Newsletter > May 2012
In this issue:
1. Firm and Industry News
2. Long Tail Marine Insurance Policies Respond to Irving Whale Refloating Costs
3. UPDATE on Smith v. Inco Limited, 2011 ONCA 628
1. Firm and Industry News
- June 6th, 2012 – Webinar – Ontario Trucking Association – Freight Claims Trends
- June 14, 2012, Toronto – Canadian International Freight Forwarders Boat Cruise
- June 28, 2012, New York – Recovery Forum Dinner – Insurance Person of the Year
- Sept. 15-19, San Diego – International Union of Marine Insurers Annual Conference
- Sept. 26-29, Toronto – Canadian Transport Lawyers Association Annual Conference
- Sept. 26-28, Dublin – International Marine Claims Conference
Gordon Hearn was appointed President of the Transportation Lawyers Association on May 4th at the Association’s Annual Meeting at Naples, Florida. Kim Stoll chaired the Canadian Transport Lawyers Association Mid- Year Meeting. Rui Fernandes and Kimberly Newton represented the firm.
Rui Fernandes presented a webinar seminar to the Ontario Trucking Association on June 6th, 2012 on Freight Claims Trends.
Kim Stoll and James Lea represented the firm at the Canadian Board of Marine Underwriters Mid-Year Meeting in Banff, Alberta.
2. Long Tail Marine Insurance Policies Respond to Irving Whale Refloating Costs
The recent decision of Justice Sean Harrington in the Federal Court of Canada in Universal Sales, Limited v. Edinburgh Assurance Co. Ltd., 2012 FC 418 demonstrates why “claims made” policies of insurance became popular with insurers over “occurrence policies.”
This is a marine insurance coverage case. The claimants sought indemnity from the defendant insurers, on policies written over thirty years earlier in 1970, for sums paid to the Canadian government in 2000 in settlement of an action for the cost of refloating the tank-barge Irving Whale and her cargo in 1996, for the cost of defending that action, and for sue and labouring expenses allegedly incurred on underwriters’ behalf. The insurers denied liability.
On 7 September 1970, the Irving Whale, under tow of the tug Irving Maple, set sail from Halifax, Nova Scotia, bound for Bathurst, New Brunswick where she was to deliver her cargo of 4,270 metric tons of Bunker C fuel oil. She never arrived. She sank that day in the Gulf of St. Lawrence where she lay 37 fathoms below the surface for 26 years, until the Crown raised her.
Justice Harrington described the aftermath of the accident:
In the short-term aftermath of her sinking, some of her cargo escaped and fetched up onto the shores of the Magdalen Islands, and to a lesser extent onto Prince Edward Island and Cape Breton. The Crown monitored the situation over the years and, from time to time, took remedial steps such as blocking vents from which oil was escaping. Nevertheless, seepage was observed. Come the 1990s, based on in-house advice and outside reports it commissioned, the Crown finally came to realize that the Irving Whale was a time bomb. Sooner, rather than later, she would corrode and break up, releasing well over 3,000 m.t. of oil to the great prejudice of the marine habitat, the shoreline, and those dependent upon the sea and shore. Although the wisdom of the Crown’s decision has not been challenged in these proceedings, the timing has. The defendants argue, and I agree, that the government of the day was pursuing a political agenda. This was post Exxon Valdez, and the principle of “polluter pays” was in vogue. However, although the precise timing of the refloating may have been political, the fact remains that the Irving Whale would have broken up, probably sooner, rather than later.
The Irving Group were put on notice that they would be accountable for the cost of raising the Irving Whale and that the cost would likely exceed five million dollars, the limit of the liability insurance coverage provided by the insurers.
The refloating operation successfully proceeded in 1996 with no environmental consequences to speak of. The Irving Group took control over the Irving Whale and her cargo at Halifax shipyard, cleaned her, and arranged for the destruction of the PCBs and oil contaminated therein. They sold the oil that was not contaminated, the proceeds of which at first instance were held by the Crown.
