TOP 10 PROPERTY COVERAGE ISSUES

TOP 10 PROPERTY COVERAGE ISSUES By: Jill M. Shore February, 2011 Dolden Wallace Folick LLP

TABLE OF CONTENTS INTRODUCTION...4 #1 - FAULTY DESIGN EXCLUSION IN ALL-RISKS POLICIES...4 1. Facts...4 2. Analysis...5 3. Practical implications for insurers...7 #2 - WARRANTIES - ARE THEY EFFECTIVE?...7 1. Historical approach to warranties materiality is irrelevant...8 2. Relaxation of the strict rules of warranty interpretation...8 3. Is it a true warranty or a suspensive condition?...10 a. Is the breach related to the risk of loss?...10 b. Did the breach cause the loss, or occur at the same time as the loss?...14 4. Summary of the current state of the law...15 #3 BUSINESS INTERRUPTION CLAIMS...15 1. Facts...16 2. Decision...18 #4 ANTI- SUBROGATION RULE...19 1. Historical approach...19 2. The anti-subrogation rule in the condominium setting...22 3. The anti-subrogation rule is not absolute...23 4. Common law anti-subrogation principles have been applied in Quebec...25 5. Implications for insurers...26 #5 CONCURRENT CAUSES OF LOSS...26 1. Application of Derksen principles to property coverage...27 a. Is it a single cause or concurrent cause?...28 b. If there are concurrent causes, is the exclusion effective to exclude concurrent causes?...28 c. Effect of new Insurance Act on concurrent causes...29 #6 - MOISTURE INGRESS EXCLUSIONS IN ALL-RISK POLICIES...29 1. Facts...30 2. Decision...31 3. Implications for insurers...32 Dolden Wallace Folick LLP 2

#7 FORTUITY OR SUCCEPTIBILITY IN ALL-RISK POLICIES...32 1. Fortuity in All Risk property policies...33 2. The insured must show that the loss was fortuitous...34 3. The trigger for coverage is an external fortuitous event...35 4. Implications for insurers...37 #8 - EARTH MOVEMENT AND SETTLEMENT EXCLUSIONS...38 1. Historical approach in British Columbia...38 2. Recent shifts in the law limit the settlement exclusion to apply to naturally occurring settlement events only, not fortuitous events...41 3. Implications for insurers...45 #9 RECTIFICATION OF INSURANCE POLICIES...45 1. Facts...46 2. Decision...47 3. Implications for insurers...48 #10 THE APPRAISAL REMEDY...48 1. Jurisdiction of the appraiser and umpire BC approach...49 2. Expanding the jurisdiction of the appraiser and umpire Alberta, Manitoba and Nova Scotia...50 a. An umpire must have expertise in the form of special knowledge or skill...50 b. Choose the umpire with the skills best able to encourage a quick settlement of the insured s loss...52 c. It is not necessary that a professional appraiser be appointed...53 3. Implications for insurers...54 CONCLUSION...55 Dolden Wallace Folick LLP 3

INTRODUCTION This paper provides an overview of ten current property coverage issues arising from case law developments across Canada. While the ranking of these issues into a top-ten list reflects the author s subjective views, the analysis of the substantive issues is objective, and provides a thorough review of these emerging legal trends. #1 - FAULTY DESIGN EXCLUSION IN ALL-RISKS POLICIES Until recently, the judicial interpretation of the faulty design exclusion in a Builders All Risks policy had varied across Canada. For example, in British Columbia, courts had historically adopted the prima facie standard, in which the fact that the designed property failed established that the design must have been faulty. In Ontario, however, the courts preferred the foreseeability standard, in which a design was considered faulty if it failed to address and withstand all forseeable risks. In 2008, the Supreme Court of Canada in Canadian National Railway Co. v. Royal and Sun Alliance Insurance Co. of Canada 1 confirmed that the state of the art standard applies in Canada. Designs that meet the state of the art will not be subject to the faulty design exclusion if they fail. The practical effect of this legal change is that the bar has been raised for insurers wishing to rely on the faulty design exclusion. We will review the new state of the art standard as recently confirmed by the Supreme Court of Canada. 1. Facts The facts of the CNR case are relatively straightforward. CN undertook to construct a railway tunnel under a river in Ontario using a massive, highly specialized boring machine. During the course of boring of the tunnel, the machine broke down and was damaged. The cause of the damage was excessive differential deflection. Although differential deflection was a foreseeable risk, the magnitude experienced was not foreseeable based on the existing state of the art, even as a remote or unlikely risk, with this design in these circumstances. The damage to the machine delayed construction by some 229 days, causing economic loss. Dolden Wallace Folick LLP 4

CN held a subscription builder s all risk policy which insured all risk of direct physical loss or damage to all real and personal property, including to the boring machine itself. CN sought indemnity under the policy and the insurers relied on the exclusion in the policy which exempted coverage for the cost of making good faulty or improper design. At trial, the court found as a fact that despite its failure, the design accommodated, within the then existing state of engineering knowledge, all foreseeable risks, including all foreseeable risks, no matter how unlikely or remote. The trial judge decided that the exclusion did not apply, because the risk was not foreseeable, and the insurers were obligated to pay the claim of CN. The insurers successfully appealed the trial decision, arguing that the faulty or improper design exclusion applied and the loss was not covered by the policy. 2. Analysis The Ontario Court of Appeal found that the trial judge applied the correct legal test, but incorrectly applied the test to the facts of the case. In particular, the Court of Appeal found that the foreseeability standard is met only where the foreseeable risk has been identified and the design has succeeded to withstand such risk without failure, regardless of the magnitude or degree of the risk experienced. In a 4-3 decision, the majority of the Supreme Court of Canada rejected the foreseeability standard in favour of the state of the art standard, and held that designs which meet the state of the art will avoid the exclusion. The court considered the different standards that could apply to determine whether faulty design had been established: The prima facie standard, derived from the Australian High Court decision in Queensland Government Railways and Electric Power Transmission Pty Ltd. v. Manufacturers Mutual Insurance, Ltd. 2, and followed in British Columbia in B.C. Rail Ltd. v. American Home Insurance Co. 3, is akin to strict liability. Any time a loss is shown to be occasioned by the design, such failure is prima facie proof that the design was faulty or improper because the product, as designed, turned out to be unfit for the intended purpose. Under the prima facie standard, the design is defective or faulty if it fails to perform as intended, regardless of 1 2008 SCC 66 2 [1969] 1 Lloyd s Law Reports 214 Dolden Wallace Folick LLP 5

whether the cause of failure was foreseeable or not, or known or unknown applying state of the art knowledge. The foreseeability standard, which applied in Ontario. A design is faulty if it fails to foresee and withstand all foreseeable risks, no matter how unlikely or remote. To establish a failure of the foreseeability standard, it must be shown both that the design failed, and that the risk that resulted in the failure was foreseeable. The state of the art standard, which imports into the concept of faulty design a comparative standard against which the impugned design falls short. A design is not faulty or improper simply because it does not meet the standard of perfection in relation to all foreseeable risks. The words faulty or improper require the insurers to show that the design failed to withstand a foreseeable risk, and that the design fell below a realistic standard, which meets the state of the art. This standard is higher than the industry standard, but lower than perfection. If the design met the very highest of standards of the day and failure occurred simply because engineering knowledge was inadequate to the task at hand, the design is not faulty or improper. The reasonable foreseeability, or tort or negligence standard, in which a design will not be faulty for the purpose of the exclusion, even if it fails, if the designer had taken into account all reasonably foreseeable risks and the design was shown to be in accordance with standard industry practice. The majority of the Supreme Court of Canada held that the state of the art standard properly reflected the intention of the parties to an all risk policy, as derived from an interpretation that reads coverage clauses broadly and exclusion clauses narrowly. A design is not improper or faulty simply because if fails. In this case, the engineering behind this uniquely complex and vast machine had used state of the art technology which, on the basis of the knowledge available at the time, was expected to withstand all foreseeable risks. The exclusion was thus held not to apply, and the insurers were ordered to pay in indemnity of more than $30 million. 3 (1991), 79 D.L.R. (4 th ) 729 (B.C.C.A.) Dolden Wallace Folick LLP 6

3. Practical implications for insurers This case should standardize the analysis used in each Province to interpret the faulty design exclusion, potentially leading to greater interpretive consistency across the country. However, the bar has been raised for insurers wishing to rely on the exclusion. Insurers will now have to prove what the state of the art standard means in each case, and then demonstrate that the insured fell below that standard. Since the Supreme Court of Canada decision in 2008, there have been 7 cases in Canada citing this decision. Interestingly, none of the seven cases address the faulty design exclusion. This absence of jurisprudence could mean different things. On the one hand, it could mean that the decision has clarified an ambiguous and confusing area of the law, and has lead to a decrease in disputed claims relating to the application of this exclusion. On the other hand, there could be just as many disputed claims out there now as before, but they are being resolved without trial in reliance upon expert evidence regarding the conformity of the design with the state of the art. #2 - WARRANTIES - ARE THEY EFFECTIVE? Warranties were initially developed as a device by which an insurer could grant a policy without troubling to make inquiries about certain matters. For instance, if an insurer was prepared to insure a vessel, but only on the condition that a watchman was stationed aboard the vessel at all times, the insurer would insert that specific term as a condition or warranty in the contract of insurance. By means of a warranty, an insured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or affirms or negatives the existence of a particular state of facts. A warranty must be exactly complied with, whether it is material to the risk or not for coverage to afford. Dolden Wallace Folick LLP 7

