In this issue:
1. Firm and Industry News
2. Long Tail Marine Insurance Policies Respond to Irving Whale Refloating
3. UPDATE on Smith v. Inco Limited, 2011 ONCA 628
1. Firm and Industry News
- June 6th, 2012 - Webinar - Ontario Trucking
Association - Freight Claims Trends
- June 14, 2012, Toronto - Canadian International
Freight Forwarders Boat Cruise
- June 28, 2012, New York - Recovery Forum
Dinner - Insurance Person of the Year
- Sept. 15-19, San Diego - International Union
of Marine Insurers Annual Conference
- Sept. 26-29, Toronto - Canadian Transport
Lawyers Association Annual Conference
- Sept. 26-28, Dublin - International
Marine Claims Conference
Gordon Hearn was appointed President of the
Transportation Lawyers Association on May 4th at the Association's
Annual Meeting at Naples, Florida. Kim Stoll chaired the
Canadian Transport Lawyers Association Mid- Year Meeting. Rui
Fernandes and Kimberly Newton represented the firm.
Rui Fernandes presented a webinar seminar to
the Ontario Trucking Association on June 6th, 2012 on Freight Claims
Kim Stoll and James Lea represented
the firm at the Canadian Board of Marine Underwriters Mid-Year Meeting
in Banff, Alberta.
2. Long Tail
Marine Insurance Policies Respond to Irving Whale Refloating Costs
The recent decision of Justice Sean Harrington in
the Federal Court of Canada in Universal Sales, Limited v. Edinburgh
Assurance Co. Ltd., 2012 FC 418 demonstrates why "claims
made" policies of insurance became popular with insurers over
This is a marine insurance coverage case. The claimants
sought indemnity from the defendant insurers, on policies written
over thirty years earlier in 1970, for sums paid to the Canadian
government in 2000 in settlement of an action for the cost of refloating
the tank-barge Irving Whale and her cargo in 1996, for the cost
of defending that action, and for sue and labouring expenses allegedly
incurred on underwriters' behalf. The insurers denied liability.
On 7 September 1970, the Irving Whale, under tow of
the tug Irving Maple, set sail from Halifax, Nova Scotia, bound
for Bathurst, New Brunswick where she was to deliver her cargo of
4,270 metric tons of Bunker C fuel oil. She never arrived. She sank
that day in the Gulf of St. Lawrence where she lay 37 fathoms below
the surface for 26 years, until the Crown raised her.
Justice Harrington described the aftermath of the
In the short-term aftermath of her sinking,
some of her cargo escaped and fetched up onto the shores of the
Magdalen Islands, and to a lesser extent onto Prince Edward Island
and Cape Breton. The Crown monitored the situation over the years
and, from time to time, took remedial steps such as blocking vents
from which oil was escaping. Nevertheless, seepage was observed.
Come the 1990s, based on in-house advice and outside reports it
commissioned, the Crown finally came to realize that the Irving
Whale was a time bomb. Sooner, rather than later, she would corrode
and break up, releasing well over 3,000 m.t. of oil to the great
prejudice of the marine habitat, the shoreline, and those dependent
upon the sea and shore. Although the wisdom of the Crown's decision
has not been challenged in these proceedings, the timing has.
The defendants argue, and I agree, that the government of the
day was pursuing a political agenda. This was post Exxon Valdez,
and the principle of "polluter pays" was in vogue. However,
although the precise timing of the refloating may have been political,
the fact remains that the Irving Whale would have broken up, probably
sooner, rather than later.
The Irving Group were put on notice that they would
be accountable for the cost of raising the Irving Whale and that
the cost would likely exceed five million dollars, the limit of
the liability insurance coverage provided by the insurers.
The refloating operation successfully proceeded in
1996 with no environmental consequences to speak of. The Irving
Group took control over the Irving Whale and her cargo at Halifax
shipyard, cleaned her, and arranged for the destruction of the PCBs
and oil contaminated therein. They sold the oil that was not contaminated,
the proceeds of which at first instance were held by the Crown.
