Boliden Ltd. v. Liberty Mutual Insurance Co.

90 O.R. (3d) 274

Court of Appeal for Ontario,

Cronk, Blair and LaForme JJ.A.

April 17, 2008

Insurance -- Liability insurance -- Exclusions -- Pollution exclusion -- Shareholders of insured company suing company and its directors and officers for alleged misrepresentations in offering prospectus following collapse of company's mine and release of toxic waste into countryside -- Company settling action, indemnifying officers and directors for their defence costs and moving for summary judgment against its insurer under directors' and officers' liability policy to cover those costs -- Insurer relying on pollution exclusion in policy -- Motion judge not erring in finding that exclusion clause excluded pollution losses and not losses connected to pollution-related claims -- Motion judge not erring in finding that alleged misrepresentations involving proper construction and maintenance of dam and its stability and structural defects did not fall within pollution exclusion -- Motion judge not erring in his interpretation of allocation endorsement in policy.

In 1998, a dam at a mine owned by a Spanish subsidiary of B Ltd. collapsed and toxic waste was released into the Spanish countryside. Less than a year before that incident, shares in B Ltd. were sold in an initial public offering. After the collapse of the dam, the shares plunged in value. Shareholders of B Ltd. who purchased their shares in the IPO brought class actions against B Ltd., its directors and officers for alleged misrepresentations in its offering prospectus. The actions were settled, and B Ltd. indemnified the directors and officers for their defence costs and moved for summary judgment against its insurer under a directors' and officers' liability policy to recover those costs. The insurer relied on a pollution exclusion clause in the policy. "Pollution loss" was defined as "a loss resulting from or attributable to or in any way involving, directly or indirectly", the actual, alleged or threatened discharge or release of pollutants. The motion judge interpreted the phrase "in any way involving, directly or indirectly" to mean "in any way tied to or concerned with". He found that some of the allegations in the statement of claim did not involve, or were not tied to or concerned with, pollution loss while others were. Some of the alleged misrepresentations in the offering prospectus dealt with the proper construction and maintenance of, and the stability and structural defects of, the dam. The motion judge found that the amounts to be paid on account of those claims were not excluded from coverage. The remaining alleged omitted material facts related to claims of actual and alleged seepage of [page275] pollutants. The motion judge found that the drop in value of the B Ltd. shares could be said to directly involve, or be tied to or concerned with, the actual or alleged escape of pollutants. Therefore, he decided that the exclusion clause applied to the latter misrepresentations. He found that pursuant to the allocation endorsement to the policy (which provided that if a claim involved a loss that was partly covered by the policy and partly not covered, 80 per cent of the defence costs were to be allocated to the covered loss and advanced by the insurer), the insurer was liable for 80 per cent of the defence costs. The insurer appealed.

Held, the appeal should be dismissed.

The motion judge was correct in proceeding on the basis that the exclusion clause excluded pollution-related losses, not pollution-related claims, and in holding that the applicability of the exclusion clause required a consideration of whether the allegations of wrongful acts or omissions on the part of directors and officers in the statement of claim gave rise to both pollution loss and loss other than pollution loss. He did not err in his conclusion that some of the allegations in the statement of claim gave rise to a covered loss. He did not err in his interpretation of the allocation endorsement.

APPEAL by an insurer from the summary judgment of Newbould J., reported at (2007), 2007 11309 (ON SC), 85 O.R. (3d) 492, [2007] O.J. No. 1321, 47 C.C.L.I. (4th) 258, 156 A.C.W.S. (3d) 911 (S.C.J.), in favour of the insured.