1. Historical approach to warranties materiality is irrelevant Prior to the 1990 s, Canadian courts took a more strict approach to warranties. For example, in New Forty Four Mines Ltd. v. St. Paul Fire & Marine Insurance Co. 4, a fire insurance policy which insured a gold mine contained the following clause: Watchman Warranty It is hereby warranted by the Insured that one man shall be on duty at all times at the Insured s premises. In actual fact, there was only a full-time caretaker who attended at the site at staggered hours. A major portion of the mill buildings burned to the ground and the property insurer denied coverage on the basis that the warranty had been breached. The Court discharged the insurer from liability, even though the insured s broker had acted carelessly in offering a warranty without the consent or knowledge of the insured. The Court confirmed that: the essential characteristic of a warranty is that it must be exactly complied with, whether it be material to the risk or not. If it be not complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach (emphasis added). Historically, courts insisted that warranties be strictly complied with, and it made no difference whether the risk was increased by the breach of the warranty. An insurer was entitled to void the policy irrespective of the materiality of the breach. This is unlike a misrepresentation, which in order to void, must not only be untrue but material. 2. Relaxation of the strict rules of warranty interpretation In some cases, Courts appear to have stretched themselves to avoid discharging the insurer in circumstances where the Court concluded that finding a breach of warranty 4 [1984] 34 Alta. L.R. (2d) 28 (Q.B.) Dolden Wallace Folick LLP 8

would work an injustice. In the 1980 s and 1990 s, the law in Canada respecting warranties changed, and it has since become more difficult for insurers to avoid indemnity on the basis of breach of warranty. The Supreme Court of Canada changed the law of warranties in Case Existological Laboratories Ltd. v. Century Insurance Co. of Canada 5, by introducing into the analysis of warranties a preliminary determination as to whether the warranty is a true warranty, or is only a suspensive condition, the breach of which did not always give rise to a right to void the policy. Case s vessel, a converted barge that was partially open to the sea on her bottom and kept afloat by an airtight deck, sank when a member of her crew intentionally opened the deck valves to let out the air trapped in the hull so the stern would settle, and then negligently failed to close the valves again. Case sought indemnity for the loss pursuant to its policy of property insurance. The insurers raised a number of defences, including breach of warranty. The clause that was said to be a warranty appeared under the heading Special Conditions and read as follows: WARRANTED that a watchman is stationed on board the BAMCELL II each night from 2200 hours to 0600 hours with instructions for shutting down all equipment in an emergency. In fact, no night watchman was stationed on board the ship once the insurance came into effect. However, the opening of the deck valves occurred early in the afternoon and the sinking occurred shortly thereafter, long before 2200 hours. So the clause bore no relationship to the occurrence that caused the loss. The Court acceded to the argument that the parties could not have intended that if the night watchman was late one night, or even missed a night, that the insurers would be discharged from liability for the remainder of the term of the policy. Even though the word warranted appeared in the term, the Court concluded that the term in question 5 (1982), 133 D.L.R. (3d) 727 (B.C.C.A.), appeal to the Supreme Court of Canada dismissed at [1983] 2 S.C.R. 47. Dolden Wallace Folick LLP 9

was actually a suspensive condition (a term which is descriptive of the risk), and not a true warranty. In the result, the insurer was not discharged from liability. Canadian Courts have continued to follow the approach set out in Case. 6 It is now readily accepted that the label warranty is not determinative, and that in each case, the condition must be assessed to determine whether the condition is a true warranty, or a suspensive condition only. If the parties did not intend that every breach of the condition will entitle the insurer to void the policy, regardless of whether the breach is related to the risk of loss or to actual loss, it is unlikely that the court will find the condition to be a true warranty. 3. Is it a true warranty or a suspensive condition? Notwithstanding the relaxation in the interpretation of warranties which has occurred recently, Courts continue to enforce warranties where it is clear that the parties intended that every breach, regardless of consequences, would entitle the insurer to void the policy. If this was not the intent of the parties, then the condition is not a warranty. Courts are more likely to find a condition to be a warranty where the breach is directly related to the contracted risk. A breach of a suspensive condition will only affect coverage where the breach has contributed to the loss, or occurred contemporaneously with the loss, regardless of whether or not the breach caused the loss. a. Is the breach related to the risk of loss? In Elkhorn Developments Ltd. v. Sovereign General Insurance Co. 7, a 2001 decision of the British Columbia Court of Appeal, Elkhorn purchased a forty-year-old wood barge to be used as a floating camp for its employees. After considerable trying, Elkhorn succeeded in obtaining insurance coverage for the barge. Prior to placing coverage, the insurer was provided with a report that provided that the barge was in a deteriorated condition and was best suited to sitting in one location. The coverage was issued subject to two express warranties: Dolden Wallace Folick LLP 10

1. Warranted vessel laid up permanently at Pearce Bay, B.C.; and 2. Warranted any movements of this vessel to be subject to underwriter prior approval of such tow. The property coverage was renewed several times and each time a cover note was delivered with a letter reiterating that the policy was subject to No moves without prior approval. On an unknown date, the barge was towed some miles to another bay. The barge was then towed a second time, this time a distance of 100 miles, where it was moored. The insurers were not advised of the moves. Five days after the second move, the barge sank. There was no proof that the move caused it to sink. The insurer argued that there had been a breach of warranty which voided the policy. The insured, not surprisingly, argued that the term was a suspensive condition the breach of which did not void the policy. The Court concluded that the moving of the barge posed a risk of damage which may or may not have resulted in the sinking. The Court determined that the term was indeed a warranty, the breach of which discharged the insurer from liability. The Court said: it is not necessary in this case to show that the loss incurred was as a result of the breach of the warranty not to move the Barge. The fact that moving the Barge bore a clear relationship to the risk contracted for by both parties is sufficient to distinguish this case from cases involving suspensive conditions (emphasis added). Accordingly, it is not necessary to prove that the breach of the warranty caused the loss. If the clause bears a clear relationship to the risk contracted for it is more likely to be characterized as a warranty, the breach of which will entitle the insurer to void the policy. 6 See: Shearwater Marine Ltd. v. Guardian Insurance Co. of Canada (1997), 29 B.C.L.R. (3d) 13 (S.C.); and F.B.D.B. v. Commonwealth Insurance (1983), 2 C.C.L.I. 200 (B.C.S.C.). 7 (2001), 87 B.C.L.R. (3d) 290 (C.A.) Dolden Wallace Folick LLP 11

A similar result is found in Action Adventures Ltd. v. Lloyd's Underwriters, and Meehan v. Lloyd's Underwriters et al., 8 a 2007 decision of the British Columbia Supreme Court. A pilot crashed his company s airplane on Vancouver Island. The company sued its insurer, Lloyd s, for breach of the policy for failing to pay for damages sustained to the airplane in the crash. When requesting the insurance, the insurer was told that the plane was registered in the company name, but would be used for private use only, and would only be flown by the pilot Mr. Mandalik. The Lloyd s policy was placed through AON Calgary, on the basis that Mr. Mandalik would be the only authorized pilot the plane, and the plane would be used for private business and pleasure excluding hire & reward. This was communicated to the insured by way of fax prior to issuance of the policy, and in the cover note for the policy. The restrictions on use as noted above were not described in the policy as warranties. Instead, the policy declarations provided that: 8. Use of aircraft: Private Business and Pleasure excluding Hire and Reward. The policy contained an exclusion which provided that the underwriters would not pay for any loss, damage or liability if, at the time of the occurrence, a pilot other than an approved pilot shown on the policy was the pilot in command of the aircraft. The policy further defined Pleasure and Business as follows: 2. Pleasure and Business shall be deemed to mean the use of the Insured aircraft for personal and pleasure purposes, or in connection with the Insured s business, but excludes the use for: (a) hire, reward or any use for which any remuneration or benefit is received, promised or anticipated, other than a bona fide reimbursement for operating expenses of the Insured aircraft. 8 2007 BCSC 321 Dolden Wallace Folick LLP 12

