to bridge the gap between “unavailable corporate indemnification, an unresponsive or exhausted underlying D&O policy, and the directors’ and officers’ personal assets.” But there are questions about the level of protection that would actually be offered, warns Tupper.

3. New entrants in the marketplace

There is no doubt that notwithstanding certain shortcomings outlined above, the environmental insurance portfolio is evolving with new entrants in the marketplace differentiating themselves.

Berkley Canada, for example, offers expedited cleanup in its environmental policies, a feature which it says is unique in Canada. Expedited cleanup not only ensures that an insured can file a claim for cleanup, but also ensures the cleanup method used is fast and efficient, rather than the most cost-effective. This enhancement helps minimize project delays, says Carl Spensieri.

The company is also specifically targeting public private partnership consortiums involved in major infrastructure projects in Canada. Berkley’s environmental policies target companies undertaking such projects by covering not only cleanup of pollution caused by the contractor’s work, but also the financial cost when pollution is discovered on the owner’s site.

“Today, risk is more complex than ever before. As such an insured should always undertake the appropriate level of due diligence and ensure they are engaging the appropriate underwriting and broking expertise when purchasing environmental insurance,” Spensieri warns.

Over the summer, Beazley, a provider of specialist environmental liability insurance launched its local environmental coverage in Canada, focusing on fixed site and operational liability risks.

"Key target industries are the manufacturing, industrial, real estate, hospital and educational sectors,” notes a company statement.

Canadian legal interpretation broadening?

In 2013, the Supreme Court of Canada held that environmental laws may be interpreted broadly, even when no obvious damage to the environment was discerned, in order to better protect the public.

In Castonguay Blasting v Ontario, a company, Castonguay Blasting, conducted a blasting operation when it was working on a highway-widening project in Eastern Ontario. The blast damaged a nearby home and vehicle with fly-rock from the blast-site, but the natural environment was not harmed. However, Castonguay was charged and convicted for failing to report the incident to the environment ministry under Ontario’s Environmental Protection Act.

Castonguay Blasting, which was granted leave to appeal to the Supreme Court of Canada, argued that the EPA does not apply if the natural environment is not also harmed. A unanimous Supreme Court, however, disagreed with Castonguay’s position.

Justice Rosalie Abella, writing for the seven-member Court, held that the EPA is entitled to a generous interpretation to ensure that it can properly respond to a wide variety of environmentally harmful scenarios so as to protect the public. “The statute places both the obligation to investigate and the decision about what further steps are necessary with the Ministry and not the discharger,” she affirmed.

In a separate case, however, the British Columbia Court of Appeal confirmed the application of the environmental exclusion provision in CGL policies.

In Precision Plating Ltd. v. Axa Pacific Insurance Company, 2015 BCCA 277, the BC Court of Appeal held that the insurer had no duty to defend the insured for claims alleging property loss arising from the escape of toxic chemicals.

The insured, Precision Plating, had leased a space within a multi-tenanted commercial strata building and stored vats filled with toxic chemicals used in its electroplating business. In 2011, a fire broke out on the insured’s premises, activating the sprinkler system. The water caused the toxic chemicals in the vats to overflow and seep into neighbouring units. The insured applied for a declaration that the insurer had a duty to defend these claims, which Axa disputed.

At issue was the interpretation of the pollution exclusion clause in the CGL policy.

Precision’s CGL policy stated that insurance does not apply to “Bodily Injury, Personal Injury or Property Damage caused by, contributed to by, or arising out of the actual, alleged or threatened discharge, emission, dispersal, seepage, leakage, migration, release or escape at any time of Pollutants.”

The trial judge determined that a literal interpretation of the pollution exclusion clause would lead to a result that was inconsistent with the insured’s “reasonable expectations” of coverage, especially since the main purpose of the insurance policy was to indemnify against liability for fire damage.

On appeal, Axa contended that the unambiguous terms of the pollution exclusion in the policy state clearly that any liability created because of property damage caused by the “seepage or leakage, migration, release, or escape of a pollutant is expressly excluded from coverage.” The Appeal Court upheld Axa’s reading, noting that the CGL policy “does not cover a claim where liability associated with the release of pollutants is alleged, whether as a sole or concurrent cause.”

On January 14, 2016, the Supreme Court of Canada dismissed, with costs, the application for leave to appeal the decision of the BC Court of Appeal.

Environmental Activism

TransMountain Expansion Project

Based on media coverage, it would appear that environmental activism is getting noisier and, in some cases, becoming quite effective in changing the course of projects and the direction of business investments.

In a recent BNN TV interview, ‎managing director and head of portfolio strategy at CIBC World Markets, Ian de Verteuil, said that analysts calculate that about $25 billion of global energy money has left Canada this year, primarily because of the negative reputation that Canada's oil sands have in Europe.

In March 2017, Royal Dutch Shell and Houston-based Marathon Oil sold their stake in the Athabasca Oil Sands Project for $12.7 billion to Canadian Natural Resources. Then, in the same month, ConocoPhillips sold its $6.8 billion stake in Cenovus Energy, in order to exit the oil sands.

Global players have a relatively small part of their production output tied to Canadan oil sands but de Verteuil said  European management would regularly be confronted by persistent questioning from a certain segment of shareholders. For many, the trouble that oilsands was causing them was just not worth their while. “This exit boils down primarily to environmental concerns,” de Verteuil said.

Blake’s Tupper notes that thus far, environmental activism has not impacted the environmental insurance portfolio because the actions are directed at prospective projects.

An example is the highly contentious TransMountain Expansion Project (TMEP), which was approved by the Federal Government in November 2016. TMEP is currently facing 18 court challenges. Most recently, Reuters reports that more than 100 environmental activists are practising seaborne drills to disrupt construction, slated to begin in September. Analysts Credit Suisse even acknowledged in an investment note that, “British Columbia's political changes translate into a difficult path for TMEP," after the British Columbia government applied for intervener status in court challenges against the pipeline expansion. The province’s former Liberal government had issued an environmental certificate for the project earlier this year, but Premier John Horgan successfully campaigned in the spring provincial election on doing everything possible stop it.

Kinder Morgan Canada, however, says it remains committed to expanding its TransMountain Pipeline, and says it expects to have the project in service by the end of 2019. It reportedly has approximately $4-billion in financial capacity to clean up a pipeline spill — $750-million in spill liability insurance and $3.2 billion in equity (cash reserves and cash flow.)