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Dirty Dirt

Measuring Damages for Toxic Torts

One of the most pressing issues for those involved in environmental claims is establishing causation and answering the question as to what constitutes the appropriate measure of damages. Given the significant financial consequences, brokers and their clients, as well as insurers, will want to consider specific case questions, such as: Is a claimant entitled to have their land returned to a pristine, or undamaged condition, or cleaned up in accordance with legislated cleanup criteria? Further, if the cleanup criteria are utilized, are there residual stigma damages and how are these assessed?

Measuring Damages
When awarding damages at common law, the courts attempt to put the injured party in the same position it would have enjoyed but for the wrongful conduct of the defendant. But four rulings–the most recent in June 2009–are causing clients, brokers and carriers to struggle with what is required to compensate a party whose land has been contaminated.

Tridan was the owner of a car dealership in Ottawa; its land had been contaminated following a gasoline spill at the neighbouring Shell site. Shell did not think Tridan should receive any damages since the contamination was at some depth and was not interfering with Tridan’s use of the property in any significant way. Tridan and the trial judge disagreed. The trial judge found that cleanup to the Ministry of Environment (MOE) guidelines was not sufficient. Shell was ordered to pay for the cost of remediating the land to a “pristine state.” In addition, the trial judge found that even after cleanup to a pristine condition, there would still be a residual diminution in value of the land and awarded additional damages for “stigma.”

The trial court accepted evidence that there was now a stigma attached to the contaminated property and that it had created an adverse effect on both the ability to obtain financing and to dispose of the property. The court therefore found that the defendants were liable to return the property to a “pristine” condition and were additionally responsible for residual stigma damages of 17% to 18%. Total damages awarded included the cost of remediation at $550,000 (CDN) and diminution in property value of $350,000.

The defendants were liable to return the property to a “pristine” condition and were additionally responsible for residual stigma damages of 17% to 18%.

The Court’s award needs to be reviewed in context. There was an agreement between the parties that the value of the property if clean was $2.7 million (CDN). The market value of the property was substantial and it was reasonable to incur those costs to protect its value. Further, the cost to remediate the property to guideline levels was between $160,000 and $440,000. At the high end, this cost was not that substantially different from the cost to clean up to a “pristine” condition.

While preserving the order for damages based on cleanup to a pristine condition, the Court of Appeal rejected the finding that there was residual stigma. The court suggested that the cleanup to a pristine condition, while not wrong in law, might be excessive, given that the property was commercial and unlikely to ever be used for residential purposes. These comments may open the door to a more nuanced approach to the valuation of damages.

More recently, the New Brunswick Court of Appeal has reignited the discussion with respect to the assessment of damages for toxic torts with its 2007 decision in Cousins v. McColl Frontenac. In that case, the plaintiff assembled three parcels of land, a former Texaco gas station and two neighbouring properties, all subsequently classified as contaminated.

The court refused to award damages based on what it termed “speculative” remediation expenses for undeveloped land. Instead, the court looked at the value of the entire investment, applied interest to that amount for 20 years and awarded damages based on one-third of the property value plus interest. Total damages of $125,320 were awarded–the value of the land affected was $100,000 if clean and the damages claimed were between $1.56 million to $2.37 million. It is suggested that the court’s approach failed to provide adequate compensation to the plaintiff because it failed to recognize what could be required by the provincial regulators and could leave the plaintiff with substantial costs. In 2008, leave to appeal to the Supreme Court of Canada was granted but the case was subsequently settled.

Consider also a 2003 Alberta trial decision, 618369 Alberta Ltd. v. Canadian Turbo (1993) Inc., where the court significantly reduced damages for residual stigma following remediation as there were actual offers for the property demonstrating a much smaller reduction in value.

Most recently, the risks inherent in measuring damages for toxic torts justified the approval by the Ontario Superior Court of a class action settlement (June 18, 2009) in Wamboldt v. Northstar Aerospace (Canada) Inc. Northstar Aerospace had contaminated the groundwater of neighbouring residential properties. Damages for cleanup and loss of property value were sought. There were a total of 721 properties, ranging in value between $200,000 and $300,000, in the class, and active remediation was being required by the Ministry of the Environment. The settlement provided for a damages fund that would be distributed pro rata. In approving the settlement, the court recognized it would be difficult to establish the impact on property value given the current economic downturn and that there was a risk the court would find that damages for environmental stigma might not be compensable under the circumstances.

Takeaway
These cases demonstrate the importance of market evidence and the difficulty of measuring and compensating damages arising from toxic torts. Ultimately, this is an area that needs to evolve with both regulatory standards and market sophistication.

For insurers, there are relatively few decisions with little instructive reasoning to guide in the underwriting of these risks. This creates significant uncertainty since the cost of clean-up to a pristine condition may vary significantly, particularly in the case of industrial property.

Brokers, on the other hand, are also challenged since they will want to ensure, in this climate of legal uncertainty, that their clients have sufficient protection to avoid unanticipated gaps in coverage.

Gabrielle Kramer is a partner at Borden Ladner Gervais LLP’s Toronto Office and practises in the area of litigation, focusing on issues related to the environment, insurance, expropriations law and regulatory defence. Gabrielle can be reached via email at gkramer@blgcanada.com.

© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the January 2010 edition of Canadian Insurance magazine.