As expected the Crown took proceedings against the
Irving Group and as well as the Administrator of the Ship-Source
Oil Pollution Fund and the International Oil Pollution Compensation
Fund 1971, parties by statute. As against the Irving Group, the
claim was based upon statutory liability arising from the Canada
Shipping Act and the Oil Pollution Prevention Regulations thereunder, as well as common law negligence and nuisance. The amount
claimed was in excess of $42,000,000.
The claims based on the statutes were dismissed by
the Federal Court in 1998 as time barred. The action based on negligence
and nuisance was allowed to proceed. Prior to examinations for discovery,
the claims were settled between the Irving Group and the Crown for
five million dollars.
Justice Harrington described the relationship between
the Irving Group and the insurers during this time as peculiar,
The relationship between the Irving Group
and the defendant underwriters is somewhat peculiar in that during
the time the Group arranged with the Crown to provide standby
services and to remediate the Irving Whale and her cargo, they
had no details of their insurance coverage. In August 1995, Bruce
Drost, an in-house counsel at J.D. Irving, Limited, wrote to Reed
Stenhouse Limited to say that it was his understanding they were
the broker who arranged various insurance coverages including
hull & machinery, and third party liability, (primary and
excess). The purpose of the letter was to state that the Crown
had awarded a contract to lift the barge and to provide notice
of potential claims.
The insurers had difficulty in retrieving the policies.
In April 1997, the insurance broker provided the Irving Group with
copies of the insurance policies. The insurers had been put on notice
of the potential claim, had been advised of the claim and had been
advised of the settlement. Surprisingly the insurers did not engage
in any dialogue as they were under the impression that the Irving
Group would absorb all the legal fees. The Irving Group had not
obtained prior approval of the settlement from the insurers. The
liability under the policies was several and not joint. This was
important in that three of the insurers were insolvent by the time
of the hearing.
The limit on liability coverage was $5,000,000, in
excess of the $200,000 covered by the Protection and Indemnity Club
(which had tendered its amount), subject to a $1,000 deductible.
Although there was no contractual duty on the part
of the insurers to defend, the policy contained a sue and labour
clause, the relevant portion of which read:
It shall be lawful for the Assured - to sue,
labor and travel for, in and about the defense of any claim, suit
or appeal from any judgment, it being understood and agreed that
the costs and expenses of minimizing or establishing a liability
of the Assured or defending any suit or suits against the Assured
based on any liability or alleged liability of the Assured
as covered by this insurance shall be payable by these Assurers.
Justice Harrington commented that sections 79 and
80 of the Marine Insurance Act (*1) provide that if a marine
policy contains a sue and labour clause, there is in fact supplementary
insurance so that the insured may recover expenses properly incurred
even if the underwriter has paid for a total loss. An insured is
duty bound to take "such measures as are reasonable for the
purpose of averting or diminishing a loss under the marine policy."
The insertion of a sue and labour clause is thus to
benefit the underwriters. The quid pro quo is that the insured
will be indemnified for expenses reasonably incurred which had the
potential of benefiting the underwriter
Justice Harrington described the insurers position
In broad strokes, on the liability issue,
the underwriters take the position that the Irving Group were
not liable to the Crown or, if they were, they paid too much.
In any event, if they were liable, such liability is not covered
by the policies. More specifically, the Irving Group were not
liable to the Crown because:
a. there was no negligence;
i. it has never been established that any member of the Irving
Group or individuals for whom they were vicariously liable, was
b. public nuisance has no application as steps to abate should
have been taken immediately, certainly not after an interval of
c. they made a gratuitous payment to enhance their public image;
d. the loss did not occur during the time frame covered by the
If they were liable, they paid too much as
they were entitled to limit their liability as the loss occurred
without their "actual fault or privity".