(b) instruction; other than for the upgrading of pilots specifically insured under the Policy. (c) rental to others. ( Pleasure and Business Use ) The trial judge found that contrary to the conditions in its insurance, the insured had used the airplane for hire, including to provide flying lessons and to transport people to remote tourist resorts. The trial judge also held that in the course of using the plane for instruction, the plane was flown by pilots other than Mr. Mandalik. At the time of the accident, Mr. Mandalik was transporting some passengers on the plane to a remote area to view a plane for purchase. As all of the passengers on the plane at the time of the crash died, it is not known whether the passengers paid a fee for the service of the transport, in excess of bona fide reimbursement of expenses incurred (which would not have been in violation of the private business use condition). Lloyd s took the position that the fatal flight was a trip for hire contrary to the policy. Lloyd s sought a dismissal of the action on the basis that the conditions that only Mr. Mandalik was permitted to pilot the plane, and that the plane be used only for private and business use, were warranties, the breach of which entitled it to void the policy. The court found that the condition that only Mr. Mandalik was permitted to fly the plane was a suspensive condition and not a warranty. As the accident happened when Mr. Mandalik was flying the plane, the exclusion did not apply, and the fact that someone other than Mr. Mandalik had flown the plane in the past was not a bar to coverage. However, the court found that the condition that the plane be used for business and personal use only was a warranty, the breach of which entitled the insurer to void the policy. Of importance in determining whether the condition was a suspensive condition or a warranty, the court looked to the fact that had the insurer known that the plane would have been used for commercial use for hire, a higher premium would have been payable, if insurance had been available at all. The evidence showed that the current coverage would not have been placed had the insurer known that commercial use for hire was intended. Dolden Wallace Folick LLP 13

b. Did the breach cause the loss, or occur at the same time as the loss? In AGF M.A.T (Allianz AGF MAT Ltd.) v. Ocean Masters Inc., 2007 NLCA 35, the Newfoundland Court of Appeal considered coverage under a marine policy in connection the loss at sea of a fishing vessel owned by Ocean Masters. The fishing vessel caught fire and sank about 40 nautical miles off the coast of St. John s. The policy had a warranties section which included the following condition: Vessel must be Canada Steamship Inspection (CSI) certified. Ocean Masters held a CSI Level II certificate for the vessel, which authorized it to conduct voyages on the east coast of Canada up to 120 nautical miles offshore. On the date of the fire, the vessel had travelled farther than 120 nautical miles offshore, but it was within its territorial limits at the time of loss. The insurer denied coverage on the basis that the breach of warranty entitled it to void coverage. The court of appeal disagreed, and found that the term was not a warranty, and that there was no breach of the condition at the time of loss. On the issue of whether the condition was a warranty, the court relied on a term in the general conditions section of the policy which set out the consequences for breach of conditions. This provision stated as follows: If any breach of a clause or condition of insurance shall occur prior to a loss under this insurance, such breach shall not void the coverage nor avail the underwriters to avoid liability, unless such breach shall exist at the time of such loss... The court held that not every breach under the policy was intended to void coverage, so the warranty was not a true warranty. The court further held that since the loss occurred within the territorial limits of the license, there was no breach at the time of loss, even though the vessel at the time was returning from a voyage that breached the condition. Accordingly, the court held that the loss was covered under the policy. Dolden Wallace Folick LLP 14

4. Summary of the current state of the law The current state of the law with respect to warranties might be summarized as follows: If the breach of condition increases the risk accepted by the insurer, the courts are more likely to find the condition to be a true warranty. If it is a true warranty, the insurer will be entitled to void the policy in the event of any breach. If the parties did not intend that every breach should give rise to a right to void coverage under the policy, the clause will likely not be characterized as a true warranty. If the condition is not a true warranty, then coverage will be unaffected by the breach unless there is a causal connection between the breach and the loss, or some temporal link between the breach and the loss. The fact that a clause contains the word warranty or warranted, or does not contain these words, does not determine whether the clause will be interpreted as a warranty. #3 BUSINESS INTERRUPTION CLAIMS The Alberta Court of Appeal recently addressed a number of important issues that arise in the context of business interruption claims. In Neste Canada Inc. v. Allianz Insurance Company of Canada 9, the Court determined the following issues. For contingent business interruption claims based upon damage to a supplier s facilities, the supplier in question need not be the owner of the facilities, and it is sufficient if the supplier uses the facilities for the purpose of providing supply to the insured. 9 2008 ABCA 71 Dolden Wallace Folick LLP 15

Where there is coverage for loss arising from the necessary interruption of the insured s business, the insured does not have to show that carrying on normal operations was impossible. Rather, a determination of whether business interruption is necessary includes the exercise of business judgment, and a matrix of factors including safety, economic, operational, and environmental considerations. The insurer was not entitled to reduce the claim because the insured had engaged in some cleaning maintenance work during the shutdown, and obtained a collateral benefit. So long as the loss was caused by the peril insured, the insurer may not deduct the value of such collateral benefits from amounts due under the policy. Although the provision in the policy was silent on timing for commencement of the waiting period, the court determined from a review of the policy as a whole, that the only reasonable interpretation was that the waiting period commenced to run upon the happening of the loss, and not with the date of the occurrence which gave rise to the loss. Although this interpretation was not as favourable to the insured, the alternate interpretations argued rendered the cap on deductibles futile. 1. Facts The insured operated a refinery plant for methyl tertiary butyl ether (MTBE), an additive for gasoline. MTBE is made from butane. The insured had supply contracts for the delivery of butane with two suppliers TransCanada Midstream (TCM) and Kinetic Resources (Kinetic). TCM and Kinetic both obtained some of their supply of butane from the same plant (the Taylor plant ). TCM was part owner of the Taylor Plant, but Kinetic was not an owner or part owner. In 1999, an explosion at the Taylor Plant caused the plant to shut down, thereby limiting the supply of butane to TCM and Kinetic, and increasing the market price of butane. TCM and Kinetic reduced the amount of butane they supplied to the insured. As a result of the supply shortage, the insured operated at 75% capacity for 23 days and then Dolden Wallace Folick LLP 16

shut down entirely for 10 days. The insured claimed under its policy for business interruption expenses. The policy provided business interruption coverage, defined as coverage against loss resulting from the necessary interruption of business conducted by the insured. Conditions applicable to the business interruption coverage included: Contingent Business Interruption Subject to the sub-limit stated in the Declarations, this Section is extended to cover within the sum insured the loss resulting from interruption of business due to damage to or destruction of property of a type not excluded by this Policy by a peril insured hereunder of: (i) the facilities of suppliers of the insured; which damage or destruction (1) prevents or delays delivery of materials upon which normal operation of the insured s business is dependent or (2) wholly or partially prevents acceptance of product(s) produced by the insured At trial, the insurer argued that Kinetic s facilities were not damaged as Kinetic had no ownership interest in the Taylor Plant. The trial judge found that even though Kinetic had no ownership interest in the Taylor Plant, coverage was intended to apply to both direct and indirect suppliers. The Court of Appeal agreed, stating that the policy could have but did not require the facilities to be owned by the suppliers. The Court stated: if the insurer had intended to limit the coverage to interruptions arising from damage only to facilities owned by a supplier, it could easily have done so by employing appropriate language. The insurer further argued that it was not necessary for the insured to have shut down its plant operations, and that the explosion at the Taylor Plant did not prevent or delay normal operation of the insured s business. The insured argued instead that the curtailment was due to economic factors. Dolden Wallace Folick LLP 17

2. Decision The Court found that in the circumstances, the curtailment and shut down was necessary. The Court noted that necessity does not mean impossibility. The policy provided that business operations must resume as soon as practicable, and that reasonable business judgment taking into account several factors must be considered when determining whether it is practicable to resume operations: [34] In our view, the threshold necessity requirement was met here. Necessity did not mean total physical impossibility here. The policy provides, in the case of a business interruption, that as soon as practicable the insured shall resume normal operation of the business. The term practicable indicates that the insured is expected to exercise business judgment in a reasonable fashion to ensure that production is resumed when it is practicable to do so, having regard to all the factors. This lends support to the conclusion that assessing whether curtailing production was necessary involves weighing a matrix of factors: especially safety, economic, operational, and environmental considerations. It is necessary to read together the necessary clause and the normal operations clause. The insurer has not demonstrated that the trial judge incorrectly applied the policy in the fact situation she found. The insurer also argued that because the insured had engaged in some maintenance work while production was stopped, that the insurer was entitled to a deduction for these collateral benefits. The Court disagreed. The insurer could have included in the policy that it was to have a credit for these collateral benefits, but chose not to do so. The Court stated, [54] Therefore, we would not give an insurer any deduction in a case like the present, unless the insurer proves that the loss was not caused by the peril insured, or that a legally-relevant effective cause not insured measurably increased the loss, or that the loss was not sustained, or that a measurable part of the loss was not sustained. If the insurer cannot prove any of those things, in our view any collateral benefit to the insured is irrelevant. Lastly, the Court was asked to consider when the waiting period started to run. In this case, the policy provided for a 15 day waiting period before coverage began, and the insured was responsible for all losses incurred during the waiting period. The policy did not specify when the waiting period would commence to run. The insured argued Dolden Wallace Folick LLP 18

that the 15 day period should commence to run upon the happening of the explosion at the Taylor Plant. The insurer argued that the waiting period began to run at the date of first loss occurred, which was the date of first curtailment of production. Considering the language of the policy as a whole, the court agreed that the waiting period commenced with the first loss, and not with the date of occurrence which gave rise to the loss. #4 ANTI- SUBROGATION RULE It has long been recognized at common law that an insurer, could not, through subrogation, be indemnified by its insured. This principle is particularly evident in the context of Builders All Risks policies. The last few years have seen a proliferation of cases in several jurisdictions regarding waiver of subrogation. Before reviewing these recent cases, some background is helpful. 1. Historical approach Waiver of subrogation was considered by the Supreme Court of Canada in Commonwealth Construction v Imperial Oil 10, in the context of the Builders All Risk policy: Whatever its label, its function is to provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling costs of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset. This purpose recognizes the importance of keeping to a minimum the difficulties that are bound to be created by the large number of participants in a major construction project, the complexity of which needs no demonstration. It also recognizes the realities of industrial life. The Court held that a subcontractor had an insurable interest in the project which extended to the entire works, and consequently, that the insurer had no right to subrogate against that sub-contractor, notwithstanding that contractor s culpable behavior. In reviewing the principles of common law that prohibit the subrogation 10 [1978] 1 S.C.R. 317, (1977), 69 D.L.R. (3d) 558, at 566 Dolden Wallace Folick LLP 19