Cases referred to Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, [2002] O.J. No. 4496, 222 D.L.R. (4th) 655, 166 O.A.C. 233, 43 C.C.L.I. (3d) 174, [2003] I.L.R. ÂI-4137, 118 A.C.W.S. (3d) 719 (C.A.) [leave to appeal to S.C.C. dismissed [2003] S.C.C.A. No. 33], consd Other cases referred to Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, [1995] S.C.J. No. 74, 127 D.L.R. (4th) 618, 186 N.R. 150, [1995] 9 W.W.R. 305, 63 B.C.A.C. 1, 10 B.C.L.R. (3d) 1, 31 C.C.L.I. (2d) 1, [1995] I.L.R. Â1-3232, 13 M.V.R. (3d) 302, 57 A.C.W.S. (3d) 640; Derksen v. 539938 Ontario Ltd., [2001] 3 S.C.R. 398, [2001] S.C.J. No. 27, 2001 SCC 72, 205 D.L.R. (4th) 1, 273 N.R. 356, 277 N.R. 82, 150 O.A.C. 1, 153 O.A.C. 310, 33 C.C.L.I. (3d) 1, [2002] I.L.R. ÂI-4029, 15 M.V.R. (4th) 1, 108 A.C.W.S. (3d) 893 Statutes referred to Securities Act, R.S.B.C. 1996, c. 418, s. 131

Gary H. Luftspring, for appellant. David Kent and Lisa Brost, for respondent.

The judgment of the court was delivered by

LAFORME J.A.: -- Overview

[1] This appeal concerns the interpretation of a pollution exclusion clause in a directors' and officers' liability policy. The appellant, [page276] Liberty Mutual Insurance Company ("Liberty"), issued a directors' and officers' liability policy ("D&O Policy") to the respondent mining company, Boliden Limited ("Boliden"). The D&O Policy insured the directors and officers of Boliden in respect of specified losses arising from claims made against them during the currency of the policy, including damages and defence costs.

[2] During the coverage period, the directors and officers were indemnified by Boliden for defence costs they incurred in connection with class actions brought against them by Boliden shareholders for prospectus misrepresentation. These actions were commenced in the wake of an environmental disaster at a zinc mine located in Spain that was owned by a subsidiary of Boliden. Liberty denied coverage for the defence costs based on a pollution exclusion clause in the D&O Policy.

[3] On Boliden's motion for summary judgment to recover the defence costs from Liberty, the motion judge determined that the pollution exclusion clause applied to some -- but not all -- of the losses arising from the allegations of misrepresentation against the directors and officers. He concluded that the defence costs should be allocated in accordance with the defence costs allocation endorsement to the D&O Policy ("allocation endorsement"). Pursuant to the allocation endorsement, he awarded summary judgment in favour of Boliden for 80 per cent of the defence costs.

[4] In my opinion, the motion judge did not commit reviewable error in interpreting the relevant terms of the D&O Policy in the way that he did. I would therefore dismiss Liberty's appeal. Background

[5] The dispute over Liberty's liability to indemnify the directors and officers of Boliden for their defence costs arose following an environmental disaster at a mine owned by a Spanish subsidiary of Boliden. On April 25, 1998, a dam at the mine's tailings pond [^1] collapsed and toxic waste was released into the Spanish countryside. The collapse of the dam led to the contamination of 10,000 hectares of land.

[6] Less than a year before this incident, shares in Boliden were sold on the Canadian market in an initial public offering ("IPO") at an IPO price of $16. After the collapse of the dam, [page277] Boliden shares plunged in value and were trading at $5.35 on the TSX by mid-November 1998.

[7] In the fall of 1998, Boliden shareholders who purchased their shares in the IPO commenced class actions in Ontario and British Columbia against the company, its directors and officers, and its lead underwriter for alleged misrepresentations in its offering prospectus.

[8] Boliden advised Liberty of the class actions and asserted a claim for indemnification under the D&O Policy. Liberty took the position that it had no obligation to indemnify Boliden or its directors and officers in respect of any loss, including defence costs, that were incurred by directors and officers in connection with the class actions.