If they were liable, the underwriters also
say the Irving Group are not entitled to indemnity because:
a. claims which were once covered have become time-barred; or
b. they settled claims which were covered and claims which were
not. As no proper "ascertainment" was made among the
various heads of claim, they are not entitled to recover anything.
Justice Harrington did not consider the grounds of
negligence against the Irving Group, as he was satisfied that one
or more of the Irving Group would have been found liable in public
nuisance to an amount in excess of $5 million.
In coming to this conclusion Justice Harrington
described the law as follows:
That liability is based on public nuisance
created by the polluters. There are common law and statutory nuisances,
as well as private and public nuisances. One could certainly say
that the relevant portions of the Canada Shipping Act and
the regulations thereunder, which were held by Mr. Justice Hugessen
to be inapplicable because of time bar, created a statutory nuisance.
However, the Act did not abolish common law nuisance which is
one, apart from statute, which violates principles recognized
in the law for the protection of the public and individuals in
the exercise and enjoyment of their rights.
 Then there is the distinction between
public nuisance and private nuisance. This case deals with public
nuisance which is one which inflicts damage, injury or inconvenience
on all Her Majesty's subjects, or on such members of the class
who come within the neighbourhood of its operation: see Halsbury's
Laws of England, 5th ed, vol 78 (Markham, Ont: LexisNexis
Canada, 2010) "Nuisance", at 99ff.
 The law of public nuisance was clearly
stated by Lord Denning in two cases in the 1950s. In Attorney
General v P.Y.A. Quarries Ltd,  1 All ER 894, 
2 QB 169, he said at pages 908 and 191 respectively:
a public nuisance is a nuisance which is so widespread in
its range or so indiscriminate in its effect that it would not
be reasonable to expect one person to take proceedings on his
own responsibility to put a stop to it, but that it should be
taken on the responsibility of the community at large.
In an obiter in Southport Corporation v
Esso Petroleum Co, Ltd,  2 QB 182 ,  1 Lloyd's
Rep 446, reversed on other grounds by the House of Lords at 
AC 218,  2 Lloyd's Rep 655,  3 All ER 864, he dealt
with oil pollution as a public nuisance at page 196: "Suffice
it to say that the discharge of a noxious substance in such a
way as to be likely to affect the comfort and safety of Her Majesty's
subjects generally is a public nuisance." He continued on
the following page: "Applying the old cases to modern instances,
it is, in my opinion, a public nuisance to discharge oil into
the sea in such circumstances that it is likely to be carried
on to the shores and beaches of our land to the prejudice and
discomfort of Her Majesty's subjects."
 A principal difference between an action
for public nuisance and an action for negligence is the burden
of proof. In Southport, above, Lord Denning continued at
In an action for a public nuisance, once a
nuisance is proved and the defendant is shown to have caused it,
then the legal burden is shifted onto the defendant to justify
or excuse himself. If he fails to do so, he is held liable whereas
in an action for negligence the legal burden in most cases remains
throughout on the plaintiff.
In this case no excuse has been made out.
Having found that the Irving Group could have been
found liable in the Crown action, the Court then had to look at
whether the insurers were required to indemnify the Irving Group.
Justice Harrington found that the $4,709,501.86 paid
to the Crown did not cover any liability on the part of Irving Oil.
Irving Oil was not the polluter. Irving Oil did not create the nuisance.
Its potential liability to the Federal Crown is too remote. If,
as and when the Bunker C oil reached shore, its liability would
be engaged under provincial environmental statutes. Its turning
over of the proceeds of the sale of the oil to the Federal Crown
more than covers any liability to the Crown it might have had.
As to which members of the Irving Group would have
been found liable, one need only look to Atlantic Towing, the bareboat
charterer of the Irving Whale. It was the polluter. It created the
The court also found that the nuisance continued and
so the action was not time-barred.
The insurers argued that the payment was gratuitous,
in that it was paid by the Irving Group for their public image.