under a Builders All Risk policy, the court found that unnamed insureds, often described as all subcontractors carrying on work in respect of the project, are protected from subrogated claims. The court also found that by its terms, the Builders All Risk policy contemplates that any person who supplies labour or material to the construction project has an insurable interest in the project to the extent of that tradesman s contribution. To the extent that the Builders All Risk policy also includes a waiver of subrogation clause, the cases have held that the insurer is precluded from bringing subrogated actions against labour and material suppliers, even if not an unnamed insured. The Supreme Court of Canada found at page 562 that the standard wording would typically preclude such action: On any construction site, and especially when the building being erected is a complex chemical plant, there is ever present the possibility of damage by one tradesman to the property of another and to the construction as a whole. Should this possibility become reality, the question of negligence in the absence of complete property coverage would have to be debated in Court. By recognizing in all tradesmen an insurable interest based on that very real possibility, which itself has its source in the contractual arrangements opening doors of the job site to the tradesmen, the Courts would apply to the construction field the principle expressed so long ago in the area of bailment. Thus all the parties whose joint efforts have one common goal, e.g., the completion of the construction, would be spared the necessity of fighting between themselves should an accident occur involving the possible responsibility of one of them. The issue of immunity for material suppliers from subrogated claims was more squarely considered and confirmed by the BC Court of Appeal in Sylvan Industries v. Fairview Sheet Metal Works 11 ( Sylvan ). In Sylvan, the insurer s subrogated action was barred, with immunity under the policy extending to the class of persons who supply materials to the subject matter of the policy, whether or not the party procuring the policy intended to include them as unnamed insureds, and particularly where the policy contains a waiver of subrogation clause. In this case, counsel had argued that a party cannot attain the status of an unnamed insured simply by holding an insurable interest in the property. Rather, an intention to insure must be proven. The Court considered the question of intention to insure both in 11 (1994), 89 B.C.L.R. (2d) 18 (C.A.) Dolden Wallace Folick LLP 20

the legal context in which the policy was written and the subjective intentions of the parties as evidenced in their construction contracts. The Court held that the material suppliers in question were unnamed insured, notwithstanding there was incomplete evidence regarding their subjective intentions. With respect to the parties subjective intentions, the Court reviewed the underlying contracts and found the evidence of intention equivocal and incomplete, and that there was no evidence of what the insured intended. The court further stated that given recent jurisprudence (finding that contractors and subcontractors were unnamed insureds) a finding of coverage should have been obvious. It stated: one might wonder why an insured would write a policy already found to confer unnamed insured status on contractors and subcontractors if it did not intend to cover them in the policy. Whether the doctrine of waiver of subrogation will apply in any given circumstance to prevent an insurer from bringing action against a party is a matter of contract interpretation. Recent developments in several jurisdictions have developed the case law in this area. In particular, recent cases have considered the application of waiver of subrogation principles in the following contexts: subrogated claims being brought by insurers under all-risk condominium policies against condominium owners; where the insurer has attempted to restrict waiver of subrogation by adopting policy wordings that limit the scope of coverage for unnamed insureds under a builders all risk policy to conform with risk allocation intended by the parties; and waiver of subrogation principles from common law jurisdictions in Canada have been applied in Quebec. Dolden Wallace Folick LLP 21

2. The anti-subrogation rule in the condominium setting A recent decision of the Alberta Court of Appeal in Condominium Corp. No. 9813678 v. Statesman Corp. 12 has highlighted the principles behind waiver of subrogation clauses in all-risk policies. The insurer for a condominium corporation brought a subrogated claim against the project s developer after a fire during construction damaged some of the buildings. The developer was also the owner of two units and was thereby a named insured in the allrisk policy which was issued to the condominium corporation. The all risk policy also contained an express waiver of subrogation in favour of unit owners. The insurer took the position that the court should find a controversial exception to the law of subrogation, because the all-risk insurance in case was taken out for the benefit of unit owners, and not as construction risk insurance. It argued that because the developer was not acting in the capacity of a resident, but as a contractor, the insurer should be allowed to subrogate. The court at trial, in reliance upon some US and UK authorities, agreed with the insurer. Despite the unusual results in this case, the Court of Appeal re-affirmed the traditional approach to waiver of subrogation, reversed the trial court decision, and dismissed the subrogated action on the basis that it was barred due to waiver of subrogation. An application for leave to appeal to the Supreme Court of Canada was dismissed on January 31, 2008. The Court of Appeal reviewed the rationale for and provided a good summary of the law regarding subrogation and the aim of multi-party insurance. The court relied upon the categories of insureds expressly listed in the policy, and upon the Condominium Property Act and condominium bylaws, which both expressly required that one all-risk policy be taken out covering a list of required insureds, including owners of the units and owners of common property. The court found that the same rational preventing subrogation against insureds in a builders all risk policy was equally applicable to the all-risk condominium policy. After presenting a myriad of potential causes of damage to condominium complexes, the court stated, at paragraph 35, that: Statute and bylaws direct the condominium corporation to take out one policy for all, to avoid delay, expense and uncertainty. They replace lengthy litigation with an immediate no-fault purse for all. That is the whole point of one no-fault 12 2007 ABCA 216 Dolden Wallace Folick LLP 22

all-perils policy. Many authorities find there a close analogy to builders all-risk policies. And in all such multi-party situations, there are many good commercial reasons for the [owner] to desire the waiver of subrogation to extend beyond the cover provided by the policy. Interestingly, the court also found that the condominium bylaws, which required the condominium corporation to obtain no-fault insurance that contains a waiver of subrogation against all owners, provided a contractual defence to the subrogated action, in reliance upon cases regarding the legal immunity provided by covenants to insure. The court held that a contract imposing a duty to get insurance is often interpreted as a waiver of subrogation, and that in this case, the duty to obtain insurance contained in the condominium bylaws precluded the suit by the named plaintiff against the developer, because he was an owner and party to the bylaws. This case shows that courts will be very reluctant to allow exceptions to waivers of subrogation, and highlights the real constraints on the ability of a property owner to subrogate against any named insured even where the insured s liability arises in an entirely different context than the basis on which the insurance was placed. 3. The anti-subrogation rule is not absolute In a recent Ontario case Brookfield Homes v. Nova Plumbing 13, issued May 5, 2010, and affirmed on appeal November 23, 2010 14, the court was asked to consider whether a subrogated claim can be brought by a home builder s insurer against a plumbing contractor who caused fire damage to several homes in a subdivision that was under construction. The builder had an all risks property insurance policy in place which responded to the loss, but the insurer argued that waiver of subrogation should not apply because of the unique contractual arrangements and policy language in question. Of course, the plumber argued that it was an unnamed insured under the builder s policy, and that the subrogated claim could not be maintained. Interestingly, the court allowed the subrogated claim to be maintained, and the Court of Appeal agreed. 15 13 2010 ONSC 2131 14 2010 ONCA 791 15 2010 ONCA 791 Dolden Wallace Folick LLP 23

The contract between the builder and the plumber was very explicit about the allocation of risk, and clearly allocated the risk to the plumber. In the contract, the plumber agreed: to be responsible for damage it caused at the worksite; to hold the developer harmless against any claims to its property; and to maintain at least $2 million liability insurance. The characterization of the builder s policy was in dispute in the action. The builder referred to it as an all risks property policy, and the plumber referred to it as a Builders Risk policy. The court confirmed that it is the content, and not the label, that matters, and then found that this particular policy has several features that made it different from the standard Builders All Risk policy. In particular: The named insureds included only the builder and its related entities. There were no other named insureds, and no generic provision extending the general coverage to unnamed contractors and subcontractors. Property damage coverage for contractors was explicitly limited. It provided that the policy also insures the interest of contractors and subcontractors during construction of an insured location to the extent of the Insured s legal liability for insured physical loss or damage to such property. The insurer s right of subrogation was preserved and the policy required the builder to cooperate in any subrogation proceeding. Another provision made clear that the plumber s insurers shall have no subrogation claims against the builder. This policy covered all of the Builder s properties, and not just the one project. The Court found that both the contract and the policy allocate the risk of loss caused by a contractor to the contractor and not to the builder. The Court relied heavily upon the words to the extent of the Insured s legal liability for Dolden Wallace Folick LLP 24

insured physical loss or damage to such property, which it found meant that the plumber is only insured to the extent that the builder is found legally liable for the loss or damage. For example, if the builder failed to provide appropriate security at the construction site and vandals damaged the contractor s materials. The Court found that these words sufficiently distinguished the type of coverage from that which provided coverage for property owned by others under normal Builders All Risk policies. Previous cases have considered the coverage provisions providing coverage to property owned by others under the Builders Risk policy as a key factor in determining that the contractor or subcontractor is an unnamed insured. By finding this particular wording substantially different from the property owned by others clause, the Court found that the plumber was not an unnamed insured under this policy. As a result of the foregoing, all of the waiver of subrogation cases were distinguished, and the Court allowed the subrogated action against the plumber to proceed. This case demonstrates that the issue of whether contractors and subcontractors are included as unnamed insureds under Builders All Risk policies is a matter of policy interpretation. However, the court is not restricted to a review of the policy alone, and the court must also consider the underlying contracts governing the relationships between the parties, the obligations regarding insurance contained in such contracts, and the intention of the parties. 4. Common law anti-subrogation principles have been applied in Quebec A recent decision of the Quebec Court of Appeal, in Optimum, societe d assurances inc. c. Plomberie Raymond Lemelin 16, considered the application of waiver of subrogation principles to a Builders All-Risk policy in Quebec. The court found that the subrogated claim against the subcontractor was barred because he was an unnamed insured under the policy. Of note is the application of common law principles and cases to the waiver of subrogation issue in Quebec. In particular, the Quebec Court of Appeal applied the following cases: 16 2009 QCCA 416 Dolden Wallace Folick LLP 25

