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Policyholder recovers costs of ‘voluntary’ remediation works

13 June 2017 | Australia
Legal Briefings – By Mark Darwin and Brendan Donohue

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The NSW Supreme Court has granted coverage to a policyholder for the costs of ‘voluntarily’ remediating accidental damage (contamination) to adjacent land, on the basis that it would have been liable to pay damages that would have been covered by the policy had it not remedied the damage.

The policyholder could not however recover costs associated with preventing similar damage in the future because that was not a liability for which it would have been covered had it been sued.

It is therefore important for policyholders to consider how such costs are recorded and classified in order to ensure that proper recoveries can be made under insurance policies.

Background facts

Petrol had leaked from a service station operated by the policyholder, Amashaw Pty Limited (Amashaw), causing an explosion in a nearby water sewer and contamination in other underground services. Amashaw acknowledged its responsibility for the leak, and undertook works to rectify the damaged sewer and to prevent future petrol leakage before either the regulator or the sewer main’s owner had commenced any form of proceedings against it for the damage.

Amashaw sought indemnity from its liability insurer for the cost of the works. The relevant policy insured Amashaw for its liability to pay damages arising out of damage resulting from pollution,1 and the relevant definition of ‘damage’ included damage resulting from ‘conversion, trespass [and] nuisance’.2

Did Amashaw have a ‘liability to pay damages’ resulting from the leak?

The key issue was whether the cost of undertaking the remedial works voluntarily could be characterised as a ‘liability to pay damages’ which was covered by the policy.3 The Defendant insurer declined the claim, arguing that Amashaw had statutory obligations to make good the consequences of the leak, and was therefore obliged to do so regardless of any other obligation it may have had to the sewer main’s owner in nuisance.

The decision

The NSW Supreme Court (Justice McDougall) found in favour of the policyholder for at least those costs that it would have been liable to pay as damages. His Honour’s sound reasoning was:

  • ‘Amashaw’s liability in damages for nuisance crystallised, at the latest, … when petrol from Amashaw’s service station site, having entered the sewer main, exploded and caused damage’;
  • while it was true that Amashaw had a statutory obligation to remediate the damage, there was nothing in the relevant environmental protection statute to ‘suggest that liability under it abrogate[d] or discharge[d] [Amashaw’s] liability … to pay damages for negligence or nuisance’;
  • regardless of any notice from authorities, ‘Amashaw was liable to [the sewer main’s owner] in nuisance for the damage caused to the sewer main. Amashaw rectified the damage, and incurred costs in doing so. By acting in that way, Amashaw effectively discharged its liability to pay damages for nuisance. Amashaw could have stood by and permitted [the sewer main’s owner] to do the work, and awaited service of the inevitable demand for payment’;
  • there was no reason ‘why, in terms … of the policy, Amashaw should be in any worse position because it undertook the works itself’.

Interestingly, it does not appear that the UK decision in Bartoline v Royal Sun Alliance Insurance PLC,5 which arrived at a contrary conclusion (albeit on a different policy wording) was even cited to the Court in this matter. The Bartoline case essentially held that the statutory liability to remediate contaminations was not covered by a policy that provided indemnity for a ‘legal liability to pay damages’ since that term meant common law damages. The Court in that case also commented that where a policy covered legal liability for damages, it was not enough to point to an event that might give rise to a legal liability for damages - that legal liability had to be established. With respect, we prefer the NSW decision since (1) in the absence of an exclusion for statutory liabilities, why shouldn’t a concurrent liability at common law and statute be insured as the same risk if the exposure is the same and (2) to find otherwise might be seen to encourage parties not to proactively address pollution incidents in order to preserve their insurance position (which does not sit well with public policy considerations). 

How much could Amashaw recover?

Amashaw claimed an indemnity of almost $1.2 million, comprising the costs of:

  • remedying the relevant damage to the sewer main (restorative works); and
  • construction works to prevent future petrol leakages (preventative works).

Justice McDougall held that Amashaw was entitled to the costs of performing the restorative works, but not the cost of the preventative works stating:

‘damages for nuisance may be assessed as the cost of making good the effects of the nuisance … However, that principle does not extend to performance of works on the land from which the nuisance emanates [such as works on Amashaw’s service station site] … [T]he works that made good the damage caused by the escape [of] petrol from the service station site to adjoining properties were the restorative works. The preventative works were not undertaken to make good the damage caused. They were undertaken to prevent further damage from being caused’.6

Non-disclosure issues

Incidentally, but also relevantly for policyholders, Justice McDougall held that Amashaw’s non-disclosure of two technical reports regarding contamination at its business had caused no prejudice and were therefore irrelevant to the coverage because a reasonable person would know that the insurer regularly underwrote insurance cover for service stations, and must be taken to have known (as the reasonable person would know) that service station sites are likely to be contaminated by hydrocarbons, so disclosure of such expected contamination was not required.

Endnotes

  1. Amashaw Pty Limited v Marketform Managing Agency Ltd [2017] NSWSC 612, [41].
  2. Ibid at [42].
  3. Ibid [29].
  4. Ibid at [117] to [123].
  5. (2007) Lloyd’s Law Reports (IR) 423.
  6. Ibid at [156] to [158].

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