The court found that:
[t]he Irving Group were conscious of their
public image. However, "in my opinion no part of the settlement
should be considered as being gratuitous. The Group had earlier
made a conditional $10 million settlement offer. At its heart,
the Irving Group would have provided funding or have become involved
in various projects in Atlantic Canada with which their name would
have been prominently associated. However, it is not necessary
to consider that offer as it was refused. Following the actual
$5 million settlement, both the Crown and the Group issued press
releases. The Group emphasized their cooperation and that both
sides thought it appropriate to bring to an end a long, contentious
and expensive piece of litigation, much at the taxpayers' expense.
Although favourable publicity may have been achieved, Irving was
putting paid to its liability, no more, no less.
In conclusion the court found that the settlement
was reasonable and made in contemplation of the likelihood that
one or more of Universal Sales, Limited, J.D. Irving, Limited, and
Atlantic Towing Limited would have been found liable in excess of
that amount should the matter have gone to trial.
The court found that the expenses claimed by the Crown
had their origin in the original sinking. The insurers' argument
that the expenses originated in new causes of action in 1995 and
1996 was rejected. In describing the duties of insurers in "occurrence
policies" Justice Harrington stated:
However the policies do not deal with the
creation of causes of action, they deal with accidents or occurrences.
The accident or occurrence was the sinking of the Irving Whale
during the policy year. It does not matter that the damage was
only suffered many years later.
 Indeed, this is the reason why many
recent policies are written on a "claims made" basis
rather than on an "occurrence" basis. The rationale
was set out by Madam Justice McLachlin, as she then was, in Reid
Crowther & Partners Ltd v Simcoe & Erie General Insurance
Co, 1993 CanLII 150 (SCC),  1 SCR 252 at 262, 263, 147
NR 44. Although "occurrence" liability policies work
reasonably well, there are exceptions:
But for insureds who are professionals
such as doctors, lawyers, engineers, etc., damages can result
(or be discovered) many years after a negligent act is committed.
This is even more the case for manufacturers and other types
of insureds who can cause damages by producing hazardous products
or toxic waste. Therefore, for each of these types of insureds,
insurers are at risk for an unknown number of claims that may
be made many years after the expiry of a particular policy of
"occurrence" liability insurance.
Compounding the uncertainty that these "long-tail"
risks caused to insurers was the evolving nature of law and
science. The potential for future developments such as the increased
availability and quality of scientific proof of causation of
harm, expanded legal liability (e.g., "superfund"
environmental legislation), and changes in the law as to quantum
of damages, added to the uncertainty on the part of insurers
as to the likely number of claims that would be made against
their insureds in the future, as well as the likely amount of
damages per claim for which individual insurers would have to
 This is exactly what happened in this
The court also dealt with whether the Irving Group
could collect its legal costs from the insurers for defending the
Crown action, as sue and labour expenses. These costs were approximately
$1,800,000.00. Justice Harrington allowed the Irving Group 25% of
these costs being the ratio of the insured to uninsured claim. (*2).
They were allowed as sue and labour costs as these costs benefitted
*1 S.C. 1993, c. 22.
*2 Justice Harrington arbitrarily fixed the exposure of the Irving
Group to the Crown at $20 million, having found that the original
claim was $42 million, that $18 million related to expenses that
were time barred and then reduced a further $4 million for risk.
3. UPDATE on Smith v. Inco Limited, 2011 ONCA 628
Supreme Court of Canada refuses leave to appeal with
Inco operated a nickel refinery in Port Colborne,
Ontario from 1918 to 1984. Historically, Inco emitted waste products
(including nickel oxide) into the air from the 500-foot smoke stack
located on its property. Inco had complied with the various environmental
and other governmental regulatory schemes applicable to its refinery
operation. Many of the properties as owned by the plaintiffs in
this class action were found to contain nickel deposits. Inco admitted
that its refinery was the source of the vast majority of the nickel
found in the subject soil.
By the time of trial, allegations that the nickel
deposits were carcinogenic or in any way harmful to the health of
the residents had been abandoned and the action limited to a claim
for loss of property value arising out of negative publicity regarding
the Inco emissions.
