Introduction

The Supreme Court of Queensland has ruled that costs incurred in remediating land in compliance with a statutory notice issued by the Environmental Protection Agency (EPA) are not capable of being the subject of indemnity under certain liability and ISR insurance policies.

Background

 

 

 

 

The Supreme Court of Queensland has ruled that costs incurred in remediating land in compliance with a statutory notice issued by the Environmental Protection Agency (EPA) are not capable of being the subject of indemnity under certain liability and ISR insurance policies.

Background

Hamcor Pty Ltd and Terence Arthur Armstrong (the Plaintiffs) were the owners of land in Queensland, which was the site of a chemical manufacturing plant operated by Binary Industries Pty Limited (Binary).

In 2005, the plant and its contents were destroyed by a fire. In the course of bringing the fire under control, large quantities of water used to control the blaze became contaminated by chemicals from the plant. The contaminated water, as well as polluting neighbouring property, also contaminated the plant site. Statutory notices were issued on the Plaintiffs by the EPA requiring the remediation and clean-up of the contaminated land. The Plaintiffs incurred over $10 million in performing the clean-up works.

In 2011, the Plaintiffs commenced proceedings against the State of Queensland alleging that the Fire and Rescue Service had in fact contributed to the contamination through their efforts to extinguish the blaze. The Plaintiffs also named their insurance brokers in the proceedings alleging that they failed to source insurance policies that would provide adequate cover to the Plaintiffs in relation to the clean-up costs. The Plaintiffs claimed that they should have been named as insureds in the primary and excess public, pollution and products liability policies (the Liability Policies) that were obtained by for Binary
and further, an industrial special risk policy (ISR Policy) should have been arranged, which would have provided adequate cover.

The brokers brought an interim application for a determination as to whether the insuring clauses of the various policies would have responded to EPA mandated clean-up costs. At issue was whether the costs of remediation incurred by the Plaintiffs whilst complying with the EPA notices gave rise to a liability to pay “compensation” triggering cover under the Liability Policies.

The Decision

Justice Boddice concluded that neither the Liability Policies nor the ISR Policy would have responded to the clean-up costs.

The Liability Policies were triggered by a requirement to pay “compensation”. The brokers argued that insofar as the scheme created under the Environmental Protection Act 1994 relates to the Plaintiffs’ own land, it did not give rise to a liability to pay “compensation” as “compensation” could only refer to payments made where the payee had been wronged by the insured.

Having regard to the specific terms of the policies before the Court, Justice Boddice did not agree that a liability to pay compensation was restricted to a legal liability to pay damages to another. However, his Honour nonetheless found in favour of the brokers, focusing on the requirement in the Liability Policies that the liability arise out of claims made against the insured, which he said could only be consistent with claims for compensation made against the insured by third parties. This view was supported by an exclusion specifically aimed at claims concerning damage to the insured’s own property.

Justice Boddice therefore concluded that the EPA clean-up costs did not constitute a liability to pay compensation in respect of a claim made against the insured and the fact that they arose as a result of action taken by a statutory authority was insufficient to allow them to be properly categorised as a liability to pay compensation in respect of a claim made against the insured.

Implications

Whilst cover for environmental risks is becoming more prevalent, third party liability policies triggered by the making of a claim for compensation against an insured may not respond where the ordered remediation costs concern the insured’s own land and a third party claim cannot be identified. This is not a particularly surprising outcome in terms of the operation of a third party liability policy. It may nonetheless take by surprise corporates who need to closely investigate the activities in their business which are potentially hazardous from an environmental standpoint and which can lead to significant clean-up costs in the event that a pollution incident occurs and work with their insurance advisers to clarify whether the cover they need is met by the insurance products they hold.