Constructive Notes ®
Introduction
Contract Works insurance may afford limited cover from time to time if the disturbance of asbestos or another contaminant is such as to reach the threshold for “physical damage” to property forming part of the Work Under Contract1. Significant gaps in cover can arise however where liability is asserted for damage to third party property.
Contractors General Liability or Public and Products policies of insurance commonly contain a “pollution” exclusion and/or a specific exclusion directed towards liability arising from the presence or disturbance of asbestos.
Contractors Pollution Legal Liability Insurance, is a sometimes overlooked component of risk management for contractors engaged not just in civil works projects, where the risk of encountering site contamination remains ever present, but also more generally with any projects involving site mobilisation for construction or demolition works.
Contractors Pollution Liability Insurance2, typically affords cover in respect of third party property damage claims3 and third party bodily injury, and also clean up costs due to covered operations at a third party site. The cover also commonly extends to emergency response costs, statutory liabilities, transportation and disposal of waste materials, civil fines and penalties and defence costs and expenses.
There is a surprising scarcity of judicial authority in Australia in relation to the operation of these policies4, so it is necessary for the most part to revert to first principles in seeking to ascertain their scope of operation in any particular factual scenario.
This issue of Constructive Notes is directed to that exercise. It is hoped that the reader will be left with a greater understanding of the operation of these specialist policies and the risks of gaps in cover arising if great care is not taken in implementing the suite of necessary insurances.
Matters informing the position and commonly encountered terminology
A decision of Young CJ in Equity in Forbes Shire Council v AG Australia Holdings5 , helpfully sets out some principles which inform the analysis6 .
It was recognised in that case7 that there is a question as to “… whether the [frequently encountered] words “discharge, dispersal, release or escape” mean that the pollutant must depart from the insured’s land for some other land, or whether it is sufficient that the seepage is into the insured’s own land”.
As to the meaning of those words, his Honour8 quoted from Derrington & Ashton:
“The various expressions, discharge, dispersal, seepage, migration, release or escape of pollutants, obviously have different applications that are intended to apply to a wide range of modes of dissemination. Whether one or more will operate in a particular case will depend on the court’s willingness to circumscribe their operation by their strict or limited construction, or by recourse to a finding of ambiguity. “Discharge” is a flowing or issuing out. A “release” is an act or instance of liberating or freeing. And “escape” is an act or instance of escaping. “Dispersal” is the process of spreading by liquid substances from one place to another which in some instances may involve a gradual quality”.
And then9:
“Ordinarily if one is talking about “escape” as a general word, one is talking about escape from A’s land to B’s land or at least something leaving A’s land …. this view has been taken involving similar exclusion clauses dealing with pollution in the United States”.
And then10 :
“Exclusion 15 notes that the discharge etc must be ‘into or onto land or any vegetation or building thereon, any water course or body of water, or into the atmosphere or ether’. Were it not for the reference of escape of smoke and vapours into the atmosphere, these words would, to my mind, confirm the construction that the pollutant must leave the land. However, it seems to me that smoke into the atmosphere must mean smoke into the atmosphere above the height which could reasonably be used by the occupant; CJ Kelsen v Imperial Tobacco Co Ltd [1957] 2 QB 334”.
In QBE Insurance (Australia) v MCM Chemical Handling Pty Ltd11, the factual scenario was that the interior of the insured’s factory had been severely damaged by an aggressive corrosive substance. In that case Bonjiorno J said12:
“The phrase ‘into and upon land’ … is apt to describe the land environment … outside the factory. It is not apt to describe the floor of the factory … Equally the word ‘atmosphere’, striking as it does in the middle of the exclusory phase, is not apt to describe the air inside the factory and it refers to the air environment outside the factory”.
It has been recognised repeatedly in the United States that those terms (i.e “discharge, dispersal, release, and escape”) are “terms of art in environmental law which are generally used with reference to damage or injury caused by improper disposal or containment of hazardous waste”.
It has been said in the context of the court construing an ”absolute pollution-exclusion clause” that the terms generally relate only to industrial pollution and contamination and/or environmental pollution13.
The Court in Porterfield v Audubon Indemnity Co14 made a number of instructive observations drawing on other US authorities, such as:
“… in determining whether there has been a discharge, dispersal, release or escape, it is necessary to assess the specific form of movement in question”.
“… the terms “discharge, dispersal, release or escape” ordinarily implied an active or clearly perceived physical event…”
“… a ‘discharge’ (a flowing or issuing out), a ‘release’ (the act or an instance of liberating or freeing), or an escape (an act or instance of escaping) …’dispersal’ (the process … of spreading… from one place to another’)”.
