Pollution Exclusion: “Sudden and Accidental” applied to legacy clean-up sites
This update was authored by Barclay Nicholson in the Houston office summarising the evolution of the “sudden and accidental” discharge exception to the pollution exclusion provision in environmental insurance policies.
The “sudden and accidental” discharge exception to the pollution exclusion provision of most environmental insurance policies has been the subject of hundreds of environmental coverage decisions throughout the years, mainly because “sudden and accidental” is not defined in the policy. Recent decisions concerning “sudden and accidental” relate to pollution incidents that occurred many years ago, with some courts applying the exception while others do not.
Travelers Indemnity v Northrop Grumman1
Northrop Grumman Corporation (NGC) sought insurance coverage from Travelers Indemnity Company (Travelers) and another carrier for the clean-up of its Bethpage, New York plant where it manufactured and tested airplanes, weapons and satellites beginning in the 1930s. In its operations, NGC used and stored volatile organic compounds such as trichloroethylene (TCE), which was used as a cleaning solvent for metal parts. TCE and other contaminants were found in the groundwater in the 1970s.
The New York State Department of Environmental Conservation (NYSDEC) inspected and tested the site, eventually providing a 1980 report in which the plant was designated a hazardous waste site. On December 6, 1983, the NYSDEC initiated a formal adversarial proceeding against NGC who in turn allegedly notified its insurance carriers in January 1984. Travelers has no record of ever receiving this notice.
In October 1990, NGC entered into a consent order with the NYSDEC to investigate and study the Bethpage facilities. In 1995 and 2001, the NYSDEC issued Records of Decisions (RODs) which set out remedial measures that NGC was required to implement. Travelers was not notified of the consent order or the RODs.
In 2012, NGC sent a letter to Travelers stating that it had spent $40,600,000 to date to remediate the property. After denying coverage, Travelers brought a lawsuit to determine whether it must cover the clean-up and remediation costs.
The court decided that the pollution exclusions in the policies applied because NGC intended to use the TCE in its operations. The policies that were in effect from 1972 to 1983 excluded coverage from liabilities “arising out of pollution or contamination caused by the discharge, dispersal, release or escape of any pollutants, irritants or contaminants into or upon land, the atmosphere or any water course or body of water unless such discharge, dispersal, release or escape is sudden and accidental.” Here it clearly was not. According to the court, the lawfulness of NGC’s acts in discharging or disposing of its wastes was not at issue. Rather the relevant question was whether the act of discharge or disposal was intended, and it was.
The 1983 to 1985 policies did “not apply to bodily injury or property damage arising out of any emission, discharge, seepage, release or escape of any liquid, solid, gaseous or thermal waste or pollutant if such emission, discharge, seepage, release or escape is either expected or intended from the standpoint of any insured or any person or organisation for whose acts or omissions any insured is liable.” The court stated that NGC knew what it was doing by intentionally using TCE in its operations.
At oral argument, NGC urged that at least the initial release of TCE-contaminated water was “sudden” within the meaning of the exception. The court found no cognisable factual basis for this assertion. Every release has some instant of commencement. To read the word “sudden” to incorporate the initiation of every release would be to render that word meaningless.
It should be noted that the court also denied coverage because NGC had failed to provide timely notice under the terms of the policy and it had voluntarily assumed payments without Travelers’ consent.
Narragansett Electric Company v American Home Assurance2
Narragansett Electric Company’s (NEC) predecessor released hazardous wastes in the 1930s and 1940s in Massachusetts. In 1987, the state brought a lawsuit against NEC to clean-up that location. NEC asked for coverage from American Home Assurance Company (American Home). American Home denied coverage, stating that this was not a “sudden and accidental discharge” that would be covered.
The court decided that there was a duty to defend. Applying Massachusetts law, the court ruled that “releases occurring over extended periods of time as part of the insured’s regular business activities are not sudden and accidental, absent additional facts” but the compliant was reasonably susceptible to the interpretation that [a co-defendant’s subsequent] residential excavation caused a separate, abrupt and unintentional release by exposing the waste products to the elements, which triggered a duty to defend.