The trial judge had found that the subject soil contained
offending nickel particles and there was widespread public concern
that adversely affected the appreciation in value of the properties
when compared to similar properties. The trial judge held Inco liable
in private nuisance and under strict liability as imposed by the
rule set down in Rylands v. Fletcher L.R. 1 Ex. 265, aff'd
(1868), L.R. 3 H.L. 330. This difference in property value was found
to have yielded a loss of $4,514 per property totaling a damage
award of $36 million.
Inco successfully appealed to the Ontario Court of
Appeal, which dismissed the class action finding that the plaintiffs
had failed to establish liability under either nuisance or Rylands
v Fletcher and, even if the plaintiffs did make out the claims,
that the plaintiffs failed to establish any damages.
To establish nuisance, the Ontario Court of Appeal
outlined that a plaintiff must prove that the defendant allowed
a noxious substance to escape onto land that was owned or occupied
by that plaintiff and that there was actual, substantial, physical
damage to that land that posed some risk to the health or wellbeing
of the residents or some physical injury to the land. The Court
of Appeal found that evidence of nickel particles in the soil that
generated "concerns" about "potential" health
risks was not enough to show actual, substantial harm or damage
to the property and, without which, the plaintiffs could not succeed.
Regarding the rule in Rylands v. Fletcher,
the Court of Appeal noted the four prerequisites to the operation
of this limited rule as found in The Law of Nuisance in Canada
by Gregory S. Pun and Margaret I. Hall, (Markham, Ontario: LexisNexis
Canada, 2010) (page 113):
(1) the defendant made a "non-natural" or
"special" use of his land;
(2) the defendant brought on to his land something that was likely
to do mischief if it escaped;
(3) the substance in question in fact escaped; and
(4) damage was caused to the plaintiff's property as a result of
The Court of Appeal stated that a finding of strict
liability under the rule was predicated on 'non-natural' use of
Inco's property and normal operations of a nickel was not 'non-natural',
'exceptionally dangerous' or 'extraordinary or unusual'. The refinery
was in an industrial area and had complied with all applicable regulations,
and was merely an ordinary use of industrial land.
Even if strict liability for "ultra hazardous"
activities, either as a freestanding basis for liability or a modification
of Rylands v. Fletcher, were part of the law in Ontario,
the Court of Appeal found that the activities of Inco's refinery
did not constitute an "extra hazardous" activity and emphasizes
that, while compliance with environmental and zoning regulations
is not a defence to a claim seeking to apply the rule in Rylands
v. Fletcher, it is part of the consideration as to the determination
of whether the use is "non- natural".
Further, the Court of Appeal found that the evidence
did not support a finding of any damage connected to Inco's activities
and held essentially that physical "change" was different
than physical damage to the land.
Furthermore, the plaintiffs failed regarding damages.
On a proper analysis of the data, the Court of Appeal concluded
that there was no evidence that residential real estate prices had
risen more slowly in Port Colborne than in Welland. Accordingly,
the plaintiffs had suffered no loss and the action was dismissed.
The plaintiffs having lost their substantial judgment
understandably appealed to the Supreme Court of Canada. They were
On April 26, 2012, the Supreme Court of Canada refused
the plaintiffs' leave to appeal (2012 CanLII 22100). The Ontario
Court of Appeal's Judgment in now the leading decision though binding
only on Ontario's lower courts but highly persuasive in other Canadian
The impact of the Supreme Court of Canada's refusal
to allow the appeal, however, means that the scope of recovery for
nuisance and strict liability has been substantially narrowed for
future claims, at least in Ontario, with the immediate effect that
expected and known results of businesses operating within the law
will not qualify as "non-natural uses" even if neighbouring
properties are adversely affected.
Given the possibility of different standards being
set in other jurisdictions, it appears that there is a distinct
possibility of further treatment by Canada's highest court in the
Kim E. Stoll
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