The Ontario Court of Appeal recently dealt with the interaction between a pollution loss exclusion and the allocation provisions of a D&O policy in the case of Boliden Ltd. v. Liberty Mutual Insurance Co.

In 1997, Boliden, a Canadian mining company with operations in Spain, issued shares in the Canadian market at an initial IPO price of $16. Less than a year later, a dam at the mine's tailings pond collapsed releasing toxic materials into the Spanish countryside. Boliden's share values plunged to $5.35. Class Actions on behalf of shareholders started immediately in Ontario and British Columbia targeting the company, its directors and officers and lead underwriter for alleged misrepresentation in its offering prospectus.

The Statement of Claim plead ten particular examples of misrepresentation, the first four of which included such matters as improper dam construction/maintenance; undisclosed knowledge of dam construction defects such that it could not support the projected mining activity; warnings about stability problems and structural defects with the dam; and a then recent study confirming design and construction problems with the dam.

Liberty, the D&O Insurer, refused to provide a defence citing its pollution loss exclusion. Boliden defended on behalf of its directors and officers, settled the claims and sued Liberty for defence costs in the amount of approximately Cdn. $3 million.

The motions Judge treated each of the ten allegations as a separate claim and found that four of the ten were not directly related to pollution and therefore did not fall within the pollution loss exclusion. As such, the allocation provisions for defence costs applied making Liberty responsible for 80% of such costs.

The Court of Appeal agreed with Liberty that there was only one claim. However, it then distinguished between pollution-related losses and pollution-related claims. The Court held that a single claim may involve both a covered and uncovered loss and that the loss arising from the alleged omissions in the four particularized paragraphs were covered losses. Therefore, they were not excluded by the pollution loss exclusion, which the Court emphasized must be interpreted strictly and narrowly against the Insurer, and in the event of ambiguities, the reasonable expectations of the parties are to be given effect.

As is the case in the United States, pollution exclusions in Canadian policies, be they contained in commercial general liability policies or D&O policies, will be scrutinized carefully by courts and may be interpreted in a manner that will continue to surprise insurers.