D&O Policy Polution Exclusion Tested in Securities Lawsuit

In Boliden Limited v. Liberty Mutual Insurance Company (April, 2007), the Ontario Superior Court of Justice has issued the first Canadian judgment dealing with the application of a pollution exclusion in a D&O policy in the context of securities litigation against directors and officers. Like many insurance coverage cases, this one was an exercise in semantics and it highlights both the general difficulties insurers face in creating a comprehensive pollution exclusion and the specific exposure of D&O insurers to pollution- related risks.

The Boliden case is available on the CANLII website.

The lawsuit against Boliden, its directors and officers concerned a drop in the company share price. Boliden indirectly owned shares of a company with mining operations in Spain. Shares of Boliden were sold to the Canadian public pursuant to an initial public offering (IPO) prospectus which described the mining operations and its expected production. Almost one year later, a tailings pond dam collapsed at the mine site in Spain, resulting in 10,000 hectares of land being contaminated. Boliden faced remediation costs of $250,000,000 and its share price subsequently dropped to $5.35 per share from the original $16 offering price.

Shareholders in Ontario and British Columbia commenced class actions against Boliden, its directors and senior officers. The shareholders alleged the IPO contained material misrepresentations concerning the construction and maintenance of the tailings dam, structural defects and leakage. The claimed damages were limited to depreciation of the stock price due to the misrepresentations. Liberty Mutual denied coverage under its D&O policy. Boliden subsequently settled the class action and then sued the insurer for more than $3 million in defence costs.

Both Boliden and Liberty agreed that the policy insuring clauses covered the claim. The issue was whether the pollution exclusion applied. The policy defined pollution loss as, "a loss resulting from or attributable to or in any way involving, directly or indirectly, the actual alleged or threatened seepage, discharge, dispersal, release or escape of pollutants". This is fairly standard pollution exclusion language in the insurance industry.

Boliden argued that the exclusion did not apply because the damages in the action were limited to depreciation in value of the shares resulting from the alleged IPO misrepresentations and could not include any amount for expenses that would be incurred in relation to the pollution. Liberty argued that the loss in share value was caused by the discharge of pollutants and the anticipated expense of the necessary remedial work. This, the insurer said, fit within the exclusion clause because the drop in share value resulted from, or was attributable to or involved, directly or indirectly, the pollution problem.

The judge reviewed previous cases concerning exclusions for losses "arising out of", "in any way involving", "based upon, arising out of or related to" pollution or specific contaminants. He concluded that none gave him sufficient guidance for interpreting the clause, "resulting from or attributable to or in any way involving, directly or indirectly". Left to tackle the meaning on his own, he broke the phrase down into its essential components, as follows.

First, "resulting from": The loss could be said to result from the misrepresentations (covered) or the discharge of pollutants (not covered). This meant there was an ambiguity that should be interpreted in favour of Boliden.

Second, "attributable to": The judge concluded that the same analysis should be used for the words "attributable to" as with the words "resulting from". There was an ambiguity that should be interpreted in favour of Boliden.

Finally, "in any way involving, directly or indirectly": The judge took this phrase to mean "in any way tied to or concerned with". He concluded that the allegations regarding construction defects and maintenance deficiencies were not tied to or concerned with the actual or threatened seepage or discharge of pollutants. These allegations were therefore covered by the policy but the allegations concerning the actual seepage from the tailings pond were not covered.

The judge then had to determine the allocation of defence costs between the covered and uncovered claims. The policy included an endorsement addressing this issue, of a type which is frequently found in current D&O policies. It provided that,

Liberty argued that the allocation endorsement had no application because it involved covered 'losses' rather than covered 'claims'. The judge rejected this, ruling the endorsement was part of the policy and the word "loss" in the endorsement was the same as defined in the policy, namely, as an amount which a director becomes legally obligated to pay on account of each claim. Accepting Liberty’s argument would render nugatory the whole purpose of the defence cost endorsement. The allocation endorsement applied and Liberty was ordered to pay 80% of Boliden’s defence costs.

The decision has been appealed by Liberty, on that issue alone.

For a more detailed analysis of environmental liability and insurance coverage, see Neo Tuytel’s paper "Environmental Liability and Insurance Coverage in British Columbia: A Primer on Contaminated Sites and Clean-Up Cost Recovery Litigation".

For more on D&O claims and insurance, see "Directors and Officers Insurance: An Overview" by Allyson Baker, Glen Boswall and Dianne Rideout.

If you have any questions about the case or any other insurance matters, please contact Glen Boswall (telephone 604-643-3125 or e-mail rgb@cwilson.com), Neo Tuytel (telephone 604-643-3180 or e-mail njt@cwilson.com) or any other member of the Clark Wilson LLP Insurance Practice Group.