Insurer ordered to indemnify for cost of restorative works following petrol contamination but not for preventative works22 June 2017 | Insurance Issues
Insurer liable to indemnify for the cost or restorative, but not preventative, works following damage caused by explosion of petrol vapour from insured service station. Insurer's non disclosure defence rejected.
- Whether the loss fell within the terms of the policy
- Whether the insurer was entitled to reduce its liability to nil for the insured’s failure to disclose pollution contam-ination reports
The plaintiff insured operated a service station in southern Sydney. The defendant insurer issued a policy of combined liability insurance (the policy) in favour of the plaintiff. Subject to various conditions, the policy as issued and renewed, insured against, among other things, damage caused by pollution.
In June 2013, during the renewed insurance period there was an explosion in a Sydney Water sewer in a laneway north of the service station. It was agreed that the cause of the explosion was the ignition of petrol vapour which had originated from the insured’s service station. At about the same time, petrol was detected in other nearby works including a Council stormwater line, a sewer line underneath a railway station, and a telecommunications service pit.
The insured undertook work to repair the damage caused by the petrol that had escaped and further work to prevent further escape of its petroleum products. It claimed indemnity under the policy.
The insurer denied indemnity on the grounds that the loss did not fall within the terms of the policy and also because of non disclosure by the insured of reports from a contractor (the Alliance reports) retained to monitor the condition of groundwater monitoring wells which identified a significant body of contamination under and adjacent to the service station.
The court rejected the insurer’s argument that a reasonable person in the position of the insured would have known that the Alliance reports were relevant to the insurer’s decision on whether to accept the risk. The court noted that the focus of the particular policy was not on existing or gradual pollution, but on pollution occurring as the direct result of a sudden, specific identifiable event. The Alliance reports did not suggest such sudden specific events, but rather, a gradual release of contamination over time. This, combined with the court’s finding that a reasonable person would have known that the insurer regularly wrote insurance cover for service stations, and must be taken to have known that service station sites are likely to be contaminated by petroleum products, meant that a reasonable person would not think that the disclosure of such expected contamination was required.
The court also noted that the proposal form contained no questions about contamination and this was considered to be further support for the view that the insurer was already aware of the likelihood that there was contamination in and around the subject service station. Although the Alliance reports provided evidence of the existence of contamination, it was consistent with historic and gradual contamination, a risk that was specifically outside the scope of the policy. The non disclosure defence failed.
As to whether the insurer was obliged to provide indemnity, the court rejected the argument that the fact that the insured had a statutory obligation (s 91 Protection of the Environment Operations Act 1997 (NSW)), to make good the consequences of the contamination, meant there was no liability to pay damages under the policy. The court held that there was such a liability, which arose in nuisance.
The court then considered whether the leakage of petrol was an ”event” for the purposes of the insuring clause. After noting that “Pollution“ was defined to mean “any pollution or contamination of the atmosphere or of any water, land or other tangible property”, the court held that the pollution must be something separate from the event, because it was the result of the event. Since the expert evidence established that the relevant contamination occurred as a result of a faulty valve in one of the underground petrol storage tanks, there was an “event” separate from the “pollution” which gave rise to a liability to pay damages.
Although the indemnity claimed fell within the scope of the policy, the insured was not entitled to recover the amount spent on preventing future contamination (about $930,000) and was only entitled to recover the cost of repairing the damage which had occurred (about $266,000).
Implications for you
This case highlights that in claims for pollution damage it is critical to establish the source of the contamination in order to determine whether the policy responds. Most such policies do not cover gradual or long term pollution and only insure against damage caused by sudden, specific events of pollution. It also demonstrates that not all damage, specifically damage to prevent future contamination, is covered, even if the policy otherwise responds.