Commonwealth Construction Co. Ltd. c. Imperial Oil Ltd., [1978] 1 R.C.S. 317; Sylvan Industries Ltd. v. Fairview Sheet Metal Works Ltd., [1994] B.C.J. No. 468, (1994) 22 C.C.L.I. (3d) 175, 183 (B.C.C.A.); Madison Developments Ltd. v. Plan Electric Co., [1997] O.J. No. 4249 (Ont. C.A.). 5. Implications for insurers In summary, the anti-subrogation rule is alive and well, and has been applied in several Canadian jurisdictions including Quebec. In each case, the wording of the policy and the underlying contractual arrangements of the parties should be examined, to determine whether on the facts the party against whom recovery is being contemplated is covered under the policy, and the right to bring a subrogated claim has been waived. #5 CONCURRENT CAUSES OF LOSS Historically, when considering coverage under a liability or property policy, insurers looked to determine if there was a single, dominant or proximate cause or a loss. If so, and the cause was an excluded peril, then coverage could be denied. However, the term proximate cause is a negligence law concept, and its application in an insurance policy analysis can be problematic, especially where there is more than one cause of the loss. In 2001, the Supreme Court of Canada in Derksen v. 539938 Ontario Ltd. 17 adopted the idea of concurrent causes of loss, and stated how to determine the applicability of coverage under an insurance policy when one of the causes of loss is covered, and one of the causes is excluded. Where there are separate concurrent causes of a loss, there is no presumption that all coverages are ousted if one of the concurrent causes is an excluded peril. 17 2001 SCC 72 Dolden Wallace Folick LLP 26

In Derksen, a steel base plate, which was part of a road sign assembly, had been stored on the defendant s truck by the truck s driver as part of the clean-up of a work site. While driving, the plate flew off the truck and went through the windshield of an oncoming school bus, killing one child and injuring three others. The Plaintiffs alleged negligence at the work site and negligence in the operation of the truck. The motions judge decided (and the Supreme Court of Canada upheld) that the accident resulted from concurrent causes: negligent clean-up and negligent operation of the truck. The court found coverage under both the CGL and the auto policy. This decision was made notwithstanding the standard exclusion in the CGL policy of the use or operation of an automobile. The Supreme Court identified and made, inter alia, the following findings: 1) Derksen was based on a series of events that are separate causes contributing to the same loss, which is different from a series of events that are the same cause of loss. 2) Insurers may suggest there was an independent and intervening act (more proximate cause) that broke the chain of causation, but this is not correct. The operation of an intervening force will not ordinarily absolve a defendant of further responsibility, if it can be considered a normal incident of the risk created by the harm. 3) Where there are concurrent causes of loss there is no presumption that that all coverages are ousted if one of the concurrent causes is an excluded peril. Rather, it is a matter of contract interpretation, and must be expressly stated in the insurance policy. 4) When interpreting the exclusion clause, there is no reason to decide in favour of the insurer, because insurers have language available to them that would remove all ambiguity from the meaning of an exclusion clause in the event of concurrent causes. Consistent with policy interpretation principles, exclusion clauses are to be interpreted narrowly. 1. Application of Derksen principles to property coverage In the context of first party property policies for industrial risks, the Derksen decision is important. It has created an opportunity for insureds seeking coverage that might otherwise have been denied. In those situations where the facts of the claim lend themselves to an argument that there was more than one cause of the loss or peril at play, the creative insureds can use Derksen to find coverage. Dolden Wallace Folick LLP 27

a. Is it a single cause or concurrent cause? An example of this type of argument is found in the decision of the British Columbia Supreme Court in Chandra v. Canadian Northern Shield Insurance Co. 18 In this case, the plaintiff was a joint owner of a house insured under homeowners policy. Initially the plaintiff made a claim under the policy as a result of a sewer backup. While repairing the damage from the sewer backup, the plaintiff learned that there was continuous and repeated seepage or leakage of water into the basement of the house that needed to be repaired. The plaintiff had the drain tiles replaced, but water was still seeping or leaking into the basement and mould began to grow. The plaintiff made a second claim under the policy with respect to the water ingress into the basement. The restoration contractor determined that the damage arose from water seepage and mould, both of which were excluded from her policy. The insurer denied coverage. At trial, the plaintiff argued that there were two causes of the damage arising as a result of the flood in the basement. One cause was negligent installation of the replacement drain tile. The policy did not exclude coverage for damages caused by, or the cost of replacing faulty design, material or workmanship, but only excluded the cost of correcting faulty design, material or workmanship. The plaintiff further argued that the insurer could have used language to exclude concurrent causes of loss but that it did not do so. The Court held that the damages were excluded by the operation of one or the other exclusions in the policy, for damage caused by wet or dry rot, fungi spores or mould, or by continuous or repeated seepage or leakage of water. On the issue of concurrent causes of loss, the Court held that the loss was really caused by only one cause, which was the continuous leak of water, and mould caused by that leak. The Court held this loss was excluded, and no coverage was available. b. If there are concurrent causes, is the exclusion effective to exclude concurrent causes? The cases decided in the early 2000 s, post Derksen saw many judges find in favour of coverage. An example from a property claim is found in the Saskatchewan Court of 18 2006 BCSC 715 Dolden Wallace Folick LLP 28

Queen s Bench decision in B&B Optical Management Ltd. v. Bast. 19 In that case, high voltage due to an improper electrical connection damaged equipment. The property insurer denied the claim on the basis of the exclusion for loss caused by artificially generated electrical causes. While the loss was caused by this, the Court found it was also caused by the contractor s negligence. The court considered the exclusion clause in question, and found that it did not include the words directly or indirectly, which would have expanded the exclusion to encompass concurrent or indirect causes. The court held that the contractor s negligence was a concurrent cause, and coverage was confirmed. Eventually, insurers started to redraft their exclusions to try to insert Derksen language, that would be effective to exclude coverage for all claims in the event of an excluded concurrent cause. Specific examples include water ingress exclusions, mould exclusions and grow op exclusions. The case law in this area is still developing. c. Effect of new Insurance Act on concurrent causes New insurance legislation recently introduced in Alberta, and waiting to be brought into force in British Columbia, may restrict the ability of insurers to insert exclusions that contain anti-concurrent clause wordings. The new Insurance Acts include provisions that restrict the applicability of unjust exclusions, and limit by regulation the types of exclusions that may be included. The relevant provisions in the new British Columbia Insurance Act are sections 28.3 28.6. The regulations referred to in these sections have not yet been drafted, so it is too early to truly assess the restrictions on drafting that may be imposed by these provisions. #6 - MOISTURE INGRESS EXCLUSIONS IN ALL-RISK POLICIES In Canada s wetter climates, moisture ingress and resulting mould damage is increasingly the subject of claims under property policies. In the case of damage caused by mould, there are typically at least two causes of the loss. One cause is usually water damage, which in many cases will be covered by the policy, but may also be excluded. The other cause is mould growth, which is an independent cause of loss. As mould 19 2004 SKQB 242 Dolden Wallace Folick LLP 29

cases became more prevalent, the industry adopted better exclusions to apply to mould damage. A recent decision of the Manitoba Court of Appeal confirms that mould damage can be effectively excluded by a properly drafted water ingress exclusion clause. In Minox Equities Ltd. et al. v. Sovereign General Insurance Co., 20 the policy excluded damage caused directly or indirectly by moisture ingress or humidity. A question arose as to whether coverage was predicated upon proof that the moisture ingress would always cause mould damage. The Court of Appeal confirmed that the exclusion would apply so long as there was evidence that moisture infiltration contributed directly or indirectly to the growth of mould. It was not necessary to prove that moisture ingress would always cause mould damage. This decision tends to confirm that claims for mould damage are likely to be excluded, given appropriately clear exclusionary language. 1. Facts Minox owned an apartment building complex, which was insured by a broad-form all risk property policy. The apartment complex was built in 1977 and almost from the outset had ongoing problems with water leaks, moisture, and high humidity. Mould was on the walls and ceilings inside the apartments, inside closets and storage areas, carpets were damp and rotting, and mould was in crawl spaces in all buildings. For several years the owners managed the problem through bleach treatment and minor repairs, without submitting any claim. In 2001, the owners learned that some of the mould was toxic and that full remediation was required. In 2002 the owner sought to recover under its all risks policy mould remediation costs incurred by it. The policy in question contained the following exclusion: 5.B. PERILS EXCLUDED This Form does not insure against loss or damage caused directly or indirectly: I (i) by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings unless concurrently and directly caused by a peril not otherwise excluded in Clause 5.B. hereof; 20 2010 MBCA 63 Dolden Wallace Folick LLP 30

