The Quebec Superior court recently handed down a rare decision on interpreting a pollution insurance policy.
After assessing the parties’ evidence, the Court ruled that a "storage tank pollution and decontamination cost" insurance policy was inapplicable and dismissed the originating application to make the defendant insurance companies assume the decontamination costs of the Route 279 oil storage depot.
Common law jurisdictions should also take note given that the Court relied on the basic rules governing the interpretation of insurance contracts for its reasoning and subsequent ruling.
The facts
In 1980, the plaintiff, Paquet & Fils ltée (Paquet), a distributor of petroleum products, purchased an oil storage depot located on Route 279, in Saint-Damien-de-Buckland. Paquet’s business operations surrounding this oil storage depot continued until 2011, when the equipment was dismantled, putting an end to all operations.
After the equipment was dismantled and in accordance with the Environment Quality Act, Paquet conducted an environmental assessment and characterization of the oil storage depot. This characterization revealed that the soil surrounding the oil storage depot was contaminated with heating oil and diesel fuel.
This contamination finding compelled the plaintiff to send a notice of claim to its insurers, requiring them to cover the "decontamination costs" pursuant to a "storage tank pollution and decontamination cost" insurance policy (Policy).
After investigating the premises, the insurers denied coverage on the grounds it had not been demonstrated that (i) the leak originated from a "storage tank system" or that (ii) this leak had occurred during the "period of insurance," as required in Coverage B of the Policy.
Paquet then filed a judicial application for the defendant insurance companies to cover the costs of decontaminating the soil surrounding the oil storage depot.
The insurance policy
The Policy included a retroactive date as at December 31, 2001, among other things, for the application of Coverage B, which is as follows:
2. Coverage B — DECONTAMINATION COSTS
[Translation] The INSURER shall pay on behalf of the INSURED the DECONTAMINATION COSTS that the INSURED becomes legally bound to pay following a LEAKAGE originating from a STORAGE TANK SYSTEM provided that the RELEASE was first reported to ENCON in writing during the PERIOD OF INSURANCE or during the EXTENDED REPORTING PERIOD, if applicable. The POLLUTING CONDITIONS must have begun on or after the retroactive date specified in section 9 of the Specific Conditions.
The expert evidence
Paquet retained an expert to prepare a phase III environmental characterization report to define the contaminated areas and verify whether the location where the old oil storage depot was situated was contaminated. In his report, the plaintiff’s expert identified the contaminated areas, but was unable to pinpoint the sources of contamination.
The insurers’ expert, retained to determine the sources and time of the contamination of the previous oil storage depot on Route 279, concluded that the source of contamination could not be determined and it would be reasonable to believe the contamination had occurred before 2001, given the fact that work had been performed on the previous oil storage depot equipment in 1997.
The parties’ position
Paquet argued that its insurers (i) had failed to act in good faith, diligence and competence from the time the contract was made until it ended, (ii) should have further investigated the covered premises, both at the time the insurance contract was made and to justify the inapplicability of the Policy and (iii) did not fulfil their duty of collaboration, diligence and transparency by failing to disclose the actual grounds for denial of coverage in response to the notice of claim. Finally, Paquet claims to have met its burden of proof by demonstrating that the leak originated from a "storage tank system" and that claiming the contamination had occurred prior to 2001 would amount to the insurers not having to actually cover any risk because the site was already contaminated at the time the Policy came into effect.
The defendant insurance companies argued that they would be entitled to deny coverage since Paquet failed to successfully demonstrate, on a balance of probabilities, i) the existence of a leak within the meaning of the Policy ii) or the date of contamination, which would not trigger Coverage B of the Policy, thereby denying coverage of the "decontamination costs" in question.
The Court’s ruling
The Court dismissed Paquet’s originating application and the insurers won the case.
According to the Superior Court, the plaintiff, who carried the burden of proof, did not successfully establish that the source of contamination corresponded to that covered by the Policy, because Coverage B did not ensure that the contamination resulted from the leak from a "storage tank system" as opposed to one occurring in the context of the oil storage depot operations (human activities). In fact, the available evidence on file does not allow the Court to conclude that the leak giving rise to the contamination originated from a source covered by Coverage B of the Policy.
In addition, regarding the date of contamination, without evidence to determine the time when the "polluting conditions" had occurred, the Court cannot conclude that the defendant insurance companies are bound to pay the decontamination expenses. Furthermore, the court rejects Paquet’s position according to which the insurers never actually covered the oil storage depot’s pollution risk because it would have been possible, after 2001, that a "storage tank system" would leak and that Coverage B of the Policy would apply, regardless of prior contamination.
Regarding the plaintiff’s claim that the insurers had not collected sufficient information about the risk at the time the Policy was issued as they simply relied on Paquet’s statements, it must be rejected because, in this case, there is no issue regarding disclosure of risk, but only regarding the interpretation of the terms of the Policy.
Finally, Justice Blanchard cannot conclude that the defendant insurance companies acted in bad faith, because they had provided Paquet with all the necessary information to be able to prove that the conditions required by Warranty B had been satisfied. In fact, the Court holds that the insurers took the trouble to inform Paquet, after the notice of claim was sent in 2012, that the insurance coverage could be problematic without an investigation confirming the source of the leak, in accordance with the Policy.
Furthermore, the insurers justified their denial of coverage, indicating in writing that the denial was due to failure in confirming that the leak originated from a "storage tank system" during the period of insurance. In providing all the necessary information for Paquet to understand and therefore attempt to disprove the grounds in support of their denial of coverage, the defendant insurance companies did not act in bad faith.
The author wishes to thank law student Catherine Gauthier for her help in preparing this legal update.
