In Paramount Resources Ltd. v Chubb Insurance Company of Canada, 2023 ABKB 627, Paramount, an oil and gas company, sued its insurers as a result of their denial of coverage with respect to an incident involving environmental contamination following a leak in a pipeline carrying natural gas condensate. The insurers asserted that the leak was “detected” outside the period required for coverage under the policy. This action proceeded in parallel with an arbitration between Paramount and its co-owner and operator of the pipeline, over whether Paramount was required to share in the remediation costs. Paramount settled the arbitration, paying less than the amount claimed by the operator. In the action, Paramount sought damages from the insurers in an amount equal to the settlement payment. The insurers defended, in part, on the basis that Paramount had made admissions in the arbitration which were fatal to its action against the insurers. The court rejected those arguments. First, Paramount was entitled to make alternative arguments in the arbitration. Second, there was a risk of inconsistent results in the two proceedings, including on whether there was coverage under the policies, which was important context. Third, Paramount was fully transparent in its strategy and the insurers did not rely upon Paramount’s “admissions”. Finally, Paramount’s “admissions of fact” as to when the leak was “detected” in the arbitration were issues of mixed fact and law in the action because they turned on the interpretation of the words “detected” and “discover” under the policy. The court found that the settlement was reasonable and awarded Paramount damages equal to the settlement amount for the insurers’ breach of contract.
Background to the action -This was an insurance policy coverage dispute in which the Plaintiff Paramount brought an action against its insurers as a result their denial of coverage with respect to an incident involving the release of pollutants from an underground pipeline carrying low vapour pressure condensate. Paramount was a half owner of a facility which ran a gas plant and the pipeline. Paramount and the other half owner agreed to terms of ownership and operation of the facility under the Construction, Ownership, and Operating Agreement (the “Agreement”) dated October 1, 2005. The other half owner operated the facility.
The parties to this action agreed that there was an unintentional discharge of pollutants from the pipeline in April, 2016. The operator had meters to monitor the volume of condensate running through the pipeline, and in May and June, noticed anomalies in the metered data and a drop in pressure. It did not immediately conclude the cause was a leak. In June, the operator’s personnel were inspecting the pipeline and saw evidence of possible hydrocarbon contamination in the area. The operator then notified the Alberta Energy Regulator (“AER”) and Paramount. The operator was required to clean up the site and called upon Paramount to pay for half of the clean up costs. Paramount refused.
The arbitration – In March, 2017, the operator commenced an arbitration against Paramount under the Agreement, in which it sought to recover half of the clean up costs. Paramount’s exposure to its alleged share of the clean up costs, with interest, and the operator’s legal costs of the arbitration exceeded $30 million. A few months before the scheduled hearing date, the parties settled the claim by payment from Paramount in the all-inclusive amount of $11 million.
The coverage litigation (to which the operator was not a party and in which it did not participate) – Paramount looked to its insurers for recovery of the settlement amount. The insurers agreed that the leak was accidental, but denied coverage in December, 2017, because the leak was not “detected by any person” within 720 hours of the commencement of the leak as required for coverage under the policy.
(a) the coverage issues – The claim primarily turned on the meaning of the language “detected by any person” in the policies, which the court had to interpret. Paramount argued that it was entitled to coverage because the operator detected the release within 720 hours of it starting in April, 2016. The insurers argued that the leak was not detected until June, 2016 – long after the detection period had expired.
The court ultimately found that the operator detected the leak in April, within the 720 hours required under the policy, as a result of which there was coverage. It rejected the following arguments made by the insurers.
(b) Paramount’s alleged admissions – In denying coverage, the insurers relied upon admissions by Paramount in the arbitration and by the operator to the AER that the leak was not detected until June. Paramount was thereby bound by its own admissions and the representations and negligent conduct of its agent the operator, and the findings of the AER that the leak was not detected until June.
The court found that Paramount’s position on the meaning of the word “detected” which underlay its “admissions” was not consistent with the court’s interpretation of that language in the policy.
In addition the context of the “admissions” was important:
“[191] Paramount’s counsel… explained that the insurers clearly accepted that June 9 was the detection date. So, one of the arguments Paramount advanced was that there was an alternate way of calculating the start date of the release (the May 16th commencement date referenced earlier). Paramount and the insurers exchanged information. The insurers later denied coverage based on their expert’s opinion that the release started much earlier (… as early as April 9). Paramount then pursued alternative arguments. Paramount submits there is nothing inappropriate in advancing alternative arguments or asserting the release was detected earlier.
…
[193] Admissions against interest in other proceedings… are admissible in this action.
[194] I do not construe Paramount’s [pleadings in the arbitration] as a binding admission that “detected” means a person actually observed the released substances. In this trial, I can decide what weight to place on the admission.