Ross Development v PCS Nitrogen3
Beginning in 1906, Ross Development Corporation operated a phosphate fertiliser manufacturing facility near Charleston, South Carolina, which generated a slag byproduct containing high concentrations of arsenic and lead. In 1963, a fire destroyed a large portion of the plant. After constructing a new plant building, Ross sold the property and its equipment in 1966.
Years after selling the site Ross purchased insurance policies to provide basic liability coverage for unexpected and unintentional damages to third-party property. Several of the policies contained a qualified pollution exclusion barring coverage for the discharge of pollutants onto land unless sudden and accidental. A second group of policies contained an absolute pollution exclusion, but would allow coverage if the discharge was “caused by heat, smoke, or fumes from a hostile fire.” The court ruled that, because there was no dispute Ross intentionally used materials that created the harmful byproducts, the “sudden and accidental” exception did not apply. Also Ross failed to offer any evidence that the fire actually caused any third-party property damage.
United Nuclear v Allstate Insurance4
United Nuclear Corporation (UNC) operated several uranium mines in New Mexico from the 1960s through the early 1980s. Among other environmental incidents through those years, in July 1979, about 94 million gallons of radioactive liquid escaped from a tailings pond and poured into the nearby Rio Grande. UNC’s insurance policies provided coverage if the pollutant discharge was “both sudden and accidental.”
The New Mexico Supreme Court reasoned that since the policies lacked a definition of the term “sudden” and there was no consensus concerning its meaning among other state courts, it could take notice of dictionary definitions and look to the insurance industry’s drafting history of the qualified pollution exclusion. Reviewing these sources, the Court held as a matter of law that the term “sudden” in the pollution exclusion clause meant “unexpected,” rather than indicating a temporal limitation on the occurrence. The Court remanded the case to allow UNC the opportunity to prove that its operations led to discharges that were in fact “sudden and accidental.”
These decisions demonstrate that the “sudden and accidental” exception to the pollution exclusion provision contained in environmental insurance policies will continue to be a topic of much legal concern and analysis in the years to come.
For more information contact:
1 Travelers Indemnity Co. v. Northrop Grumman Corp., Case No. 1:12-cv-03040 (S.D.N.Y., February 25, 2014)
2 Narragansett Electric Company v. American Home Assurance Company, et al., Case No. 1:11-cv-08299 (S.D.N.Y., February 1, 2013)
3 Ross Development Corporation v PCS Nitrogen Incorporated, Case No. 12-2059, 12-2454 (4th Cir. June 6, 2013)
4 United Nuclear Corporation v. Allstate Ins. Co., 285 P.3d 644 (New Mexico, August 23, 2012)
Never having to say you’re sorry: are Canadian punitive damage awards on the rise?
Punitive damage awards in Canada appear to be on the rise, with a number of significant punitive damage amounts awarded of late.
The following cases suggest a trend towards rising punitive damage awards:
- Branco v American Home Assurance Co.1 Disability insurance case — $4.5 million in punitive damages awarded at the Saskatchewan Queen’s Bench level (currently subject to appeal).
- Fernandes v Penncorp Life Insurance Co.2 Disability insurance case — $200,000 in punitive damages awarded at the Ontario Superior Court level.
- Cinar Corporation v Robinson.3 Copyright infringement case — $500,000 in punitive damages awarded by the Supreme Court of Canada.
The recent Ontario Court of Appeal decision in Pate Estate v Galway-Cavendish and Harvey (Township)4 appears to further substantiate this trend.
P was the township’s chief building official for almost 10 years when he was fired because of discrepancies with respect to building fees. The township turned some, but not all, information over to the police who reluctantly laid charges against P, but only after pressure from the township. At the criminal trial, P was acquitted of all charges.
Following his acquittal, P sued the township for wrongful dismissal, malicious prosecution and reputational injuries, and also sought punitive damages. The claim for wrongful dismissal succeeded and P received punitive damages of $25,000 based on the township’s conduct, which the trial judge described as “reprehensible.”
In 2011, P successfully appealed the claim for malicious prosecution and the quantum of the punitive damage award. The Ontario Court of Appeal referred the matter back to the Superior Court, which increased the punitive damage award to $550,000 and found the township liable for malicious prosecution. The township appealed to the Court of Appeal in 2013.