(ii) by the entrance of rain, sleet or snow through doors, windows, skylights or other similar wall or roof openings unless (e) by dampness or drying of atmosphere, changes of temperature NOR DOES THIS FORM INSURE (m) wear and tear, gradual deterioration, latent defect The insurer denied coverage on the basis that the loss was not fortuitous, and that the exclusions regarding latent defect, improper design, seepage of water, entrance of rain and/or dampness or drying of atmosphere applied to exclude coverage. Damage caused by mould was not excluded under the policy. 2. Decision The trial court found that the damage caused by mould was fortuitous, and the exclusion clauses in the policy could not be relied upon to deny coverage, although each of the excluded perils was present. The trial judge held that the exclusions were not effective to preclude coverage because the mould did not inevitably result from the moisture or humidity problems. The Court of Appeal summarized at paragraph 44 of the decision the trial judge s relevant findings of fact, as follows: The trial judge determined that the evidence established that there was seepage of water through doors or windows, that there was the entrance of rain, snow or sleet through doors or windows, and that there was dampness of atmosphere in the complex, all of which contributed to excess humidity and moisture within the units of the Complex. He also determined that moisture was an essential ingredient for the development of mould. However, because the evidence established that mould would not inevitably result from moisture or humidity problems, the trial judge determined that he was unable to conclude that the excessive moisture was a direct or indirect cause triggering the appearance of the mould. The Court of Appeal found that the trial judge erred in interpreting the exclusion clause in a way that the damage had to have been inevitably caused by the excluded perils of seepage, rain or humidity. Instead, the Court of Appeal held that it was not necessary for the insurer to prove that these excluded events would always cause the mould Dolden Wallace Folick LLP 31

damage. Relying on Derksen 21, the Court of Appeal held that the words directly or indirectly effectively excluded both direct and indirect or consequential losses of an event. Therefore, as long as the evidence indicates that mould was a direct or consequential result of the seepage, rain or humidity, then the exclusion clauses would apply, absent other issues. With respect to the issue of concurrent causes, the court further stated at paragraph 53 that: Thus, in this case, even if the mould was the result of concurrent causes, the use of the phrase directly or indirectly caused in the exclusion clauses, allows the exclusion clauses to apply. It was found that moisture was a prerequisite for mould growth, so the seepage, rain and humidity problems contributed at least indirectly to the growth of the mould, notwithstanding that the right temperature or adequate food and mould spores were also required for mould to grow. The insurer was not required to cover the costs of the mould remediation. 3. Implications for insurers This case is important for insurers because it determines that mould is not a concurrent cause of damage caused by water ingress, but rather, is a direct or consequential result of water ingress. Although the court stated that even if the mould was the result of concurrent causes, the use of the phrase directly or indirectly in the exclusion clause would have been sufficient to exclude mould as a concurrent cause of loss, even without a mould exclusion being present. #7 FORTUITY OR SUCCEPTIBILITY IN ALL-RISK POLICIES Most within the insurance industry recognize that only fortuitous losses are insurable. In its most simple terms, a fortuitous act is one that is neither intentional nor inevitable. Insurance is not provided for certainties. As the cases demonstrate, the principle of fortuity is easily stated, but problematic to apply. The difficulty arises because the test for fortuity is a subjective one. Whether a 21 Derksen v. 539938 Ontario Ltd., 2001 SCC 72 Dolden Wallace Folick LLP 32

particular type of loss was intentional or inevitable is often difficult to determine, and is often the subject of litigation. To further complicate matters, fortuity principles arise in a variety of insurance contexts. The concepts of accident and accidental loss, which arise in property, liability, and sickness and disability insurance, all involve an analysis of fortuity. Case law in these areas develops through widely different circumstances, yet somehow needs to be reconciled in a manner that is consistent. For the purpose of this paper we review the principles that have emerged in the property context, but also make reference to recent developments from the Supreme Court of Canada in other areas, which may have an impact on property claims that deal with issues of fortuity. 1. Fortuity in All Risk property policies In the context of the All Risk property policy, the insurance constitutes a promise to pay only upon the fortuitous happening of loss or damage from any cause. It might therefore appear that All Risk policies do not require the exclusions for wear and tear, latent defect or inherent vice, which exclude coverage for inevitable or virtually inevitable loss. Nonetheless, it is in fact very important, from the insurer s point of view, that these exclusions be specifically included in All Risk policies. This is so because the courts define the requirement of fortuity in a manner which strongly favours the position of the insured. Several Canadian cases make reference to a 1921 decision of the House of Lords in British & Foreign Marine Insurance Company v. Gaunt, 22 as the leading authority on the scope of all risks policies, when considering the issue of fortuity. That case involved a claim under an all risks policy arising from water damage to bales of sheep s wool during transit by land and sea in South America. The court established the proposition that to be covered under an all risks policy, the loss must be due to some fortuitous circumstance or casualty. The court confirmed that All Risks coverage does not cover damage however caused. It does not cover losses that the insured brings about by its own act, or losses inevitable from ordinary wear and tear, inherent vice, or depreciation. At page 57 the court held: 22 [1921] 2 A.C. 41 Dolden Wallace Folick LLP 33

There are, of course, limits to all risks. They are risks and risks insured against. Accordingly the expression does not cover inherent vice or mere wear and tear or British capture. It covers a risk, not a certainty; it is something which happens to the subject-matter from without, not the natural behaviour of that subject-matter, being what it is, in the circumstances under which it is carried. Nor is it a loss which the assured brings about by his own act, for then he has not merely exposed the goods to the chance of injury, he has injured them himself. Finally, the description all risks does not alter the general law; only risks are covered which it is lawful to cover, and the onus of proof remains where it would have been on a policy against ordinary sea perils. The court held that the plaintiff was required to show that the loss fell within the policy, and that the loss was fortuitous. It was not necessary that the plaintiff prove the exact mechanism of how the loss occurred, so long as it is shown to have been fortuitous. In this case, the loss was found to have been caused by a fortuitous event, and coverage was triggered. The issues raised in this case have been tested over the last decade in a variety of contexts. The following cases provide some useful examples. 2. The insured must show that the loss was fortuitous The 2000 Ontario Supreme Court decision Brennan v. Economical Mutual Insurance Co. 23 considered the issue of the plantiff s burden of proof on the issue of fortuity. In this case, a residential tenant had caused damage to its rental premises in the form of splotchy black soot residue which covered the walls, ceiling, flooring, window coverings and fixtures throughout the home. When the tenant moved out, the landlord made a claim under its rental dwelling insurance policy which provided all risks coverage subject to an exclusion for wear and tear. Expert testimony established that the soot was caused by the tenants burning wax candles in the home. The insurer denied coverage on the basis that the damage was not caused by a fortuitous event or casualty. The Court held that the plaintiff s burden of proof was low. It simply had to show that the loss was the result of some casualty or accident within all risks, but did not have to cause the exact nature or cause. The Court held that this was easy to do, given the 23 2000 CanLII 22709 (On.S.C.) Dolden Wallace Folick LLP 34

extent of damage, and there was enough of it to infer a casualty. However, the Court held that the insurer may try to rebut that the damage was caused by a casualty. At paragraph 28 the Court held: While the insured need only prove a casualty, there is no reason why the defendant cannot then attempt to rebut by disproving the facts that triggered coverage, or proving additional facts that might take it outside coverage. There must still be fortuity. While an insured s burden to prove fortuity in an all risks policy may not be onerous, fortuity must nevertheless be proven and may itself be a matter of contest and further proof. While the burden shifts to the insurer, I conclude that the insurer is not limited to proving an exclusion where more may be known about the coverage triggering event itself. The insurer may rebut the insured s evidence, however low the evidentiary burden on the insurer may be, by leading evidence of its own to disprove fortuity. If it is unable to do so, it may then attempt to prove an exclusion. That is what the insurer did here. The Court held that the source of the damage was the deliberate lighting of wax candles by the tenant, and that it is a certainty as a result of the inherent nature of wax candles that they produce soot when burned. The court held that the damage was not caused by a fortuitous event, and there was no coverage. 3. The trigger for coverage is an external fortuitous event The distinction between fortuity and susceptibility was considered in a 2006 decision of the BC Court of Appeal in Nelson Market International v. Royal and Sun Alliance. 24 This case highlighted a central principle underlying all first party all risks property policies; the trigger for coverage requires an external fortuitous act. The Court confirmed that the insured must demonstrate that the damage to the cargo was caused by an external fortuitous occurrence, and not caused by the inherent nature of the cargo. Losses arising from the inherent nature or susceptibility of the property insured do not trigger coverage. The case involved an action pursuant to an all risks policy of marine cargo insurance for damage to the cargo. The cargo consisted of kiln-dried wood which had been fastened into laminated planks of hardwood flooring. The planks were highly susceptible to moisture. Upon arrival at the destination it was discovered that the Dolden Wallace Folick LLP 35