[9] Liberty relied on a pollution exclusion clause in refusing to provide coverage. The relevant coverage and exclusion provisions read:

1. Insuring Agreement: In respect of a loss resulting from a wrongful act which a director(s)/officer(s) becomes legally obligated to pay on account of any claim first made against him during the policy period and reported to Liberty International Canada [a division of Liberty] during the policy period or discovery period, Liberty International Canada shall pay: 1.1 on behalf of the director(s)/officer(s), as and to the extent permitted or required by the applicable law the loss for which the director(s)/officer(s) are not indemnified by the insured organization; and, 1.2 on behalf of the insured organization, the loss for which the insured organization has granted indemnification to such director(s)/officer(s) as and to the extent permitted or required by the applicable law.
2. Exclusions: Liberty . . . shall not be liable under this policy to make any payment for loss respecting a claim: . . . . . 2.6 except to the extent provided for in paragraph 3, for or in respect of a pollution loss.
3. Pollution Loss Coverage: If so specified in a separate endorsement to this policy, the exclusion in paragraph 2.6 does not apply to defence costs incurred in relation to a claim(s) respecting a pollution loss made against any director(s)/officer(s) in a derivative action. . . . . .
4. Definitions: In this policy: 28.1 "claim" means any verbal or written claim or allegation made anywhere in the world against or in respect of a director/officer which may reasonably result in a loss. . . . . . [page278] 28.10 "loss" means the total amount which director(s)/ officer(s) become legally obligated to pay on account of each claim and for all claims first made in a policy year against them for wrongful acts for which coverage applies under this policy, including, but not limited to, damages, judgments, settlements, costs and defence costs . . . . All loss attributable to interrelated wrongful acts are deemed one loss originating in and attributable to the earliest policy year in which the applicable claim occurred[.] . . . . . 28.15 "pollution loss" means a loss resulting from or attributable to or in any way involving, directly or indirectly, (1) the actual, alleged or threatened seepage, discharge, dispersal, release or escape of pollutants in contravention of; or (2) any direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants, under the Environmental Protection Act of the Province of Ontario, R.S.O. 1990 c. E-19 or any federal, provincial, state, municipal or other governmental statute, law, regulation or ordinance or the common law (including nuisance and trespass) or equity. Pollutants include (but are not limited to) any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalies, chemicals and waste. . . . . . . . . 28.17 "wrongful act" means any actual, alleged, attempted, or allegedly attempted error, mis- statement, misleading statement, act, omission, neglect, or breach of duty, by any director(s)/ officer(s) anywhere in the world. . . . All casually connected wrongful acts shall be deemed to be interrelated.

[10] The allocation endorsement to the D&O Policy regarding defence costs provides that if a claim involves a loss that is partly covered by the policy and partly not covered by the policy, 80 per cent of the defence costs are to be allocated to the covered loss and shall be advanced by Liberty. The relevant part of the allocation endorsement states: 11. Allocation: In the event that a claim involves a loss that is covered by this policy and a loss or payment not covered by this policy. . . 11.1 with respect to defence costs, to create certainty in determining a fair and equitable allocation of defence costs, 80% of all defence costs which must otherwise be allocated as described above shall be allocated to covered loss and shall be advanced by Liberty International Canada on a current basis. . .

[11] The class action initiated in British Columbia was designated as the lead class action. The statement of claim in that proceeding is relevant for present purposes. The amended pleading in that action asserted a cause of action for misrepresentation based on the relevant provision of British Columbia's Securities Act, R.S.B.C. 1996, c. 418, s. 131 and the comparable provisions in the securities legislation of the other nine provinces.

[12] In the pleading, the plaintiffs alleged that the prospectus contained certain misrepresentations. The alleged misrepresentations included statements in the prospectus that environmental protection and pollution prevention are priorities at all Boliden operations, that Boliden believed it would become the fifth largest zinc producer in the western world once the Spanish mine reached specified 1998 production levels, and that Boliden's production estimates for the Spanish mine were that it would generate 4 million tonnes of ore in 1998, increasing to 4.2 million in 2000.

[13] The pleading also alleged that the defendants omitted from the prospectus relevant information about the tailings dam at the mine. Paragraph 36 of the amended claim particularized the allegedly omitted material facts. They included such things as: (a) the tailings dam had not been properly constructed or maintained; (b) that prior to the IPO, the defendants had been apprised that the dam was suffering from construction defects and could not support the mining activity; (c) that Boliden executives . . . had repeatedly been apprised of the stability problems with and structural defects under the tailings dam, including written warnings provided to them in 1992 and 1995; and (d) in 1997, Boliden had commissioned a study by the same company that had designed and constructed the tailings dam, which study again confirmed some of the problems with the dam.

