An insurer only has to pay part of the costs associated with defending a claim that falls within partial coverage

An insured ("Boliden") under a policy of directors and officers liability insurance issued by Liberty Mutual Insurance Co. ("Liberty"), was successful in obtaining an order that Liberty reimburse Boliden for 80% of the defence costs incurred in defending class actions brought by shareholders where the Court found that some of the allegations did not fall within the pollution exclusion clause in the policy.

Here is the citation: Boliden Ltd. v. Liberty Mutual Insurance Co. [2007] O.J. No. 1321. Ontario Superior Court of Justice. J.C. Newbould J. April 3, 2007.

The case was originally digested by Jonathan Meadows and edited by David Pilley.

Here is a link to the decision.

 

In April 1998, there was a mining disaster in Spain in which a tailings pond dam collapsed resulting in toxic waste contaminating a large amount of land. The mine was owned by a Spanish subsidiary of Boliden. The shares of Boliden plummeted in value. Shareholders of Boliden who had acquired their shares less than one year earlier in an initial public offering commenced class actions in Ontario and British Columbia against directors and officers of Boliden for alleged misrepresentations contained in the prospectus leading to the initial public offering. The class actions were settled. Boliden sued Liberty for defence costs of the class action estimated in excess of $3,000,000. Liberty denied coverage based upon a pollution exclusion clause in the D & O Policy.

The Statement of Claim in the underlying class actions alleged that Boliden had made misrepresentations with respect to the construction, maintenance and stability of the tailings dam. It was further alleged that misrepresentations had been made with respect to past seepage and leakage from the tailings pond. The D & O Policy contained an exclusion for "pollution loss", which was defined to mean 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…". An endorsement to the policy also provided that where a claim was advanced against the directors and officers that was partly covered by the policy and partly not covered by the policy, 80% of defence costs would be allocated to the covered loss.

The Court set out the following principles applicable to the determination of a duty to defend:

1. Insurer’s duty to defend is governed by the pleadings in the underlying action;

 2. Coverage provisions in insurance policies should be construed broadly in favour of the insured and exclusion clauses should be interpreted strictly and narrowly against the insurer;

3. Where there are ambiguities in the policy, the reasonable expectations of the parties are to be given effect;

4. If there is ambiguity in a provision of an insurance contract, the contra proferentum doctrine resolves the ambiguity against the insurer.

The Court held that the wording of the pollution exclusion was ambiguous. In this case, the Court accepted that there would have been no litigation but for the escape of pollution that led to the decrease in values of the shares of Boliden. Therefore, it could be said that the allegations were "resulting from" or "involving, directly or indirectly" a claim for pollution loss. However, the claim was not for the actual loss caused by the pollution damage, but rather for damages for failing to disclose certain facts that constituted a misrepresentation. A number of the alleged misrepresentations did not specifically deal with the escape of pollutants. In the result, the Court held that the exclusion clause applied to some of the claims of misrepresentations, but not all of them. As a result, under the endorsement in the policy, Boliden was entitled to coverage for 80% of all its defence costs in connection with the class action litigation.

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