planks were damaged by moisture. The insured sought coverage under its policy and the insurer denied. The policy contained an exclusion for loss caused by inherent vice or nature of the subject matter insured. The factual findings of the trial judge regarding the cause of the moisture damage were central to the issue of whether the damage was caused by a fortuitous event. The insured had argued that the damage to the flooring had been caused by moisture due to rainfall. The Court, however, rejected this and preferred the evidence of the insurer s expert who testified that the moisture that caused the damage was absorbed at the mills, after the flooring was manufactured, while awaiting shipment. While the planks were wrapped in plastic and shipped, the water inside the planks had repeatedly evaporated and condensed inside the plastic wrapping, causing moisture damage and staining. As such, the source of the moisture was internal, not external. The Court found that the water damage was not caused by any external water source. The trial court 25 considered the issue of fortuity, and held that the moisture that caused the loss was absorbed at the mills, after the flooring was manufactured, while it was awaiting shipment. The court further found that the damage was caused by the temperature in the ship s hold, which caused the absorbed moisture to evaporate and condense. The trial court found that the environment in the hold was not expected or intended, and was fortuitous. The Court of Appeal overturned the trial court s decision on the issue of fortuity, and held that there was no coverage, because the loss was not caused by an external fortuitous event. On the issue of fortuity, the Court of Appeal held that all risks does not mean all losses. Rather, it means losses caused by fortuitous circumstances, as opposed to losses that are bound to happen or to which the insured property is necessarily susceptible. The Court of Appeal stated that, to succeed on a claim under an all risks cargo policy, the Insured must establish, by direct evidence or by an inference to be drawn from the available evidence, that an external fortuitous occurrence caused the deterioration of the cargo as distinct from the cargo having simply succumbed to the ordinary incidents of the voyage because of the cargo s inherent nature or susceptibility. 24 2006 BCCA 327, leave to appeal to the Supreme Court of Canada dismissed on March 8, 2007, at 2007 CanLII 6821 (S.C.C.). 25 2005 BCSC 772 Dolden Wallace Folick LLP 36

The Court of Appeal held that the nature of the flooring was to absorb and release moisture. The amount of moisture absorbed and released varied with the environmental conditions of temperature and humidity to which the flooring was exposed. For the damage to have been fortuitous, the flooring would have been exposed to unexpected conditions substantially out of the ordinary. The court found there was no evidence that the conditions were unexpected, so the damage was not fortuitous. This case highlights a central principle which underpins first party all risks property policies; the trigger for coverage requires an external fortuitous act and that an inherent defect in the insured property that creates a loss does not give rise to coverage. Coverage will only extend where losses are caused by fortuitous circumstances, namely accidental losses, as opposed to losses that are bound or certain to happen under ordinary conditions, given the nature of the property insured. 4. Implications for insurers Both the Brennan and Nelson cases stand for an important principle applicable to proving coverage under an all risks policy. It is trite law to say that the insured has the burden of proving coverage and that the insurer has the burden of proving exclusions. However, it is important to note that while an all risks policy may indeed have an exclusion clause that deals specifically with inherent or latent defects, this simply mirrors the trigger for coverage. When coverage under an all risks policy is litigated, the insured bears the initial burden, albeit a low one, of showing the loss was caused by an external fortuitous event. To do so, the insured may need to establish, at least in a preliminary and prima facie way, that the loss did not arise from an inherent or latent defect in the subject matter of the insurance. Indeed, it was this burden which ultimately doomed the insured in Nelson Marketing as the Court of Appeal found that the evidence as led by the insured could not support any finding that the conditions in the vessels were exceptional such as to constitute fortuitous occurrences that caused the damage to the flooring. The insurer did not have to prove the application of the exclusion. Insurers should remain alive to the fact that in the absence of a latent or inherent defect exclusion clause in the context of a first party all risks policy, the insured must still demonstrate that the loss was caused by fortuitous external circumstances. Dolden Wallace Folick LLP 37

#8 - EARTH MOVEMENT AND SETTLEMENT EXCLUSIONS Two recent cases arising out of the Court of Appeal in British Columbia and Alberta have taken a different approach to the interpretation of the exclusions for damage to buildings caused by earth movement and settling. Each case was decided on different basis, but the result was the same. In both cases, the court held that the earth movement and settlement exclusions did not apply. These cases mark a departure from previous decisions in BC. Before reviewing the new cases, some historical background is helpful. 1. Historical approach in British Columbia In Pavlovic v. Economical Mutual Insurance Company 26 ( Pavlovic ), the insured s home was damaged by a ruptured domestic water line that connected the insured s water supply to the city water main. Soils subsidence and building settlement occurred when water leaking from the domestic water line escaped into the foundation soils, causing distortion and damage to the home. The insurer denied coverage relying on several exclusions, including the settlement exclusion and the earth movement exclusion, which provided as follows: We do not insure: (5) settling, expansion, contraction, moving, bulging, buckling or cracking except resulting damage to building glass ; We do not insure loss or damage: (7) to an insured building caused by snowslide, earthquate, landslide, or any other earth movement. The British Columbia Supreme Court found that coverage was excluded by the water seepage and leakage exclusion, but the earth movement and settling exclusions did not apply. The Court found the phrase other earth movement as used in the context of the earth movement exclusion should be interpreted narrowly to mean severe earth movement initiated or caused by a distinct and dramatic natural phenomenon. The Court stated: 26 (1992), 9 C.C.L.I. (2d) 17 (B.C.S.C.) Dolden Wallace Folick LLP 38

As to clause (7), the whole tenor of that clause suggests a dramatic earth movement of the type contemplated by the words earthquake, landslide. In my view, the words or any other earth movement should be read in context of a severe earth movement initiated or caused by a distinct and dramatic natural phenomenon. I apply the contra preferentem rule against the insurer as to this clause. The Court also considered the term settling in the context of the settlement exclusion, and found that the damage to the Plaintiff s residence, notwithstanding the relatively modest amount of movement, was a collapse and not simply settlement. Accordingly, it held that the settlement exclusion did not apply. The decision in Pavlovic was reversed on appeal 27, based on a different interpretation of the application of the seepage and leakage exclusion, but the analysis of the earth movement and subsidence exclusions was not reconsidered. It is noteworthy that the earth movement exclusion in Pavlovic did not include the word subsidence within the list of other excluded types of damage in the landslide and earth movement exclusion. In 2000, the British Columbia Court of Appeal further considered the settlement exclusion in Leahy v. Canadian Northern Shield Insurance Company 28 ( Leahy ). In Leahy, a homeowner sued for coverage under its all risks homeowner s policy for settlement and cracking damage caused by a leak in its ccurrin s sprinkler system, which caused water to escape underground and soil to collapse on the insured s property. The settlement exclusion in Leahy was similar to the exclusion in Pavlovic, discussed above, and stated as follows: We do not cover: 12. settling, expansion, contraction, moving, bulging, buckling or cracking except. Unlike Pavlovic, in Leahy the Court found that the damage was not a total collapse, but was settling and cracking. Further, this exclusion clause was not prefaced by the words caused by, which were relied upon in Pavlovic to be ineffective to exclude an indirect cause of loss. Therefore, the Court had to interpret the exclusion to see if it was 27 (1994), 28 C.C.L.I. (2d) 314 28 2000 BCCA 408 Dolden Wallace Folick LLP 39

effective to exclude coverage in this case. The Court found that there is a difference between exclusion clauses that exclude a cause of loss, and exclusion clauses that exclude a type of damage. The Court found that this settlement exclusion excluded settlement as a type of damage, and was not cause dependent. On this basis, the Court found that the exclusion was not ambiguous, and that it was effective to exclude all settlement and cracking, regardless of the cause of such damage, thereby giving the settlement exclusion a broad interpretation. As a result, the Court held that there was no coverage. A 2006 decision of the British Columbia Supreme Court, The Owners, Strata Plan NW2580 v. Canadian Northern Shield Insurance Company 29 ( Strata Plan ) reconsidered the earth movement and settling exclusions, and this time the term subsidence was included within the earth movement exclusion. In this case, the insured s building suffered damage when preload soil or sand was placed on the adjacent property (to cause compaction and settlement of the underlying soil in preparation for construction). The preload on the adjacent property caused the insured s property to move and settle. The Court considered the application of two separate exclusions against loss or damage caused directly or indirectly to buildings by: aa.) Snowslide, landslide, subsidence, or other earth movement, except for ensuing loss or damage which results from fire, explosion, smoke or leakage from fire protective equipment; and cc.) Settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded (emphasis added). The Court held that the damage was caused by a chain of causation whereby the preload caused the earth movement, which in turn resulted in the structural damage to the insured s building. The Court reviewed the differences between various types of causal relationships, and found that proximate cause was the preload, and the direct cause was the earth movement. In the chain of causation, the Court held that contributing causes are proximate but indirect causes. As a result, the preload was a contributing and indirect cause of the loss. 29 2006 BCSC 330 Dolden Wallace Folick LLP 40