[14] The damages claimed by the plaintiffs were not particularized or quantified in the pleading, beyond a claim for general and special damages as a result of the misrepresentations.

[15] The class actions ultimately settled. Boliden indemnified the directors and officers for their defence costs associated with the class action litigation. The company then moved for summary judgment against Liberty to recover these costs, which were said to be in excess of $3 million.

Decision of the motion judge

[16] At the motion for summary judgment, the material facts were not in dispute. It was also not disputed that the insuring clause in the D&O Policy covered the claim for defence costs in the class action litigation. Boliden accepted for the purpose of the motion that the materials in the tailings pond were pollutants and that their escape when the dam collapsed would constitute [page280] pollution within the meaning of s. 28.15 of the policy. The primary issue was the effect of the exclusion clause for "pollution loss".

[17] The motion judge considered case law referred to him by the parties from this court as well as from state and circuit courts in the United States which involved the interpretation of pollution exclusion clauses. He concluded that the authorities interpreting pollution exclusion clauses were not determinative of the question before him, noting that "[n]one of the cases contained all of the same language as the exclusion clause in question or have facts comparable to this case" (at para. 22). The question before him required "the consideration of the meaning of the definition of 'pollution loss' when applied to the claims of misrepresentation pleaded in the B.C. class action litigation" (at para. 28).

[18] The motion judge concluded that the exclusion clause applied to some, but not all, of the losses to be paid on account of each allegation of misrepresentation in para. 36 of the amended statement of claim. He based this conclusion on the phrase "in any way involving, directly or indirectly" in the definition of "pollution loss". His conclusion is found in para. 35 of his reasons:

The sense that I take of the words "in any way involving" is that it means in any way tied to or concerned with. The issue then becomes whether the amount to be paid for each claim of misrepresentation can be said in any way to be directly or indirectly involved, or tied to or concerned with, pollutants.

[19] The motion judge then went on to conclude that some of the allegations in para. 36 do not involve, or are not tied to or concerned with, pollution loss while others are. He found that those omitted material facts described in paras. 36(a), (b), (c) and (d) "do not involve, nor are they tied to or concerned with, the actual or threatened seepage or discharge of pollutants". His view was that these omitted facts deal with the proper construction and maintenance, as well as the stability and structural defects of the dam. Accordingly, "the amounts to be paid on account of these claims are not excluded from coverage".

[20] The motion judge found that the remaining alleged omitted material facts described in paras. 36(e) to (j) fall within the language and the definition of "pollution loss" because they relate to claims of actual and alleged seepage of pollutants. He then, in paras. 38 and 39, framed the issue for his consideration in these terms: [page281]

. . . whether it can be said that the amounts which the directors would become legally obligated to pay if these claims succeeded for the depreciation in value of the shares resulting from the misrepresentation could be said to directly or indirectly involve, be tied to or concerned with, such actual and alleged seepage of pollutants.

Can it be said that the drop in value of the Boliden shares as pleaded in the further amended statement of claim indirectly involves, or is tied to or concerned with, the actual or alleged escape of pollutants. . . .

[21] The motion judge concluded that it can. That is, he found that the drop in value of the Boliden shares can be said to directly involve, or be tied to or concerned with, the actual or alleged escape of pollutants. Thus, he decided that the exclusion clause applies to some of the claims of misrepresentation but not to all of them.

[22] The motion judge went on to consider the effect of the allocation endorsement to the D&O Policy. He held that pursuant to this endorsement, Liberty was liable for 80 per cent of the defence costs.

Issues

[23] In my view, this appeal turns on whether the motion judge committed reviewable error: (i) in his interpretation of the pollution exclusion clause and the meaning of "pollution loss" in the D&O Policy; or (ii) in his interpretation of the allocation endorsement.

Analysis

(i) Did the motion judge commit reviewable error in his interpretation of the pollution exclusion clause and the meaning of "pollution loss" in the D&O Policy?