US Courts have also had regard to dictionary definitions in relation to the threshold question of whether something qualifies as a “contaminant” or “pollutant”. In the Court of Appeals of Maryland15 in Sullins v Allstate Insurance Company16 regard was had by the Court to the definition from Webster’s Dictionary of ‘contaminant’ being “something that contaminates” and ‘contaminate’ as ‘to soil, stain, corrupt, or infect by contact or association” or “make inferior or impure by mixture”, and a ‘pollutant’ as “something that pollutes” and ‘pollute’ as “to make physically impure or unclean”.
Some of the policies which might be called upon to respond to liability for environmental losses have an “Occurrence” or “Event” trigger (which can be relevant not just to indemnity under the insurance policy but also the number of potentially applicable deductibles). In Marketform Managing Agency v Amashaw Pty Ltd17 the New South Wales Court of Appeal18 affirmed the primary judge’s finding that the relevant “event” for the purposes of liability was the release of petrol into the groundwater between the periods of March, April and May 2013, such release having occurred by the spontaneous failure of a check valve, underground and adjacent to a ULP 98 petrol pump.
The definition of “Occurrence” frequently involves consideration of the words “neither expected nor intended”.
In the decision of The Owners Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3)19, Wigney J commented in respect of the definition of ‘Occurrence’ in the Policy which responded to “Property Damage”:
“the words “neither expected nor intended” refer to the “property damage”, not the “event”. That was the construction given to a similarly worded clause in Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance (2018) 359 ALR 314; [2018] NSWCA 100 at [103]. That construction of the definitional clause followed “[a]s a purely semantic matter” because the “word ‘which’ obviously refers back to ‘event’, so that an essential characteristic of the relevant ‘event’ is that it ‘results in’ Property Damage” and “[i]f it were intended that another essential characteristic of the ‘event’ should be that it was not expected or intended by the insured, the words ‘and which is’ (or, at least, ‘and is’) would necessarily appear before ‘neither expected nor intended by You’”: Weir at [103]. The clause in question in this case includes the words “that is” before the word “neither”, but does not include the word “and”. It follows that the reasoning in Weir applies equally to the wording of the clause in this matter.
Pollution Liability exclusions often have a write-back of cover where the Pollution condition (eg the release or dispersal of pollutants out of factories) is “sudden or accidental or unintended”.
The phrase “sudden and accidental” as it related to property damage was considered in the decision of Visy Packaging Pty Ltd v Siegwerk Australia Pty Ltd.20 The Court said:
It is clear that these words are intended to have their ordinary meanings when used in the policy. They are not technical terms. The Macquarie Dictionary provides two alternative meanings of the word “sudden”, being “happening, coming, made, or done quickly, without warning or unexpectedly” or “sharp; abrupt”. In construing the meaning of the word “sudden” in an insurance policy in Sun Alliance & London Insurance Group v North West Iron Co Ltd (1974) 2 NSWLR 625 at 631–633, Sheppard J adopted the “unforeseen and unexpected” meaning of the word. The Macquarie Dictionary defines “accidental” as “happening by chance or accident, or unexpectedly”. Again, in an insurance context, the High Court in Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 adopted the meaning of “accident” involving its unintended and unforeseen elements. At 527, Wilson, Deane and Dawson JJ said:
As a matter of ordinary language in this country, an “accident” (from the Latin accidens) means very much what the etymologist would expect. It is something which happens without intention or design. When used with reference to something which causes injury, it means an unexpected and unintended mishap.
The decision of Thompson v NSW Land and Housing Corporation (No 2)21 considered similar wording in relation to “dispersal”. Significantly, the Court commented:
“There is no place for that concept in this case as on each occasion Pestkil attended the property and dispersed the relevant chemical for its intended purpose over a period of time. Unlike Australia Paper Manufacturers Limited v American International Underwriters [1994] 1 VR 685 where the Victorian Court of Appeal found that the adjectives accidental, unexpected and unintended qualified only the particular “happening” in relation to the subject policy, the words “sudden” and “accidental” qualified the words “discharge”, “dispersal”, “release” or “escape”. There is no relevant analogy with the APM decision. Nothing in the conduct of the Pestkil operations was thus characterised; the toxic chemical was dispersed intentionally and deliberately in a controlled manner.”
