Should You Worry About a Pollution or Clean-up Costs Exclusion in Your D&O Policy?

D&O, insurance, directors and officers, environmental liability, pollution, clean-up costs, Northstar Aerospace

The usual answer to this question can all too easily fall into the “life’s too short” category. After all, how many cases have there been where directors have personally been held to account for clean-up costs? Well, now there is one, albeit subject to appeal.

The case arose out of the insolvency of Northstar Aerospace of Canada and certain other companies within the group who were granted protection in June 2012 under the Canadian Company’s Creditors Arrangement Act (“the act”). Six weeks later the company was adjudged bankrupt. In the bankruptcy proceedings, Ontario’s Ministry of the Environment issued an order against the former directors and officers of Northstar requiring them personally to fund environmental remediation at a cost estimated to be C$15m.

Some eight years earlier, in 2004 Northstar had first informed the Ontario Ministry of Environment of potential environmental contamination on its site. The contamination involved the use of industrial solvents which had migrated to the soil and groundwater and presented a potentially serious threat to health.

What makes this case so striking is that in the period from 2004 through to 2012, the evidence was that Northstar and its directors did everything right. They seem to have taken all reasonable steps to investigate, mitigate and remediate the pollution. They even originally reported it to the authorities themselves. The problem was that, in the end, the company had neither the time nor the money to finish the job. Moreover, and perhaps unsurprisingly, even after Northstar had applied for protection under the act, the evidence was that no potential buyer showed any interest in purchasing the contaminated site. In other words, whether or not the directors had sought to raise funds under the protection of the bankruptcy court (as indeed they did), no assets would have been available to fund compliance with the Ministry’s orders. In short, there was no evidence either pre-or post-filing for protection, that the directors and officers of Northstar had acted negligently, either in causing or allowing the pollution to occur in the first place, or in failing to attempt to mediate its effects.

According to the law firm, Heenan Blaikie, the only way out for these directors and officers, on the assumption that their appeal is unsuccessful, would have been to have secured a personal release of their obligations under the Environmental Protection Act as part of formal restructuring under the act.

Exclusions

We do not know the extent to which these directors have the benefit of D&O insurance and, if so, on what terms. Many such policies exclude cover for clean-up/pollution costs. Indeed, some of these exclusions may also extend to the provision of defence costs in relation to allegations of pollution or alternatively (and at best) sublimit such cover. The moral of this particular tale seems to be that pollution/clean-up costs cannot safely be ignored as a “battle too far” when it comes to amendments to standard D&O forms.


This post was originally published August 1, 2013.

About Francis Kean

Francis is an Executive Director in Willis’ FINEX Global, where he specializes in insurance for Directors & O…
Categories: Directors & Officers, Environmental Liability, Executive Risk

9 Responses to Should You Worry About a Pollution or Clean-up Costs Exclusion in Your D&O Policy?

  1. Pingback: Directors and Officers Held Personally Liable for Bankrupt Company's Environmental Liabilities

  2. Clive Walker says:

    In response to Francis’ concluding comments, whilst enhancements to a D&O policy can provide a degree of pollution cover, the cover will be restricted to defence costs only, leaving the directors personally exposed to the full scope of environmental liability that could be incurred following a pollution event such as the one described above. It is worth noting that had the Company taken out an Environmental Insurance policy (that includes D&O as insured in standard wordings) prior to the discovery of the pollution (2004), and provided that the pollution was unknown and incidental, then such a policy could respond.

    Environmental insurance is specifically designed to cover the wide spectrum of costs that can be incurred following a pollution release or physical damage to the environment including mitigation, investigation, clean-up, monitoring, 3rd party damages and legal expenses.

    It is significant that under environmental laws, such as the EU Environmental Liability Directive, directors can be exposed to strict and unlimited (uncapped) liability and face up to 2 years imprisonment following an environmental offence, regardless of operator neglect or intent. Given that strict liability applies, the burden of proof under such legislation falls to the polluter and not the regulator and can result in legal defence costs alone easily running to seven figures.

    • Francis Kean says:

      Thanks for this Clive. Quite agree that a bespoke policy may provide a much better response. In particular, it would pick up the entity liability although I imagine it might cost a bit more than D&O for that reason!

      • Neil cameron says:

        Hi Francis

        If you’re suggesting that company directors are unlikely to be prosecuted then I think this is a little misleading. It’s certainly not an everyday occurrence but if you look at 2008 as an example, for England & Wales alone, the Environment Agency successfully prosecuted 209 individuals including 19 company directors.

        Whilst a D&O policy is invaluable for its intended purpose, by no stretch of the imagination can add ons or bolt ons really make it suitable for the nuances of modern environmental risks faced by todays company directors, hence why we have a raft of environmental insurance products available to offer the required protection as described by Clive earlier.

        • Francis Kean says:

          I think the point is that the facts of this case and the nature of the award were highly unusual. Prosecutions against directors do occur as you say although not all that often. The key point about other insurance products is their ability to respond to the entity’s exposure and not just that of the directors as I said in response to the last comment.

          • Neil cameron says:

            It’s a fair point that other products can apply to both the entity’s and director’s exposure but I think the wider and perhaps more important point is that company directors now face much more onerous environmental duties, responsibilities and liabilities than ever before and consequently prosecutions against directors are no longer considered unusual or uncommon and are most probably set to increase. Therefore it surely makes sense to recognise and advocate at any opportunity the valuable contribution that an EIL policy can make to an entity’s whole programme to ensure both it and its most valuable of assets are protected from comparatively complex and costly exposures.

  3. Alvaro Igrejas says:

    Good Morning Francis

    Very interesting your article, but the wording aproved of many insurance companies in Brazil, this situation is cover.

    Best Regartds

    Alvaro Igrejas

    FInex Brasil – Divisional Director

    • Francis Kean says:

      Thank you Alvaro. Glad to see that Brazilian insurers (or most of them) are on top of this.

    • Neil cameron says:

      My understanding of the D&O market in Brazil is that underwriters do take a similar position to those in the UK and elsewhere i.e. it’s an absolute exclusion or limited defence costs cover, either way not appropriate for the risks in question. I think it’s useful to be as clear and as concise as possible when commenting on what coverage does or does not exist under non environmental policies purporting to be offering such cover as this only leads to misinformation or disinformation in the mind of the client.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>