[24] Liberty contends that the motion judge erred in treating each of the allegations of undisclosed information set out in para. 36 of the British Columbia statement of claim as being a separate claim under the terms of the D&O Policy. According to Liberty, the class action represents a single claim for failing to disclose information in the prospectus about the dam deficiencies, which deficiencies involved the threat of the seepage or escape of pollutants. The class action, it says, is therefore a claim in respect of a pollution loss and the exclusion clause applies to the defence costs incurred in relation to defending this claim.

[25] In other words, Liberty's position is that the exclusion clause should be read as excluding all losses arising from a claim that relates to or involves a pollution loss. I disagree.

[26] There is language in the motion judge's decision that could be taken to suggest that he equated each allegation in para. 36 of [page282] the pleading as a separate claim. For example, at para. 35 of his reasons he stated: "[t]he issue then becomes whether the amount to be paid for each claim of misrepresentation can be said in any way to be directly or indirectly involved, or tied to or concerned with, pollutants" (emphasis added). However, in the next paragraph he indicated that he was using the words "claim" and "allegation" interchangeably:

The allegations of misrepresentation are contained at paragraph 36 of the further amended statement of claim and involve allegations of misrepresentation by omission of material facts. In my view, some of these allegations [do] not involve, or are not tied to or concerned with, pollution and others do involve, or are tied to or concerned with, pollution. (Emphasis added)

[27] I agree with Liberty; the claim for purposes of the D&O Policy is the amended statement of claim filed in the lead class action, and not the individual allegations found in the pleading. Claim is defined in s. 28.1 as "any verbal or written claim or allegation made anywhere in the world against or in respect of a director/officer which may reasonably result in a loss". Nothing of significance turns on this distinction, however.

[28] In the end, my opinion is that Liberty's argument that the motion judge committed reviewable error in failing to interpret the exclusion clause as excluding any claim that relates to or involves a pollution loss should fail. I reach this conclusion for two reasons.

[29] First, the motion judge proceeded on the basis that the exclusion clause excludes pollution-related losses, not pollution-related claims. In doing so he held that the applicability of the exclusion clause requires a consideration of whether the allegations of wrongful acts or omissions on the part of the directors and officers in the statement of claim gave rise to both pollution loss and loss other than pollution loss. He was correct.

[30] In reaching the conclusion he did, the motion judge had regard to the relevant principles of interpretation of an insurance contract. He correctly noted that exclusion clauses should be strictly and narrowly interpreted against the insurer and where there are ambiguities, the reasonable expectations of the parties are to be given effect: see Amos v. Insurance Corp. of British Columbia, 1995 66 (SCC), [1995] 3 S.C.R. 405, [1995] S.C.J. No. 74, at p. 414 S.C.R.; Derksen v. 539938 Ontario Ltd., 2001 SCC 72, [2001] 3 S.C.R. 398, [2001] S.C.J. No. 27, at paras. 52 and 57.

[31] Second, Boliden heavily relied on this court's decision in Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 2002 33365 (ON CA), 62 O.R. (3d) 447, [2002] O.J. No. 4496 (C.A.) in support of the non- application [page283] of the exclusion clause. In Zurich, it was held that a pollution exclusion clause in a commercial general liability policy was not applicable even though its language appeared to cover the claim in question. The motion judge distinguished Zurich from this case.

[32] The motion judge noted in para. 20, that in Zurich, if the insurer's suggested interpretation of the exclusion clause were applied, "there would be little left for coverage of the insured's business". Whereas, in this case, the D&O Policy "covers a broad range of wrongful acts and a misrepresentation case involving underlying pollution problems would be but one of many claims that could fall within the policy". I agree with the motion judge; Zurich is not determinative of the meaning to be given to the pollution exclusion clause in the D&O Policy.

[33] In my opinion, the applicable principles of interpretation support the conclusion that the exclusion clause in issue excludes pollution losses, as opposed to pollution- related claims. In the words of the exclusion clause: "Liberty . . . shall not be liable under this policy to make any payment for loss respecting a claim . . . for or in respect of a pollution loss" (emphasis added). These words can be read as excluding pollution losses from coverage as opposed to all losses connected to a pollution-related claim. Any ambiguity as to whether the clause excludes pollution-related losses or pollution-related claims should be resolved in favour of the insured.

