The recent decision in Amashaw Pty Limited v Marketform Managing Agency Ltd  NSWSC 6212 saw an insured service station operator recover costs for restorative, but not preventative, works it voluntarily undertook following an explosion in a nearby sewer main caused by petrol vapour emanating from the service station. The decision provides useful guidance on the bounds of pollution liability coverage together with issues of non-disclosure.
An explosive situation
The plaintiff operated a service station in Sydney. The defendant insurer issued and renewed a combined liability policy to the plaintiff (Policy). Subject to its conditions, the Policy provided cover for damage caused by pollution.
During the Policy period there was an explosion in a sewer main to the north of the service station. It was agreed that the explosion was caused by the ignition of petrol vapour emanating from the service station. At around the same time, petrol was detected in other nearby underground works.
The plaintiff undertook restorative works and preventative works to avert the further escape of petrol vapour. The plaintiff sought indemnity for the costs of the works. The defendant denied liability, with the issues in dispute being:
- whether the loss fell within the terms of the Policy;
- if so, the quantum of the indemnity; and
- whether the defendant was entitled to reduce its liability to nil for non-disclosure.
Was the loss within the terms of the Policy?
The court identified three issues for consideration.
1 Was there a “liability to pay damages”?
The court rejected the defendant’s submission that because the plaintiff had a statutory obligation to make good the cost of the contamination, there was no liability for damage to which the Policy could respond. The court found there was a relevant liability, which arose in nuisance, and did not see why the plaintiff should be any worse off for undertaking the work itself rather than letting the owner of the sewer do the work and awaiting the inevitable demand for payment.
2 If there was a liability, did it arise out of “Damage occurring in its entirety during the Period of insurance”?
Further to the expert evidence the court found that, while contamination of the sewer had started well before the inception of the Policy, the damage was first caused when petrol vapour ignited and exploded in the sewer. This was more likely than not a result of a fresh entry of petrol following the failure of a valve.
3 Did any such “Damage” arise out of “Pollution” as “the direct result of a sudden, specific and identifiable event occurring during the period of Insurance”?
The Court found in favour of the plaintiff that:
(1) the pollution giving rise to the damage was the contamination of the sewer; and
(2) the pollution was caused by a separate event, being the earlier discharge of petrol following the failure of a valve.
The indemnity claimed by the plaintiff therefore fell within the scope of the Policy.
The Court held that the plaintiff was entitled to an indemnity for the restorative works but not the preventative works, which accounted for about $265,700 of a total claim of almost $1.2 million. The court acknowledged that, in some circumstances, damages may be assessed as the cost of making good a nuisance but that this does not extend to works on land from which a nuisance emanates.
The court considered the plaintiff’s non-disclosure of two reports which identified groundwater contamination under and near to the service station. The defendant argued that:
- the reports were matters relevant to whether it would have accepted the risk and, if so, on what terms; and
- a reasonable person in the plaintiff’s position could be expected to have known this.
The court rejected these arguments, distinguishing between the historic and gradual contamination demonstrated by the reports and pollution which was the direct result of a sudden, specific and identifiable event, which was covered by the Policy.
Further, the court found that a reasonable person would have known the defendant regularly underwrote insurance for service stations. As such, the defendant should be taken to have known that service station sites are likely to be contaminated and that disclosure of such expected contamination is not required.
To take away…
– an insurer may be taken to know broad facts relating to businesses it regularly underwrites, for example that service station sites are likely to be contaminated; and
– any allegation must be relevant to the decision of the insurer to accept a particular risk.
- An insured will not be disadvantaged for voluntarily undertaking work to discharge its liability to pay damages that would have been covered by the policy had it not carried out the work.
- In claims for damages caused further to pollution it is essential to establish the source of the contamination in order to determine whether the policy responds.