As expected the Crown took proceedings against the Irving Group and as well as the Administrator of the Ship-Source Oil Pollution Fund and the International Oil Pollution Compensation Fund 1971, parties by statute. As against the Irving Group, the claim was based upon statutory liability arising from the Canada Shipping Act and the Oil Pollution Prevention Regulations thereunder, as well as common law negligence and nuisance. The amount claimed was in excess of $42,000,000.
The claims based on the statutes were dismissed by the Federal Court in 1998 as time barred. The action based on negligence and nuisance was allowed to proceed. Prior to examinations for discovery, the claims were settled between the Irving Group and the Crown for five million dollars.
Justice Harrington described the relationship between the Irving Group and the insurers during this time as peculiar, stating:
The relationship between the Irving Group and the defendant underwriters is somewhat peculiar in that during the time the Group arranged with the Crown to provide standby services and to remediate the Irving Whale and her cargo, they had no details of their insurance coverage. In August 1995, Bruce Drost, an in-house counsel at J.D. Irving, Limited, wrote to Reed Stenhouse Limited to say that it was his understanding they were the broker who arranged various insurance coverages including hull & machinery, and third party liability, (primary and excess). The purpose of the letter was to state that the Crown had awarded a contract to lift the barge and to provide notice of potential claims.
The insurers had difficulty in retrieving the policies. In April 1997, the insurance broker provided the Irving Group with copies of the insurance policies. The insurers had been put on notice of the potential claim, had been advised of the claim and had been advised of the settlement. Surprisingly the insurers did not engage in any dialogue as they were under the impression that the Irving Group would absorb all the legal fees. The Irving Group had not obtained prior approval of the settlement from the insurers. The liability under the policies was several and not joint. This was important in that three of the insurers were insolvent by the time of the hearing.
The limit on liability coverage was $5,000,000, in excess of the $200,000 covered by the Protection and Indemnity Club (which had tendered its amount), subject to a $1,000 deductible.
Although there was no contractual duty on the part of the insurers to defend, the policy contained a sue and labour clause, the relevant portion of which read:
It shall be lawful for the Assured – to sue, labor and travel for, in and about the defense of any claim, suit or appeal from any judgment, it being understood and agreed that the costs and expenses of minimizing or establishing a liability of the Assured or defending any suit or suits against the Assured based on any liability or alleged liability of the Assured as covered by this insurance shall be payable by these Assurers.
Justice Harrington commented that sections 79 and 80 of the Marine Insurance Act (*1) provide that if a marine policy contains a sue and labour clause, there is in fact supplementary insurance so that the insured may recover expenses properly incurred even if the underwriter has paid for a total loss. An insured is duty bound to take “such measures as are reasonable for the purpose of averting or diminishing a loss under the marine policy.”
The insertion of a sue and labour clause is thus to benefit the underwriters. The quid pro quo is that the insured will be indemnified for expenses reasonably incurred which had the potential of benefiting the underwriter
Justice Harrington described the insurers position as follows:
In broad strokes, on the liability issue, the underwriters take the position that the Irving Group were not liable to the Crown or, if they were, they paid too much. In any event, if they were liable, such liability is not covered by the policies. More specifically, the Irving Group were not liable to the Crown because:
a. there was no negligence;
i. it has never been established that any member of the Irving Group or individuals for whom they were vicariously liable, was negligent;
b. public nuisance has no application as steps to abate should have been taken immediately, certainly not after an interval of 25 years;
c. they made a gratuitous payment to enhance their public image; and
d. the loss did not occur during the time frame covered by the policy.
If they were liable, they paid too much as they were entitled to limit their liability as the loss occurred without their “actual fault or privity”.
If they were liable, the underwriters also say the Irving Group are not entitled to indemnity because:
a. claims which were once covered have become time-barred; or
b. they settled claims which were covered and claims which were not. As no proper “ascertainment” was made among the various heads of claim, they are not entitled to recover anything.