[34] Moreover, the exclusion clause should be interpreted so as to give effect to the reasonable expectations of the parties. The following language in the allocation endorsement expressly contemplates that a single claim may involve both a covered and uncovered loss: "[i]n the event that a claim involves a loss that is covered by this policy and a loss or payment not covered by this policy . . .".

[35] The motion judge's approach to the applicability of the exclusion clause gives effect to the relevant principles of construction. That is, it requires an assessment as to whether the allegations against the directors and officers in the amended statement of claim could lead to both covered and uncovered losses.

[36] I would also not interfere with the motion judge's conclusion that the loss arising from the alleged omissions in paras. 36(a) to (d) of the pleading was a covered loss. The wrongful acts alleged in these paragraphs were capable of giving rise to liability irrespective of the dam collapse. As Boliden observes in its factum, a mining company's share price is affected by its ability to maintain estimated production volumes. If mining were to be [page284] suspended because of structural problems with the tailings pond, production volumes could be affected even if the dam did not collapse.

[37] In addition, para. 37 of the pleading supports the conclusion that the liability of the officers and directors and the defence costs incurred on their behalf were related to allegations of misleading production estimates connected to undisclosed structural problems affecting the dam and not solely because of the dam collapse. Paragraph 37 states:

Further, the Production Estimates were misrepresentations in that they were untrue, inaccurate, misleading, and/or not realistically feasible in light of, inter alia, the facts listed in paragraph 36 above, and the heavy rainfall in southern Spain in 1996.

[38] The "facts listed in paragraph 36" include paras. (a) to (d), which describe the structural deficiencies with the dam and which do not refer to the escape or possible escape of pollutants. Accordingly, this allegation also gave rise to a covered loss.

[39] For these reasons I would answer question one in the negative. That is, the motion judge did not commit reviewable error in his interpretation of the pollution exclusion clause and the meaning of "pollution loss" in the D&O Policy.

(ii) Did the motion judge commit reviewable error in his interpretation of the allocation endorsement?

[40] Liberty argues that in light of the motion judge's reasons, each allegation in the statement of claim is a separate claim and the motion judge was required to determine whether each claim involved both a covered and uncovered loss. Liberty contends that none of the individual claims in paras. 36(a) to (d) involve both covered and uncovered losses and, thus, there is no basis to apply the allocation endorsement.

[41] Liberty's suggested interpretation of the allocation endorsement must be rejected, in my view. First, as I have already discussed above, the motion judge intended to treat each allegation in the statement of claim as a separate claim as defined in the policy. Second, it would make no commercial sense to parse each allegation in a statement of claim to determine whether it gives rise to both a covered and uncovered loss as a precondition for applying the allocation endorsement.

[42] Clause 11 provides that the event that triggers the application of the allocation endorsement is "a claim [that] involves a loss that is covered by this policy and a loss or payment not covered by this policy". The question therefore is whether the amended statement of claim exposed the directors and officers to [page285] both covered and uncovered losses. If so, then the parties agreed that, in the interests of certainty, 80 per cent of all defence costs associated with the claim would be advanced by Liberty.

[43] As I have discussed above, the pleading in this case did two things. First, it sought relief regarding covered losses arising from non-pollution related matters. Second, it contemplated pollution-related losses and, to that extent, concerned uncovered losses. Thus, the directors and officers were exposed to both covered and uncovered losses. Accordingly, the motion judge properly applied the allocation endorsement.

[44] The motion judge in this case was required to consider the meaning of the policy provisions within the particular factual matrix of the class action litigation against Boliden and its officers and directors. The interpretative exercise involved answering questions that turned primarily on the wording of the D&O Policy and the amended statement of claim. In my view, there is no basis to interfere with his interpretation of the relevant terms of the D&O Policy, and I would dismiss Liberty's appeal.

Disposition

[45] For the foregoing reasons, I would dismiss the appeal. I would order costs of this appeal to the respondent. The parties' costs submissions should be made in writing to the Registrar. The respondent shall do so within ten days of the release of these reasons and thereafter the appellant shall do so within a further period of ten days.

Appeal dismissed.

Notes

[^1]: The storage area of the refuse material separated out in processing.