In Imperial Metals Corporation v. Factory Mutual Insurance Company, 2022 BCSC 73 the British Columbia Supreme considered an insured’s claim that its business interruption claim was subject to a $250,000,000 policy limit, rather than being limited to a $10,000,000 policy limit. The Court also considered a counterclaim by the insurer who sought to recover payment made pursuant to the policy as a result of settlements obtained by the insured with at-fault third parties. This article only addresses the insurer’s counterclaim to share in the benefits of the insured’s recovery efforts.
Imperial Metals Corporation and its subsidiary, Mount Polley Mining Corporation, which operates the Mount Polley Mine (collectively, “Imperial”) were the plaintiffs in the action. Imperial purchased a policy of insurance from the Factory Mutual Insurance Company (“Factory Mutual”) that covered property damage and business interruption losses.
In 2014, the tailing deposit facility (“TDF”) at the Mount Polley mine failed. Due to the TDF failure, the mine was shut down for a significant period of time. Imperial later estimated that it suffered over $300 million in losses due to the TDF failure, including physical damage and business interruption losses.
Factory Mutual promptly paid Imperial $10 million under the Policy pursuant to a policy provision limiting coverage for TDFs to $10 million. Imperial claimed against Factory Mutual alleging that its business interruption loss was not subject to the $10 million policy limit, but was, rather, subject to a significantly larger $250 million limit under the Policy for “earth movement”. Factory Mutual counterclaimed to recover some or all of the payments made pursuant to the Policy, as a result of the settlements Imperial reached with third parties.
B. Factory Mutual’s right to subrogation
Factory Mutual sought to recover indemnity it had already paid to Imperial under the Policy based on Imperial’s recovery from at-fault third parties. In essence, Factory Mutual only asserted its subrogation rights after Imperial had done the work to recover from the at-fault parties.
In British Columbia, an insurer’s subrogation rights are codified in section 36 of the Insurance Act, S.B.C. 2012, which provides:
36(1) The insurer, on making a payment or assuming liability under a contract, is subrogated to all rights of recovery of the insured against any person, and may bring an action in the name of the insured to enforce those rights.
(2) If the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount must be divided between the insurer and the insured in the proportions in which the loss or damage has been borne by them respectively.
Following the TDF failure, Imperial sued the engineers of record for the mine, ultimately settling for over $108 million in 2018. In 2016, Imperial advised Factory Mutual of the claim against the engineers, and followed up on the advisement in 2017. Factory Mutual did not assert its subrogation rights until 2020 in the form of a counterclaim to Imperial’s coverage action.
Imperial argued that because Factory Mutual did not fund or share in the risk of the recovery action, it should not be entitled to share in the settlement from it.
The Court determined that the permissive right to bring an action in the insured’s name was not a condition for asserting subrogation rights under s.36 of the Insurance Act. Rather, subrogation rights under s. 36 are automatically available when an insurer makes a payment or assumes liability under an insurance contract.
Imperial argued that Factory Mutual was estopped or barred by the duty of good faith from asserting its subrogation rights four years after learning of the action. However, Imperial did not ask Factory Mutual to participate in the litigation, Factory never told Imperial it would not assert its subrogation rights, and Factory Mutual did not take any steps that prejudiced Imperial. Therefore, Factory Mutual had not breached its duty of good faith and was not estopped from asserting its subrogation rights and sharing in the amounts recovered from the at-fault parties.
Important to the Court’s finding that Imperial was not prejudiced by Factory Mutual’s delay in asserting its subrogation rights was that, under s. 36, the costs incurred in the recovery efforts are deducted from any portion of the amount to be shared between the insurer and the insured. Therefore, Imperial would be reimbursed for its litigation costs before the funds are shared between it and Factory Mutual, to the extent of the indemnity paid by Factory Mutual.
The result in Imperial presents another option for insurers – adopt a wait-and-see approach to subrogation where an insured commences an action against at-fault parties for amounts in excess of policy limits. Insurers need to be aware that if their conduct amounts to an estoppel or breaches their duty of good faith, their ability to enjoy the benefit of their insured’s recovery is unlikely. From the insured’s perspective, at the outset of any recovery effort, the insured should request the insurer’s position on whether they intend to participate in the recovery effort and request that they do so. Taking those steps may result in an outcome opposite to that in Imperial.