Defence + Indemnity - August 2019: Case Summary: SWAT Consulting Ltd v Canadian Western Bank

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An insurer is not required to pay a third party contractor after having previously paid their insured. The third party contractor’s claim against an insurer for environmental clean-up costs owed to the contractor by the bankrupt insured was dismissed. 

SWAT Consulting Ltd v Canadian Western Bank, 2018 ABQB 875, per Prowse, Master 

Facts + Issues

Anterra obtained two consecutive policies of liability insurance from the defendant Energy Insurance. The policies provided coverage for various types of liability, including liability arising from pollution claims. Anterra was involved in two pipeline spills for which Energy Insurance paid Anterra a total of $3,266,629.99 in that regard (the “insurance proceeds”).

Anterra deposited the insurance proceeds into a bank account with its banker, Canadian Western Bank (“CWB”), who eventually applied the bulk of the proceeds in repayment of loans owed to CWB.

SWAT Consulting Ltd. (“SWAT”) had provided remediation services to Anterra in connection with cleaning up the pipeline spills. Its invoices were unpaid in the amount of $374,377.06. Those invoices were taken into consideration in calculating the payment made by Energy Insurance to Anterra. SWAT was not paid by Anterra. Anterra filed for protection under the Companies Creditors Arrangement Act and all of their unsecured creditors ended up being unpaid.

SWAT claimed that it should have been paid directly by Energy Insurance or, alternatively, that their invoices are payable out of the funds that Anterra deposited with CWB, such that CWB ought to be required to disgorge those funds and remit them to SWAT. SWAT relied on s. 534 of the Insurance Act and the wording of the insurance policies. Section 534 provides as follows:

Execution against insured unsatisfied

534(1)  In any case in which a person insured against liability for injury or damage to persons or property of others has failed to satisfy a judgment obtained by a claimant for the injury or damage and a writ of enforcement against the insured in respect of the judgment is returned unsatisfied, the enforcement creditor has a right of action against the insurer to recover an amount, not exceeding the amount of insurance under the policy or the amount of the judgment, in the same manner and subject to the same equities as the insured would have if the judgment had been satisfied.

(2)  This section does not apply to contracts of motor vehicle liability insurance.

The policies provided as follows:

All sums which the Insured shall be obligated to pay by reason of the liability:

imposed upon the insured by law, or

assumed under contract or agreement by the Insured or any officer, director, partner or employee of the Insured, while acting in his capacity as such, for damages on account of: ... Pollution Liability 

Energy Insurance and CWB applied for summary dismissal.

Issue: Does an insurer, faced with an insured seeking reimbursement for clean-up costs, owe a legal duty to the service providers who did the clean-up work (such as SWAT) to make sure that the insured has in fact paid those service providers or, if they have not been paid, a duty to send payment directly to the service provider?

HELD: Summary dismissal granted; SWAT does not have a valid claim against Energy Insurance or the CWB.

It was held that SWAT did not have a claim under s. 534 of the Insurance Act.

  1. The Court held that SWAT did not have status as a “claimant” under that section:

[29] SWAT is not a party whose land was damaged by an oil spill. Instead it is a contractor who performed clean-up work at the request of Anterra.

[30] If an adjoining land owner has a claim for a spill of pollutants, it is a ‘claimant’ under section 534.

[31] Section 534 deals with a claimant “for injury or damage to persons or property”. SWAT has not suffered damage to its property. It has suffered a financial loss due to Anterra breaching its contractual promise to pay SWAT for work done by SWAT.

[32] In my view it is the land owner, upon whose land Anterra’s pipeline spilled petroleum products, who is a ‘claimant’ with a potential claim under section 534, and not a service provider such as SWAT.

  1. Furthermore, it was held that SWAT had not satisfied the technical requirement to sue under s. 534.

[33] Even if SWAT were a ‘claimant’ under section 534, it has not obtained a judgment against Anterra Energy, nor issued a writ of enforcement against Anterra which has been returned unsatisfied. Accordingly SWAT is not in a position to sue Energy Insurance under section 534.