It will come as no surprise that these types of insurance policies commonly contain exclusions relating to “Intentional and Illegal Acts” excluding “Loss arising from any dishonest, criminal, fraudulent, malicious, intentional or illegal act or omission of any responsible insured”.
The meaning of “dishonest” was considered in Bolitho v Banksia Securities Ltd (No 18)22:
“Dishonesty encompasses recklessness … a dishonest state of mind may be inferred from wilful blindness or from dishonest of deliberate ignorance … a failure to make enquiry may sustain an inference of knowledge of the actual or likely existence of the relevant matter …”
In Vero Insurance Limited v Power Technologies Pty Ltd23 the court observed as follows:
“The taking of measures known to be inadequate to deal with the danger which is itself known involves making a deliberate decision to court the danger”.
Another common exclusion for Non-Compliance may also operate:
“Loss arising from any Responsible Insured’s intentional, wilful or deliberate non-compliance with any statute ….”.
In Beresford v Royal Ins Co Ltd24 Lord Atkin stated that:
“On ordinary principles of insurance law, an assured cannot by his own deliberate act cause the event upon which the insurance money is payable”.
In Clayton v Mutual Community General Insurance Pty Ltd25, King CJ suggested that the likelihood of loss arising from the insured’s act may be so high as to be treated as being caused deliberately.
Conclusion
While specifically designed Contractors Pollution Liability cover is an essential component of any contractor’s risk and insurance strategy, it is unlikely to operate as warranty insurance, and gaps in cover can readily emerge if there is not careful consideration at policy inception, of the interface between cover available under this specie of insurance and the contractor’s Contract Works (Material Damage) cover and the contractor’s Public and Products (GL) cover.
Given exclusions that may operate in relation to the Contract Works cover (and even issues arising from whether the threshold for “physical damage” has been met), reliance on Public and Products cover, without more, is unlikely to afford sufficient protection in the absence of a stand alone Contractors Pollution Liability Policy, or at the very least a substantive endorsement writing back cover that would otherwise be proscribed due to the operation of exclusions in GL cover in relation to “Products” and Consequential Loss26, generally contained within such policies.
As environmental obligations become ever more onerous, and penalties for non-compliance continue to increase, Contractors may also be exposed to emerging risks as to what substances may be classified as a “contaminant” or “pollutant” (eg. Per- and polyfluoroalkyl substances (PFAS)) and this may exacerbate exposure arising not just from the actions of government environmental authorities, but from third parties, even potentially via representative actions.
It is also apparent that manufacturing operations, waste disposal businesses and any industrial enterprise where a risk of groundwater or atmospheric pollution exists should ensure that they have adequate fixed site cover, of a similar nature, specifically tailored to their individual needs.
1 Although there is often a question mark surrounding this, with divergence in approach between the position in the US, the UK and Australia : See for example Armstrong World Industries Inc v Aetna Casualty and Surety Co 45 Cal App 4th I, the comments of Potter LJ in Pilkington UK Ltd v CGU Insurance plc [2004] EWCA CiV 23 at [43-45] and similarly those of Wigney J in The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (no 3) [2023] FCA 815 at [145-148]
2 Which can be written on a practice or project specific basis.
3 Including often times trespass or nuisance.
4 Unlike the position in the US where differing approaches are evident in different States and there is much jurisprudence arising from the interpretation given not just to Environmental Liability cover but also in relation to the “absolute pollution exclusion” traditionally contained within general liability policies.
5 [2007] NSWSC 847
6 Although the insurance policy under consideration was not a contractors pollution liability policy, so caution needs to be observed in extrapolating these principles across into that specie of policy which typically responds in respect of covered operations at a third party site. Exclusion clauses may also be construed more narrowly than coverage clauses.
7 At [38]
8 At [40]
9 At [42]
10 At [48]
11 (2006) 14 ANZ Ins CAS 61-697
12 At [14]
13 Porterfiled v Audubon Indemnity Co. (CV-00-D-1291-N 2002-2003); 856 50 2d 789
14 Ibid 9
15 Renamed in December 2022, the Supreme Court of Maryland.
16 (filed 6 November 1995)
17 (2018) 97 NSWLR 306
18 At [321]
19 [2023] FCA 814.
20 [2013] FCA 23.
21 [2012] NSWSC 864.
22 [2021] VSC 666 at [1329]
23 [2007] NSWCA 226
24 [1938] AC 586 at page 595.
25 8 ANZ INs CAS 61-263
26 Not to mention specific “pollution” and/or “asbestos” exclusions
This article may provide CPD/CLE/CIP points through your relevant industry organisation.
The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.