The Ontario Court of Appeal upheld the finding of malicious prosecution, and substituted a punitive damage award of $450,000, noting that it was a sum sufficient to satisfy the purpose of punitive damages (i.e. retribution, deterrence and denunciation). Although this punitive damage award constituted a reduction from the Superior Court amount, the decision is notable for its high punitive damage award rendered by an appellate court. It is also noteworthy that Lauwers J.A., writing for the dissent, would have maintained the higher $550,000 award.
The decision in Pate Estate is appellate court confirmation of what appears to be a trend towards increased punitive damage awards.
Courts have wide discretion when imposing punitive damage awards. The modest punitive damage awards originally envisioned by the Supreme Court of Canada appear to be trending upward. Employers, insurers, and defendants generally should take note and be cognisant of this apparent trend in their dealings with opposing parties, both before and during litigation.
For more information contact:
1 2013 SKQB 98
2 2013 ONSC 1637
3 Cinar Corporation v Robinson, 2013 SCC 73 [Cinar]
4 2013 ONCA 669 [Pate Estate]. This decision is not being appealed to the Supreme Court of Canada
Contractual prescription clauses: South African insurers not alone
South African insurers can take heart from the Hong Kong High Court’s judgment to uphold an insurers’ reliance both on a time limit clause and a forfeiture clause in a commercial insurance policy.
The time limit clause provided that the insurer was not liable for any loss or damage after the expiration of twelve months from the happening of the loss or damage, unless the claim was the subject of pending action or arbitration.
The forfeiture clause provided that all benefit under the policy is forfeited if any claim is made and rejected, and no action is sued within three months of a rejection, or within three months after the arbitrator’s award.
Arbitration had been commenced within three months of the date of the rejection notice, but the arbitration notice was invalid because it did not engage the matters agreed by the parties for determination by the arbitrators.
Because the insurer rejected the claim in whole, no dispute had arisen as to the amount to be paid under the policy. In the circumstances, no arbitration was possible and the insurers were entitled to rely on the forfeiture clause.
The insured should have instituted court action in twelve months both to interrupt the time limit provision and to stall the operation of the forfeiture clause. There was no reason why the insured could not have done so.
The suggestion that the insurer had acted deviously in delaying dealing with the claim, and that there was an implied term that the claim should have been rejected or accepted within a reasonable time period was rejected by the court.
Both parties were commercial parties and the policy contained no markedly unusual or obscure language or conditions. The insured was legally represented from fairly early on in the claim and the insured could easily have acted to protect itself.
Time-bar and forfeiture clauses have been upheld by South African courts. But in the case of personal lines policies a more consumer-based approach will be adopted if the policyholder has limited means to protect their rights.
For more information contact:
Claimants have but one bite of the cherry
Clark and another v In Focus Asset Management & Tax Solutions Ltd1
The Court of Appeal of England and Wales has held that a complainant cannot accept an award from the Financial Ombudsman Service (the FOS) and subsequently bring a civil action in court for additional redress in respect of the same complaint. This landmark decision resolves the uncertainty that had arisen from two previous conflicting High Court judgments. Yet, while it provides some welcome clarification of the law, it remains to be seen how much comfort it will give professional indemnity insurers and their insureds.
In November 2008, Mr and Mrs Clark made a complaint to the FOS alleging losses of £500,000 as a result of investment advice given by their financial adviser, In Focus, to invest the sale proceeds from a family business in a geared traded endowment plan. Upholding their complaint, the FOS awarded the Clarks £100,000 (the then statutory maximum award, which is now £150,000) and recommended that In Focus pay the balance of the Clarks’ alleged loss. The Clarks accepted the FOS award inserting the words “we reserve the right to pursue the matter further through the Civil Court” in the acceptance form. In Focus paid the Clarks £100,000 only, following which the Clarks issued court proceedings against In Focus for the balance of their loss.
At first instance, In Focus sought to strike out the claim on the basis of the High Court decision in Andrews v SBJ Benefit Consultants2, which held that a complainant accepting a FOS award cannot subsequently litigate to recover the balance of any loss. The High Court3 declined to follow Andrews holding that the FOS award did not extinguish the Clarks’ cause of action.
