How environmental liability ruling could affect other insurance lines

Environmental liability is not the only line of insurance that could be impacted by the recent Supreme Court of Canada ruling on a trustee in bankruptcy’s obligation do deal with inactive energy assets such as oil wells.

In Orphan Well Association v. Grant Thornton Ltd., released Jan. 31, Supreme Court of Canada over-ruled an Alberta court decision that found the province’s energy regulations are in conflict with the federal Bankruptcy and Insolvency Act.

“While the ruling was based on a case that was focused on environmental obligation, it doesn’t limit to environmental obligation. This could affect liability associated with different sources of coverage,” said Miles Foxworth, a Toronto-based underwriter with Lloyd’s insurer Beazley Canada, in a recent interview.

The Orphan Wells case has its roots in the 2015 bankruptcy filing by oil and gas company Redwater, whose facilities included 84 wells. Grant Thornton was Redwater’s trustee in bankruptcy. Grant Thornton initially told the Alberta Energy Regulator it would only take possession and control of Redwater’s 17 most productive wells three associated facilities and 12 associated pipelines. Grant Thornton’s task was to do its best with Redwater’s assets to pay anyone owed money by Redwater. One of Redwater’s creditors was ATB Financial, which was owed $5.1 million.

The result of the Orphan Wells ruling is that Redwater’s trustee in bankruptcy cannot “walk away” from the environmental liabilities associated with Redwater’s inactive wells.

This means banks take on more exposure when they lend money to any company with regulatory obligations, Foxworth told Canadian Underwriter earlier.

He added some oil and gas companies were going into bankruptcy in order to avoid obligations to the regulators – and pay back creditors instead.

“Previously there was no obligation to deal with their regulatory obligation to pay back their creditors,” said Foxworth.

“What we expect is because lenders or creditors are now going to be taking on this increased exposure associated with regulatory obligations, we expect lenders or creditors to now require more of their borrowers to buy coverage before they are willing to provide loans or cash to borrowers.”

In 2015, the Alberta Energy Regulator ordered Redwater to “suspend and abandon” the assets that were no longer making money. The regulator was exercising its powers under provincial law, including the Oil and Gas Conservation Act and Pipeline Act.

A company who receives an “abandonment” order must seal a hole used for drilling, render the site environmentally safe, decontaminate the buildings and land and remediate the property, chief Justice of Canada Richard Wagner wrote.

The dispute first went to the Alberta Court of Queen’s  Bench in 2015.The Alberta Energy Regulator asked the court to rule that Grant Thornton’s renunciation of some of Redwater’s inactive assets was void. AER also asked the court to order Grant Thornton’s to comply with the regulator’s abandonment orders.

Grant Thornton asked the court to approve a sales process that would exclude the assets Grant Thornton wanted to renounce.

In Redwater Energy Corporation (Re), released in 2016, the Court of Queen’s Bench ruled against the regulator, a ruling that was upheld on appeal. The provincial courts agreed with Grant Thornton’s argument that the provincial law was in conflict with federal law and therefore federal law should prevail.

But the Supreme Court of Canada ruled that the provincial energy law does not conflict with federal bankruptcy law. The trustee in bankruptcy is not on the hook to pay anything in a case like this, Chief Justice Wagner noted.

Orphan Wells Association, which sided with the regulator and against the trustee in bankruptcy, is overseen and funded by by the oil and gas industry. Its job is to oversee reclamation of  oil and gas assets that were never properly remediated after a company became insolvent.

OWA got involved in the case because each oil and gas company has to pay a levy based on the estimated cost of abandoning and reclaiming orphan well sites.

The number of new orphan wells increased from 80 in the 2013-14 years to 591 in the 2014-15 years.