Justice Harrington did not consider the grounds of negligence against the Irving Group, as he was satisfied that one or more of the Irving Group would have been found liable in public nuisance to an amount in excess of $5 million.
In coming to this conclusion Justice Harrington described the law as follows:
That liability is based on public nuisance created by the polluters. There are common law and statutory nuisances, as well as private and public nuisances. One could certainly say that the relevant portions of the Canada Shipping Act and the regulations thereunder, which were held by Mr. Justice Hugessen to be inapplicable because of time bar, created a statutory nuisance. However, the Act did not abolish common law nuisance which is one, apart from statute, which violates principles recognized in the law for the protection of the public and individuals in the exercise and enjoyment of their rights.
 Then there is the distinction between public nuisance and private nuisance. This case deals with public nuisance which is one which inflicts damage, injury or inconvenience on all Her Majesty’s subjects, or on such members of the class who come within the neighbourhood of its operation: see Halsbury’s Laws of England, 5th ed, vol 78 (Markham, Ont: LexisNexis Canada, 2010) “Nuisance”, at 99ff.
 The law of public nuisance was clearly stated by Lord Denning in two cases in the 1950s. In Attorney General v P.Y.A. Quarries Ltd,  1 All ER 894,  2 QB 169, he said at pages 908 and 191 respectively:
…a public nuisance is a nuisance which is so widespread in its range or so indiscriminate in its effect that it would not be reasonable to expect one person to take proceedings on his own responsibility to put a stop to it, but that it should be taken on the responsibility of the community at large.
In an obiter in Southport Corporation v Esso Petroleum Co, Ltd,  2 QB 182 ,  1 Lloyd’s Rep 446, reversed on other grounds by the House of Lords at  AC 218,  2 Lloyd’s Rep 655,  3 All ER 864, he dealt with oil pollution as a public nuisance at page 196: “Suffice it to say that the discharge of a noxious substance in such a way as to be likely to affect the comfort and safety of Her Majesty’s subjects generally is a public nuisance.” He continued on the following page: “Applying the old cases to modern instances, it is, in my opinion, a public nuisance to discharge oil into the sea in such circumstances that it is likely to be carried on to the shores and beaches of our land to the prejudice and discomfort of Her Majesty’s subjects.”
 A principal difference between an action for public nuisance and an action for negligence is the burden of proof. In Southport, above, Lord Denning continued at page 197:
In an action for a public nuisance, once a nuisance is proved and the defendant is shown to have caused it, then the legal burden is shifted onto the defendant to justify or excuse himself. If he fails to do so, he is held liable whereas in an action for negligence the legal burden in most cases remains throughout on the plaintiff.
In this case no excuse has been made out.
Having found that the Irving Group could have been found liable in the Crown action, the Court then had to look at whether the insurers were required to indemnify the Irving Group.
Justice Harrington found that the $4,709,501.86 paid to the Crown did not cover any liability on the part of Irving Oil. Irving Oil was not the polluter. Irving Oil did not create the nuisance. Its potential liability to the Federal Crown is too remote. If, as and when the Bunker C oil reached shore, its liability would be engaged under provincial environmental statutes. Its turning over of the proceeds of the sale of the oil to the Federal Crown more than covers any liability to the Crown it might have had.
As to which members of the Irving Group would have been found liable, one need only look to Atlantic Towing, the bareboat charterer of the Irving Whale. It was the polluter. It created the public nuisance.
The court also found that the nuisance continued and so the action was not time-barred.
The insurers argued that the payment was gratuitous, in that it was paid by the Irving Group for their public image. The court found that:
[t]he Irving Group were conscious of their public image. However, “in my opinion no part of the settlement should be considered as being gratuitous. The Group had earlier made a conditional $10 million settlement offer. At its heart, the Irving Group would have provided funding or have become involved in various projects in Atlantic Canada with which their name would have been prominently associated. However, it is not necessary to consider that offer as it was refused. Following the actual $5 million settlement, both the Crown and the Group issued press releases. The Group emphasized their cooperation and that both sides thought it appropriate to bring to an end a long, contentious and expensive piece of litigation, much at the taxpayers’ expense. Although favourable publicity may have been achieved, Irving was putting paid to its liability, no more, no less.
