Edited by Amanda Kostek and Kristen Hansen
Last week’s Court Rulings from the Alberta Court of King’s Bench, Court of Appeal and SCC.
Paramount Resources Ltd v Chubb Insurance Company of Canada, 2024 ABCA 266
Coverage Dispute | Environmental Loss | Interpretation of Policy
At issue was whether the release of pollutants from a pipeline were “detected” pursuant to the terms of the policy within 720 hours. The insurer appealed a decision finding coverage and granting Judgment in the amount of $9,740,000 plus costs and interest. The release had commenced on or about April 21, 2016. Pursuant to the policy, detection had to occur by May 20, 2016. During the required timeframe the Insured was aware of anomalies in the pipeline, but believed the pressure readings were unreliable, and a result of newly installed monitoring equipment. They increased the frequency of right of way visual inspections and the leak was visually observed in June 2016 outside the 720 hour window.
On appeal, the Court of Appeal set aside the lower court ruling on the basis that the lower Court attributed a meaning to the term “detected” that went beyond the clear wording of the policy. The Court affirmed that although the phrase was to be interpreted broadly, there was no reason to “stray from the plain and ordinary meaning of those words”. At Trial, the Justice incorporated reference to CSA Z662 in interpreting the definition. However, the policy made no reference to CSA Z662. The Court of Appeal concluded that if the parties had intended the CSA Z662 to play a role, they could have incorporated that into policy. Further, the Court of appeal concluded that the interpretation applied by the lower Court would increase the need for an adjudicator to interpret whether the terms of the policy had been met. This would lead to a commercially unreasonable result, and was contrary to the rules of interpretation. Fourth, the interpretation by the lower Corut exposed the insurer to a risk it did not bargain for and rendered the 720 hour clause requiring detection shortly after the environmental spill meaningless. Finally, the interpretation attributed by the lower Court was contrary to provision requiring strict conformance with reporting requirements:
[35] First, in determining the objective intention of the parties, the “actual words chosen are central to the analysis because this is how the parties chose to capture and convey their contractual objectives”: Earthco at para 63. We agree that the phrase “is detected by any person” is a coverage provision that should be construed broadly (Ledcor Construction Ltd v Northbridge Indemnity Insurance Co, 2016 SCC 37at para 51), but we see no reason to stray from the plain and ordinary meaning of those words. Conoco observed the Release on June 9, 2016 when personnel were inspecting the LVP pipeline right of way, and thereafter reported it to the AER.
[36] Second, as already noted, the Endorsement and definition of Pollution Incident did not refer to any regulatory instruments, including CSA Z662 or Annex E. It would have been simple for the parties to expressly incorporate Annex E by reference at the time the Policies were entered into if that is what the parties intended. In these circumstances, the trial judge erred by going beyond the language of the contract to incorporate regulatory provisions that the parties could have incorporated, but did not.
[37] Third, the summary trial judge’s interpretation increases the likelihood of needing a third-party to adjudicate when a person of “ordinary prudence” had “reasonable grounds to believe” a release occurred. Detection in that interpretation does not depend on events that occurred like actual detection by a person, but events that ought to have occurred. The parties are more likely to be able to determine and agree without third-party adjudication what did occur, than what ought to have occurred. In our view the summary trial judge’s interpretation leads to a commercially unreasonable result, contrary to the canons of contractual interpretation: see Swan Group Inc v Bishop, 2013 ABCA 29 at para 23 citing Consolidated‑Bathurst Export Ltd v Mutual Boiler and Machinery Insurance Co, 1979 CanLII 10 (SCC), [1980] 1 SCR 888 at 901, 112 DLR (3d) 49; see also Ledcor at para 78. Requiring a third-party to adjudicate what was “in the mind of a person of ordinary prudence” would introduce delay and complexity to an insurance claim process; that is, in our view, not a commercially sensible result.
[38] Fourth, the summary trial judge’s interpretation exposes the insurer to a risk that it did not bargain for and renders the 720-hour clause in the Endorsement meaningless. The requirement for a release to be detected by any person within 720 hours after commencement is, on its face and as found by the summary trial judge, intended to limit the insurer’s risk: “the detection clause is part of the policy structure intended to limit exposure to accidents that are ongoing and unaddressed for a defined time period”: Reasons at para 137 [emphasis added]. In our view, the summary trial judge’s interpretation defeats that main objective: see Consolidated-Bathhurst Export at 901-2. The objective standard of “reasonable grounds to believe” introduces a potentially indeterminate time period between when “reasonable grounds to believe” are established and the time when a release is actually observed, whether through measurement devices or direct observation. This potentially indeterminate time gap unreasonably subjects an insurer to exposure for losses that were never bargained for.
[39] Finally, in construing the words chosen by the parties, the words must be read in light of the entire agreement: Sattva at para 57. In this respect, the summary trial judge’s expansive interpretation of Pollution Incident and reporting requirements is inconsistent with the provision requiring “strict conformation” with those reporting requirements included in the Endorsement.
The Court of Appeal concluded that the Insurer was justified in denying coverage.