The Court of Appeal decision of Neste Canada Inc. v. Allianz Insurance Co. of Canada, focused on the interpretation of a policy providing indemnity for business interruption and contingent business interruption. In large part it affirmed the reasoning of Justice Rowbotham in the trial decision of Neste Canada Inc. v. Allianz Insurance Co. of Canada.

The insured ("Neste") obtained a policy that included coverage for losses and expenses arising from business interruption and contingent business interruption from its insurer, Allianz. Neste and Chevron Canada Limited ("Chevron") each owned a fifty percent interest in a plant refining methyl tertiary butyl ether ("MTBE"). A number of entities, including TransCanada Midstream ("TCM") and Kinetic Resources ("Kinetic"), supplied Neste with butane, the raw material used to produce MTBE.

Both TCM and Kinetic obtained some of their butane from the Taylor plant in British Columbia. Due to an explosion and fire at the Taylor plant, TCM and Kinetic reduced their butane supply. Neste in turn curtailed its production of MTBE and then initiated a total shutdown. During the shutdown some maintenance work was performed on the plant.

Interpretation Of The Policy

Direct vs. Indirect Suppliers of Butane

Allianz argued that losses for contingent business interruption covered losses resulting from damage to "facilities of the suppliers." Since TCM had an ownership interest in the Taylor plant, but Kinetic did not, Allianz argued that losses resulting from Kinetic's failure to supply butane were not covered under the policy. The trial judge held that coverage for interruption of supply included direct as well as indirect suppliers.

She noted that the definition of "suppliers" in the policy required two things: that the entity not be owned or operated by the insured, and that the entity deliver its goods or services to the insured. Since there were no negotiations regarding the wording of the policy, Justice Rowbotham applied an interpretation of the policy that she found best accorded with the intention of the parties at the time they entered into the contract.

She concluded that legal ownership of the facilities of the suppliers was neither contemplated nor within the control of the insured. Making the distinction advocated by Allianz would lead to an absurd result in that Neste could lose coverage because a supplier divesting itself of its assets, without the knowledge of Neste. The Court of Appeal agreed with Justice Rowbotham, and held that the effect given by the trial judge to the language of the policy fit with the purpose of the policy. If the insurer had intended to limit coverage on this basis it could easily have used specific words in the policy.

Waiting Period

The Court of Appeal affirmed that calculation of losses within the policy deductible for Neste commenced with the curtailment of production, not from the date of the explosion. The word "occurrence" was defined in the policy and referred to the occurrence of damage. As it pertained to the insured, this referred to damages arising from the curtailment of the production of MTBE. Were it otherwise, the insured would have no reason to mitigate its damages. The Court of Appeal was fortified in its reasoning by noting that there was a cap on all deductibles and waiting periods. However, without damage to the insured, a cap could not be applied.

Pre-judgment Interest

The trial judge awarded interest from July 1, 1999, from the 61st day after the proof of loss was filed by the insured. The Court of Appeal reasoned that she must have implied a finding that there was enough detail by July 1, from which date she calculated the prejudgment interest, for the insurer to know whether to deny or pay the claim.

Cause of the Loss

The trial judge concluded that the curtailed production of MTBE was mainly due to the lack of butane and the ultimate decision to operate at less than full capacity was a reasonable one. She further concluded that the shutdown was caused not by a need for maintenance but the reduced supply of butane.

The policy provided that coverage was for "loss resulting from the necessary interruption of business conducted by the insured". Coverage under the contingent business interruption extended to losses resulting from the interruption of business due to damage or destruction of property at the facilities of the suppliers of the insured. This damage or destruction had to prevent or delay the delivery of materials upon which "normal operation of the insured's business [was] dependent". Normal was also defined in the definitions as "the condition that would have existed had no loss occurred".

The trial judge found that the main reason for the curtailment of production of MTBE and the shutdown was the reduction in the butane supply, which was causally linked to the explosion at the Taylor plant. She initially framed the question as whether the curtailed production was "necessary", but the insurer argued at trial that Neste's decision was not reasonable. However, when reading the judgment as a whole, the Court of Appeal concluded that Justice Rowbotham understood that the curtailment must have been "necessary" in all the circumstances and only framed the question in terms of "reasonableness" because of the insurer's argument.

The Court of Appeal went one step further and held that the threshold necessity requirement was met in this case. In giving a proper meaning to "necessity", the Court of Appeal noted that the policy provided that in case of a business interruption the insured was to resume "normal operations" as soon as "practicable". "Practicable" necessarily meant that some business judgement, in a reasonable fashion, was to be applied to the circumstances. Whether the curtailment of production was "necessary" involved weighing a matrix of factors, including safety, economic, operational, and environmental considerations. The "necessary" clause and the "normal operations" clause had to be read together.

The insurer was required to compensate the insured for losses arising from the curtailment of production and for the losses arising from the shutdown. Justice Rowbotham held that the insurer failed to establish that the maintenance, undertaken during the shutdown, was the cause of improved production subsequent to the shutdown, and therefore no deductions were made for the "betterment" of the plant. The Court of Appeal referred to case law on collateral benefits and held that the insurer suffered no deprivation. The repairs might well not have occurred without the insured peril and therefore the insurer had no legitimate reason to complain that the insured had drawn a collateral benefit. Were it otherwise, an insured would not attempt to make repairs, leaving all parties worse off.