An insured was entitled to business interruption coverage and expenses under its business interruption insurance when its supplies were disrupted by an explosion at their supplier’s plant

The Insured brought an action under its policy for recovery of contingent business interruption and contingent extra expenses following an explosion at a plant which provided the Insured with its raw materials. The Insurer denied the claim on the basis that the damaged facility was not a “supplier”, that the curtailment of production was not reasonable, and the decision to shut down the plant was related primarily to performing maintenance. The Court found that the loss was covered under the policy.

Neste Canada Inc. v. Allianz Insurance Co. of Canada, [2006] A.J. No. 1660, Alberta Court of Queen’s Bench, Rowbotham J., December 20, 2006

Neste Canada Inc. (“Neste”), a company involved in the refining and manufacturing of components for motor gasoline and oil, had a policy of insurance with Allianz Insurance Co. of Canada (“Allianz”). Among the coverages provided were “business interruption” and “extra expense” coverages. They were extended by the “contingent business” and “contingent extra expense” provisions. On January 27, 1999, and explosion occurred at the Taylor plant. The Taylor plant provided butane to Trans Canada Midstream (“TCM”) and Kinetic Resources (“Kinetic”). TCM and Kinetic in turn sold butane to Neste. Following the explosion, the Taylor plant was damaged and did not produce butane for approximately one year. As a result, TCM and Kinetic reduced the butane which they supplied to Neste. Neste reduced production and ultimately shut down its plant for approximately ten days.

Allianz denied coverage on the grounds that 1) Kinetic was not a supplier under the policy; 2) curtailment of production was not reasonable; and 3) the decision to shut down the plant was primarily by a need to perform maintenance. The Insurer also argued that the period of indemnity did not begin until after a 15-day waiting period which was to be measured from the date the shutdown occurred. Additionally, the Insurer argued that the measure of losses suffered by Neste did not include professional fees paid to its accountant and did not include the extra cost of butane after the plant was reopened.

The Court held that Kinetic was a supplier. The Court considered the intention of the parties when they entered into the policy, and found that the risk that Neste first saw was the loss sustained as a result of the interruption of its own business caused by the interruption flow of goods or services. The nature of Neste’s business was known to the Insurer, and both would have been aware of the risk that the supply of butane would be interrupted by damage to that supply. Also, none of the contractual or proprietary interests between Kinetic and the Taylor Plant were in the control of Neste, and they could change without the knowledge of Neste or Allianz.

In considering whether the curtailment of production was reasonable, the Court accepted the issue was whether it was necessary to curtail production as a result of the reduced supplies. On the evidence, the Court found that Neste’s decision to curtail production was reasonable. The Court noted that a competing company also made a business decision to curtail production at the same time, even though that company was self-insured and therefore motivated only by a concern for the supply of butane.

In considering whether the shutdown was necessary, the Court found that the shutdown was not planned and the main reason for the shutdown was the butane supply.

In considering when the 15-day waiting period began, the Court found that the waiting period began when the company curtailed production. The Court reasoned that a waiting period operates in the same manner as a deductible, and applied McNaughton Automotive Ltd. v. Cooperators Insurance Co., [2005] O.J. No. 2436 and its analysis of the importance of the purposes of deductibles.

The Court then considered whether the enhanced production following the March 1999 shutdown should allow the Insurer to claw back the increased profits in order to submit that Neste suffered no loss. The Court found that there should be no deduction for increased production.

In regards to professional fees, the Court found that the policy covered professional fees that went to establishing the amount of the loss. The Court found that in this case, those fees amounted to $60,842.47, and the amount subsequent to that was related to expert reports which would be dealt with under the issue of costs.

The Court also found that though there was no provision for the payment of prejudgment interest either in the policy or in the Insurance Act, in circumstances where the Insured immediately reported the loss, the parties exchanged information about the loss as early as the summer of 1999, and the calculation of the loss was complex, Neste was entitled to prejudgment interest from July 1, 1999.

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