In conclusion the court found that the settlement was reasonable and made in contemplation of the likelihood that one or more of Universal Sales, Limited, J.D. Irving, Limited, and Atlantic Towing Limited would have been found liable in excess of that amount should the matter have gone to trial.
The court found that the expenses claimed by the Crown had their origin in the original sinking. The insurers’ argument that the expenses originated in new causes of action in 1995 and 1996 was rejected. In describing the duties of insurers in “occurrence policies” Justice Harrington stated:
However the policies do not deal with the creation of causes of action, they deal with accidents or occurrences. The accident or occurrence was the sinking of the Irving Whale during the policy year. It does not matter that the damage was only suffered many years later.
 Indeed, this is the reason why many recent policies are written on a “claims made” basis rather than on an “occurrence” basis. The rationale was set out by Madam Justice McLachlin, as she then was, in Reid Crowther & Partners Ltd v Simcoe & Erie General Insurance Co, 1993 CanLII 150 (SCC),  1 SCR 252 at 262, 263, 147 NR 44. Although “occurrence” liability policies work reasonably well, there are exceptions:
…But for insureds who are professionals such as doctors, lawyers, engineers, etc., damages can result (or be discovered) many years after a negligent act is committed. This is even more the case for manufacturers and other types of insureds who can cause damages by producing hazardous products or toxic waste. Therefore, for each of these types of insureds, insurers are at risk for an unknown number of claims that may be made many years after the expiry of a particular policy of “occurrence” liability insurance.
Compounding the uncertainty that these “long-tail” risks caused to insurers was the evolving nature of law and science. The potential for future developments such as the increased availability and quality of scientific proof of causation of harm, expanded legal liability (e.g., “superfund” environmental legislation), and changes in the law as to quantum of damages, added to the uncertainty on the part of insurers as to the likely number of claims that would be made against their insureds in the future, as well as the likely amount of damages per claim for which individual insurers would have to provide indemnity.
 This is exactly what happened in this case.
The court also dealt with whether the Irving Group could collect its legal costs from the insurers for defending the Crown action, as sue and labour expenses. These costs were approximately $1,800,000.00. Justice Harrington allowed the Irving Group 25% of these costs being the ratio of the insured to uninsured claim. (*2). They were allowed as sue and labour costs as these costs benefitted the insurers.
*1 S.C. 1993, c. 22.
*2 Justice Harrington arbitrarily fixed the exposure of the Irving Group to the Crown at $20 million, having found that the original claim was $42 million, that $18 million related to expenses that were time barred and then reduced a further $4 million for risk.
3. UPDATE on Smith v. Inco Limited, 2011 ONCA 628
Supreme Court of Canada refuses leave to appeal with costs
Inco operated a nickel refinery in Port Colborne, Ontario from 1918 to 1984. Historically, Inco emitted waste products (including nickel oxide) into the air from the 500-foot smoke stack located on its property. Inco had complied with the various environmental and other governmental regulatory schemes applicable to its refinery operation. Many of the properties as owned by the plaintiffs in this class action were found to contain nickel deposits. Inco admitted that its refinery was the source of the vast majority of the nickel found in the subject soil.
By the time of trial, allegations that the nickel deposits were carcinogenic or in any way harmful to the health of the residents had been abandoned and the action limited to a claim for loss of property value arising out of negative publicity regarding the Inco emissions.
The trial judge had found that the subject soil contained offending nickel particles and there was widespread public concern that adversely affected the appreciation in value of the properties when compared to similar properties. The trial judge held Inco liable in private nuisance and under strict liability as imposed by the rule set down in Rylands v. Fletcher L.R. 1 Ex. 265, aff’d (1868), L.R. 3 H.L. 330. This difference in property value was found to have yielded a loss of $4,514 per property totaling a damage award of $36 million.