[34] It is true that Anterra sought and obtained protection from creditors pursuant to the Companies Creditors Arrangement Act, but it was up to SWAT to apply for a lifting of that stay in order to pursue Energy Insurance directly. 

  1. The Court held that Energy Insurance had already paid its insured Anterra and, therefore, s. 534 may not apply:

[40] Given that SWAT is not a ‘claimant’ and has not in any event complied with the technical requirements of section 534 it is clear that no claim lies against Energy Insurance pursuant to section 534. It is therefore not necessary for me to answer the questions posed in the two preceding paras.

It was held that the policies of insurance in question did not expressly require Energy Insurance to confirm that the service providers have been paid or, if not, to pay them directly.

  1. The wording of the policy, and in particular the use of the phrase ‘on behalf of the insured’, when considering a reimbursement of the insured for clean-up costs as opposed to a third party liability claimant, does not mean that the proceeds are payable to service providers who did clean-up work, such as SWAT.

[43] The policies of insurance in question do not expressly require Energy Insurance to confirm that the service providers have been paid or, if not, to pay them directly.

[44] The wording could have, for example, set up an express trust. This is what is done with labour and material payment bonds.

[47] The coverage section of the policy provides as follows:

The Insurer will pay on behalf of the Insured:

All sums which the Insured shall be obligated to pay by reason of the liability:

imposed upon the insured by law, or

assumed under contract or agreement by the Insured or any officer, director, partner or employee of the Insured, while acting in his capacity as such, for damages on account of: ... Pollution Liability 

[48] This phrase ‘on behalf of the insured’ applies to all 13 types of coverage provided under the policies, including “Pollution Liability”.

[49] The phrase fits quite easily into the scenario where the insurer is paying a third party claimant with a liability claim against the insured. The insurer pays the third party claimant ‘on behalf of the insured’.

[50] The phrase does not fit so easily into the coverage for ‘clean up costs’ which, as I have indicated earlier, are costs incurred by the insured itself under environmental legislation.

[51] The phrase ‘on behalf of the Insured’ applied to clean up costs leads to the awkward outcome that Energy Insurance is said to be paying clean-up cost to Anterra ‘on behalf of Anterra’.

[52] In my opinion the awkwardness of this wording (wording which is of general applicability to all types of coverage under the policies) when applied specifically to clean up costs falls short of establishing that the insurer is obligated, by the use of the phrase ‘on behalf of the insured’, to pay service providers such as SWAT.

...

[57] In my view, the wording of the policy, and in particular the use of the phrase ‘on behalf of the insured’ ,when considering a reimbursement of the insured for clean-up costs as opposed to a third party liability claimant, does not mean that the proceeds are payable to service providers who did clean-up work, such as SWAT.

  1. Subsequent conduct is not properly to be considered to aid in the interpretation of Energy Insurance’s policies.

[63] In my view, the wording of the insurance policies is not ambiguous and this subsequent conduct is not properly usable to aid in the interpretation of Energy Insurance’s policies.

Summary judgment was held to be appropriate to resolve this matter.

  1. A trust had not been created pursuant to the wording of the policies.

[74] Even if the policies were in CWB’s possession at all relevant times, in these reasons I have concluded that the wording of the policies of insurance does not create a trust in favour of service providers such as SWAT. 

  1. A Quistclose or purpose trust was held not to exist in this scenario.

[80] To establish this type of trust, SWAT would need to establish that Energy Insurance paid insurance proceeds to Anterra for the specific purpose of paying suppliers such as SWAT, and that the funds were not to be mixed with Anterra’s other funds.

[81] There is no evidence to this effect, and in fact the insurance proceeds were ultimately deposited into Anterra’s general operating account.

...

[95] In the end, we are essentially dealing with the interpretation of a contract of insurance.

...

[100] In the end, I do not believe that a trial is necessary in order arrive at a just result.

  1. The Court held that according to Steer v Chicago Title Insurance Company, 2018 ABQB 28, Summary judgment is an appropriate vehicle to adjudicate the interpretation of an insurance policy where the facts are not in dispute.

COMMENTARY

This case serves as a reminder that close attention should be paid to the wording of insurance policies when determining whether third party service providers are entitled to insurance proceeds.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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