Insurance implications of the Supreme Court of Canada’s Redwater decision
On 31 January 2019, the Supreme Court of Canada released its much-anticipated decision in Orphan Well Association et al. v. Grant Thornton Limited et al., colloquially known as the ‘Redwater’ case. Closely monitored by energy sector participants and stakeholders, the court considered whether trustees in bankruptcy could renounce an insolvent debtor’s interest in licensed, non-producing assets pursuant to s.14.06(4) of the federal Bankruptcy and Insolvency Act (BIA). In 2015, Redwater Energy Corp.’s (Redwater’s) principal secured lender demanded repayment of Redwater’s debt obligations; Grant Thornton Limited (GT) was subsequently appointed as receiver. GT advised the Alberta Energy Regulator (AER) that it would only take control of certain Redwater properties licensed by the AER that had value; the remaining properties were disclaimed by GT. AER subsequently issued a closure and abandonment order in respect of the disclaimed assets, and filed an application with the court to compel GT to comply with the order and fulfill Redwater’s statutory abandonment and reclamation obligations (AROs) pertaining to all of the licensed assets. Redwater was subsequently assigned into bankruptcy, whereby GT became the trustee in bankruptcy. Shortly thereafter, GT disclaimed Redwater’s uneconomic assets pursuant to s.14.06(4) of the BIA and indicated that it did not intend to comply with the AER’s order.
The court of first instance concluded that GT was permitted to renounce an insolvent debtor’s interest in uneconomic licensed assets while keeping and selling valuable licensed assets to maximize recovery for the debtor’s estate. As such, the claim of Redwater’s secured creditor had priority over provincial statutory ARO obligations. The Alberta Court of Appeal affirmed the decision. However, the Supreme Court of Canada ultimately overturned the ruling, finding that while s.14.06(4) protects the trustee from personal liability, it does not allow the trustee to walk away from the environmental liabilities of the bankrupt’s estate. The court thus found that the AROs that Redwater’s estate owed to the AER are not subject to the creditor priority scheme in the BIA. The result of this decision is that the AER can now require trustees in bankruptcy to expend estate assets to meet the estate’s outstanding AROs, leaving less money for creditors subject to the BIA priority scheme. Lenders may now only recover in an insolvency after potentially millions of dollars are paid from the bankrupt’s estate toward end-of-life statutorily mandated AROs.
While this decision will undoubtedly impact the investment and lending climate in the energy sector, the insurance implications are more remote. A directors’ and officers’ (D&O) liability insurance policy will not respond to fulfill a defunct corporate entity’s ARO obligations, or any of its other environmental remediation responsibilities. Should environmental remediation obligations be imposed on directors or officers personally by operation of law, which was not the case in the Redwater decision, a D&O insurance policy could respond to provide a measure of protection for individual insureds. Aon’s proprietary non-public D&O policy provides coverage for non-indemnifiable loss incurred by individual insureds in connection with an environmental remediation or clean up order. However, the coverage provided by public company D&O forms is more limited – some domestic insurers will offer a sub-limited endorsement to select companies providing select coverage for individual insureds should they be faced with clean-up costs imposed pursuant to section 17 or 18 of the Ontario Environmental Protection Act. Any potential gaps in environmental remediation costs coverage could potentially be filled by a D&O Side A Difference-in-Conditions (DIC) policy, which sits above the primary D&O policy and drops down to provide broad coverage for individual insureds for most matters not covered by the primary policy. In this vein, Aon has been successful in adding affirmative language to its proprietary Side A DIC form, which explicitly provides coverage for remediation costs incurred by individual insureds to comply with an order issued by an environmental regulator.