[195] This is not a case of Paramount changing an admission of fact. The meaning of “detected” in the insurance policies is a question of mixed fact and law, not fact alone. There is no evidence that the insurers relied on Paramount’s positions taken in the arbitration to their detriment, or at all. There is no evidence suggesting Paramount misrepresented the coverage situation in the arbitration.
[196] Although Paramount’s positions in the arbitration and this action are conflicting, it was faced with an unusual and difficult situation. The outcome of both the arbitration and coverage action were uncertain. On the arbitration side, Paramount faced an uphill battle in establishing gross negligence [of the operator]… On the coverage side, both Paramount and the insurers agree that there is almost no Canadian case law on the interpretation of the detection provision. Consequently, there was litigation uncertainty over the outcome of Paramount’s coverage claim in this Court and its gross negligence defences and claims in the arbitration. The matters had to be pursued in separate forums, adding litigation management problems and the risk of inconsistent decisions of the Court and arbitration tribunal.
[197] So long as Paramount did not attempt to misrepresent the situation of the inconsistent claims in the arbitration and in this Court (and the insurers did not suggest or adduce evidence that Paramount or its counsel were not forthright on these matters), then I do not see mischief arising from its strategy. If the arbitrators had refused to find that Paramount actually lost coverage, then there would have been no inconsistency in Paramount continuing its coverage claim in this Court. If the arbitrators had accepted there was no coverage…, then Paramount would be estopped from pursuing the issue against the insurers and the coverage claim would become an abuse of process if Paramount refused to drop it.
[198] The actual outcome was that the arbitrators did not determine the matter because the claim settled. There is no evidence that [the operator] was misled in any way in negotiating a settlement or that the insurers have been misled.
[199] Given the circumstances, Paramount should not be precluded from asserting in the present action that the release was detected within the 720 hour period.”
(c) The operator’s alleged admissions – Further, the court found that the insurers failed to prove that Paramount and the operator had an agency relationship that bound Paramount to the operator’s admissions. Therefore, Paramount was not bound by the operator’s representation to AER that it did not detect the leak until June.
(d) The AER findings – The Court found that it was not bound by any findings of the AER about when the leak was discovered and that, in any event, it was not using the term “discover” in the context of the language of an insurance policy.
(e) The arbitration settlement issue – Paramount sued the insurers for damages on the basis of their breach of contract for denying coverage. Its position was that is damages were the amount of its settlement with the operator:
“[239]…It did not have to have to ‘stubbornly maintain a denial of liability all the way to judgment in order to obtain the protection of the policies’ and was entitled to ‘buy peace at a reasonable price even where the insured might not have been liable at law for the claim’… Paramount submits that the settlement was reasonable.”
Paramount kept the insurers apprised of the arbitration and provided copies of the pleadings and Paramount’s witness statements and expert reports, but agreed to the settlement before having received the operator’s witness statements and expert reports.
In February, 2020, Paramount notified the insurers of the tentative settlement and made a time limited offer to accept $3.5 million to resolve the coverage dispute, failing which it would pursue the insurers for $12 million (the settlement amount plus costs). Paramount and the operator signed the settlement agreement in April, 2020, pursuant to which Paramount paid $11 million.
The insurers argued that a carefully considered denial of coverage is not wrongful and that Paramount must actually prove it would have lost the arbitration. Mere proof of a reasonable settlement is not enough. Further, the settlement was not reasonable because Paramount was not liable to pay anything in view of the operator’s gross negligence.
The court found that an insured faced with a denial of coverage may defend itself and, if reasonable, settle the claims without a determination of liability by a court or arbitral tribunal. In this case, the underlying claim fell within the scope of coverage, the insurers wrongfully denied coverage, and Paramount’s settlement was reasonable. It was not necessary for Paramount to prove that it would have been liable. Two significant considerations were that the operator’s liability turned on whether it was grossly negligent, which was an all or nothing risk to Paramount, and that the arbitration and coverage litigation were happening in parallel, which raised the risk of inconsistent results.
The court found that Paramount proved all the requirements of coverage, breach of contract and damages. Therefore the court held that Paramount was entitled to damages from each insurer for the coverage afforded under its policy (subject to policy limits and deductibles etc) to the collective limit of $11 million.
Editor’s Notes:
This case demonstrates the complexity of the issues that can arise when there are parallel court and arbitration proceedings, both as to the evidence to be adduced and the strategic decisions to be made. The case also raised a potential res judicata issue because the Alberta Energy Regulator found that the operator did not detect the leak until June. The insurers argued that Paramount was bound by that finding because the operator was Paramount’s agent. As stated above, the court rejected the agency argument, but it also found that the AER’s use of the word “discover” was not made in the context of the language of the insurance policies.