Inco successfully appealed to the Ontario Court of Appeal, which dismissed the class action finding that the plaintiffs had failed to establish liability under either nuisance or Rylands v Fletcher and, even if the plaintiffs did make out the claims, that the plaintiffs failed to establish any damages.
To establish nuisance, the Ontario Court of Appeal outlined that a plaintiff must prove that the defendant allowed a noxious substance to escape onto land that was owned or occupied by that plaintiff and that there was actual, substantial, physical damage to that land that posed some risk to the health or wellbeing of the residents or some physical injury to the land. The Court of Appeal found that evidence of nickel particles in the soil that generated “concerns” about “potential” health risks was not enough to show actual, substantial harm or damage to the property and, without which, the plaintiffs could not succeed.
Regarding the rule in Rylands v. Fletcher, the Court of Appeal noted the four prerequisites to the operation of this limited rule as found in The Law of Nuisance in Canada by Gregory S. Pun and Margaret I. Hall, (Markham, Ontario: LexisNexis Canada, 2010) (page 113):
(1) the defendant made a “non-natural” or “special” use of his land;
(2) the defendant brought on to his land something that was likely to do mischief if it escaped;
(3) the substance in question in fact escaped; and
(4) damage was caused to the plaintiff’s property as a result of the escape.
The Court of Appeal stated that a finding of strict liability under the rule was predicated on ‘non-natural’ use of Inco’s property and normal operations of a nickel was not ‘non-natural’, ‘exceptionally dangerous’ or ‘extraordinary or unusual’. The refinery was in an industrial area and had complied with all applicable regulations, and was merely an ordinary use of industrial land.
Even if strict liability for “ultra hazardous” activities, either as a freestanding basis for liability or a modification of Rylands v. Fletcher, were part of the law in Ontario, the Court of Appeal found that the activities of Inco’s refinery did not constitute an “extra hazardous” activity and emphasizes that, while compliance with environmental and zoning regulations is not a defence to a claim seeking to apply the rule in Rylands v. Fletcher, it is part of the consideration as to the determination of whether the use is “non- natural”.
Further, the Court of Appeal found that the evidence did not support a finding of any damage connected to Inco’s activities and held essentially that physical “change” was different than physical damage to the land.
Furthermore, the plaintiffs failed regarding damages. On a proper analysis of the data, the Court of Appeal concluded that there was no evidence that residential real estate prices had risen more slowly in Port Colborne than in Welland. Accordingly, the plaintiffs had suffered no loss and the action was dismissed.
The plaintiffs having lost their substantial judgment understandably appealed to the Supreme Court of Canada. They were not successful.
On April 26, 2012, the Supreme Court of Canada refused the plaintiffs’ leave to appeal (2012 CanLII 22100). The Ontario Court of Appeal’s Judgment in now the leading decision though binding only on Ontario’s lower courts but highly persuasive in other Canadian jurisdictions.
The impact of the Supreme Court of Canada’s refusal to allow the appeal, however, means that the scope of recovery for nuisance and strict liability has been substantially narrowed for future claims, at least in Ontario, with the immediate effect that expected and known results of businesses operating within the law will not qualify as “non-natural uses” even if neighbouring properties are adversely affected.
Given the possibility of different standards being set in other jurisdictions, it appears that there is a distinct possibility of further treatment by Canada’s highest court in the future.
Kim E. Stoll
This newsletter is published to keep our clients and friends informed of new and important legal developments. It is intended for information purposes only and does not constitute legal advice. You should not act or fail to act on anything based on any of the material contained herein without first consulting with a lawyer. The reading, sending or receiving of information from or via the newsletter does not create a lawyer-client relationship. Unless otherwise noted, all content on this newsletter (the “Content”) including images, illustrations, designs, icons, photographs, and written and other materials are copyrights, trade-marks and/or other intellectual properties owned, controlled or licensed by Fernandes Hearn LLP. The Content may not be otherwise used, reproduced, broadcast, published,or retransmitted without the prior written permission of Fernandes Hearn LLP.
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