The Court of Appeal Judgment
Allowing the appeal, Lady Justice Arden confirmed that, in accordance with the doctrine of res judicata (which essentially operates to prevent the same matter being litigated twice), acceptance of a FOS award precludes a complainant from starting legal proceedings to pursue complaints already submitted to, and decided by, the FOS.
In brief, a complainant will be barred from pursuing further litigation, and any subsequent claim will be struck out, if the following two requirements are met:
- the defendant establishes that the complainant relied in a complaint to the FOS on a set of facts which are in substance the same as those forming the basis of the claim being litigated; and
- the complainant accepted the FOS award in relation to the complaint.
Arden LJ considered the statutory construction of section 228(5) of the Financial Services and Markets Act 2000 (FSMA), which provides that acceptance of a FOS decision is “binding on the respondent and complainant and final”, and acknowledged that this section does not expressly address whether or not an award precludes further legal proceedings. Equally, she found that there is nothing in FSMA to exclude the common law doctrine of res judicata. Indeed, to do so would “run counter to the more specific purpose set out in section 225(1) [of FSMA] that disputes should be resolved quickly and with the minimum of formality.”
In her judgment, Arden LJ commented that if Parliament had intended that the complainant should be able to recover loss in excess of the FOS limit, it would not have imposed that limit and would have made it clear that consumers were free to go outside the scheme and start court proceedings. However, when setting up the FOS scheme for resolving disputes “Parliament manifested its intention that consumer protection did not go beyond the scheme.”
The Court held that the FOS would not be able to circumvent the doctrine of res judicata by formulating its award in a particular way or by simply stating that the doctrine did not apply (this is a matter for the Court).
The principal effect of the Court of Appeal’s decision is to prevent a complainant from accepting a FOS award and litigating the same matter again, regardless of the size of any monetary award and any recommendations made by the FOS.
This ruling resolves the uncertainty that arose following the conflicting High Court judgments in this case and Andrews and effectively closes the door to repeat claims by complainants who accept FOS awards. Costs appears to have been one motivating factor behind the decision. As recognised by Arden LJ, if the Clarks had been successful in the appeal it could set a precedent for complainants to use a FOS award as a “fighting fund for legal proceedings” and “the development of a claims industry in this field that increases the costs of obtaining financial advice.”
Insurers and financial intermediaries will welcome this clarification of the law and the certainty that should result where the requirements described above are met. In some cases, however, there may be room to argue over whether the first requirement is met. More broadly, uncertainty remains about how this decision will influence the pursuit and defence of claims and the associated costs.
On its face, for complainants whose claims fall well within the FOS limit, or substantially exceed it, deciding whether to go to the FOS or the courts should be fairly straightforward. More difficult may be those cases that are valued closer to the FOS limit. Even then, a complainant may be more inclined to go to the FOS, on the basis that this will more likely result in a favourable decision and be cheaper and quicker than court action. This may not be so where the case is more complex or faces limitation issues.
Assuming that complainants are more likely to go to (and accept an award from) the FOS, this should not only shorten the tail of some claims but also reduce the costs exposure for firms and insurers. However, there are several reasons why the costs burden for firms and insurers may not necessarily reduce following the Court of Appeal’s decision. First, some complainants with larger claims may be more inclined to go directly to court, which will likely result in more costs being incurred sooner by both sides. However, some complainants may still choose to refer a complaint to the FOS, hoping for a favourable indication which they can then use to support a court action. Brave may be the complainant who receives a significant monetary award from the FOS and chooses not to accept it. But some complainants may still consider it worthwhile to decline a favourable award, in view of the FOS limits. Further, complainants who are unsure of their options, or the merits or value of their claims, may seek legal advice more readily than they might have done previously, which is also only likely to increase costs.
In short, it remains to be seen what effect the Court of Appeal decision will have in practice on how complainants pursue their claims or how firms and their insurers defend them. What can at least be said is that the decision will not necessarily have the effect of reducing costs overall and may well result in it being more expensive to resolve some cases. Decisions about the defence and settlement of individual claims will likely continue to be made on a case by case basis.
For more information contact:
1 Clark and another v In Focus Asset Management & Tax Solutions Ltd  EWCA 118
2 Andrews v SBJ Benefit Consultants  EWHC 2875
3 Clark and another v In Focus Asset Management & Tax Solutions Ltd  EWHC 3669