The Court interpreted the exclusions applying the reasoning in Pavlovic, and found that the earth movement exclusion only excluded naturally occurring movement, not fortuitous events, and that it did not apply to exclude the claim. There was no discussion regarding the effect of inclusion of the word subsidence within this exclusion, which arguably differentiated it from the previous cases. The Court also reviewed the settlement exclusion, and applying both Pavlovic and Leahy, held that the settlement exclusion was effective to preclude coverage, even though the exclusion in question excluded settlement as a cause of loss, and not settlement as a type of damage, as distinguished in Leahy. In particular, the Court held that the settlement exclusion was not limited to naturally ccurring settlement events that affect every building, and was broad enough to exclude fortuitous settlement events. With respect to the exception to the settlement exclusion, the Court found that there was no concurrent or independent direct contributing cause of the loss that would trigger the application of the exception. There were other indirect causes of the loss, but no other concurrent direct cause. As a result, the court held that the settlement exclusion applied and coverage was excluded. 2. Recent shifts in the law limit the settlement exclusion to apply to naturally occurring settlement events only, not fortuitous events. In Engle Estate v. Aviva Insurance Company of Canada 30 ( Engle ), the Alberta Court of Appeal gave a very narrow interpretation to the exclusion under all risks policy for loss caused by building settlement. The issue was whether building settlement damage caused by construction on an adjacent property triggered the building settlement exclusion. The Court found that the exclusion applied only to settlement resulting from gradual, naturally-occurring events; it did not apply to sudden man-made events (also described as fortuitous events). As a result, the insured was entitled to be indemnified for settlement damage caused by construction on a neighbouring lot. The insured, Engle, owned a commercial building in Calgary that was insured under an all risk policy. In June 2006, a developer began building a high-rise condominium project next door to Engle s building. After the condominium property was excavated several stories deep, the walls, floors and ceilings of Engle s building began to crack. Engle s engineer concluded that the cracks were caused by vibrations and inadequate underpinnings and shoring in the excavation. The estimated cost of repairing Engle s Dolden Wallace Folick LLP 41

building was $1 million. Engle sought indemnity from its insurer, which the insurer denied in reliance upon the settlement exclusion, which provided as follows: 6. EXCLUSIONS B) PERILS EXCLUDED This form does not insure against loss or damage caused directly or indirectly: 1) to buildings by: (iii) settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded in Clause 6.B thereof; The Chambers Judge concluded that the settlement exclusion did not apply: the loss was fortuitous, not inevitable, and the exclusion clause applied only to settlement-type damage caused by natural forces. 31 The Chambers Judge followed American cases that limited settlement exclusions to natural settlement only. The Chambers Judge declined to follow Canadian case law such as the Supreme Court of British Columbia s decision in Strata Plan 32 discussed above, which interpreted the same exclusion more broadly. The Chambers Judge also concluded in the alternative that the settlement exclusion clause was ambiguous and, applying the contra proferentem rule, that it should be interpreted as only excluding losses resulting from naturally-occurring events. The Court of Appeal upheld the decision of the Chambers Judge and dismissed the insurer s appeal. The Court of Appeal also declined to follow the Supreme Court of British Columbia s decision in Strata Plan, focusing its decision on the parties intentions and reasonable expectations. It noted that the exclusion used the term settling alongside expansion, contraction, moving, shifting or cracking. This choice of wording suggested that the clause was intended to exclude damages for passive, gradual, naturally occurring events. 30 2010 ABCA 18 31 2008 ABQB 645 32 2006 BCSC 330 Dolden Wallace Folick LLP 42

The insurer argued that the words directly or indirectly broadened the exclusion clause to exclude both fortuitous and naturally-occurring settlement. The Court however cited other instances in the policy where these terms were used, such as an exclusion for loss or damage caused directly or indirectly... by flood, including waves, tides, tidal waves, tsunamis or the rising of, the breaking out of or the overflow of, any body of water, whether natural or man-made.... The Court found that the words directly or indirectly did not necessarily demonstrate an intent that the exclusion applied to both fortuitous and natural events. Of particular importance was the use of the phrase natural or manmade elsewhere in the policy, as demonstrated by the flood exclusion, which were not present in the settlement exclusion. The Court of Appeal concluded that the drafters could have made the settlement exclusion expressly apply to man-made events, but had not done so. At paragraph 21 the Court held: [21] These provisions indicate that the words directly or indirectly in the exclusion clause do not necessarily demonstrate an intent that the settlement exclusion apply to both fortuitous and natural events. They show that the drafters were able to reflect an intent to exclude both natural and fortuitous events by employing precise language such as whether natural or man-made. In contrast the settlement exclusion clause makes no attempt to specify that damage arising from settling, whether natural or man-made, was intended to be excluded. The Court also stated that its interpretation was consistent with the underlying purpose of all risk policies to protect against fortuitous events. The Court noted that insurers would reasonably want to exclude naturally-occurring settlement because of its inevitability, and that an insured would not expect such settlement to be covered. Conversely, there would be no reason for the parties to exclude damage resulting from an unnatural or fortuitous event, particularly since an insurer may potentially recover any payment by right of subrogation. The Court of Appeal s reasoning in Engle has already influenced other Courts interpreting settlement exclusion clauses. For example, the Engle trial decision had been distinguished by the Supreme Court of British Columbia in Buchanan v. Wawanesa Mutual Insurance Company 33 ( Buchanan ), on the basis that the settlement exclusion clause at issue in Buchanan did not contain the words caused by, which 33 2009 BCSC 470 Dolden Wallace Folick LLP 43

were present in Engle. In Buchanan, the insured s home sustained cracks and settlement as a result of water leaking from a valve on the district s water main located just outside of the insured s property. Significant volumes of wet soil were removed by the district in order to fix the water main. The insured s homeowner s all risk policy provided as follows: You are insured against all risks of direct physical loss or damage to the insured property except: (2) Settling, expansion, contraction, moving, bulging, buckling, cracking. The trial judge in Buchanan followed Leahy, and found that all settlement, however caused, was excluded from coverage. However, in Leahy the water source was the neighbour s sprinkler, but in this case, the water source was a public water main, for which coverage was expressly included as an exception to the water leakage and seepage exclusion. The British Columbia Court of Appeal in Buchanan 34 overturned that decision, relying in part on the Alberta Court of Appeal s reasoning in Engle. The majority of the British Columbia Court of Appeal concluded that there was a contradiction between the exclusion (relied upon by the trial judge) that excluded settlement as a type of damage, and other portions of the policy that appeared to cover water escapes from public mains as a cause of damage. This contradiction was resolved in favour of the insured. It is interesting to note that the Court of Appeal in Buchanan expressly did not overturn Leahy, but instead distinguished it on the facts. In fact, the Court of Appeal was invited to have a 5 judge panel hear the case in Buchanan in the event that the Court was inclined to overturn Leahy. It determined that a 5 judge panel was not required, and therefore Leahy is still valid. In British Columbia, the settlement exclusion may apply to exclude fortuitous events where the settlement is excluded as a type of damage, and not as a cause of damage, so long as none of the exceptions to the exclusions may apply to provide coverage. It would appear that all settlement exclusions in Alberta, whether excluding settlement as a type of damage or settlement as a cause of damage, will be given a narrow interpretation limiting their application to naturally occurring events. 34 2010 BCCA 333 Dolden Wallace Folick LLP 44

3. Implications for insurers Engle and Buchanan demonstrate that an exclusion for settlement or similar perils should use explicit language that either defines the scope of the exclusion by the type of damage, without reference to cause, or, if it refers to the cause of damage, makes clear whether the underwriters intend to exclude from coverage natural causes, man-made causes, or both. #9 RECTIFICATION OF INSURANCE POLICIES The BC Court of Appeal in Concord Pacific v. Temple Insurance 35 ( Concord ) was recently called upon to consider whether an insurance contract can be re-written by the court to more truly reflect the mutual intentions of the underwriters and insured. The court was asked to re-write an endorsement to a Builders risk policy by inserting a scheduled date for completion of construction. The date determined the insured s eligibility for coverage under the endorsement, and the proposed change would have the effect of eliminating the insured s ability to make a claim for indemnity. Potentially limiting the court s ability to rectify the policy is common Canadian insurance legislation 36 which provides that unless a term or condition of the policy is set out in writing, then that term or condition is not a valid term to be used against the insured. The Court considered the application of the Insurance Act, and determined that the equitable remedy of rectification was appropriate and not precluded by the statute. The Court amended the policy, and the insured s claim was dismissed. The main issue before the courts was whether the contract reached between the parties was accurately reflected in the policy documents, or whether there was an error in the original documentation which needed to be fixed. The Court held that so long as there is adequate evidence of the true intention of the parties to an insurance contract, the policy may be rectified to reflect those intentions where necessary, without running afoul of provincial insurance legislation. 35 2010 BCCA 275 36 Insurance Act, R.S.B.C. 1996, c.226, s.12. Dolden Wallace Folick LLP 45

1. Facts At the British Columbia Supreme Court level in Concord 37, the Court granted an application by the insurer Temple Insurance Company to correct a policy certificate issued to the developer. The sole correction was to insert a Scheduled Date of Completion of April 15, 2002 for the construction project. Having made the correction, the Court then dismissed the developer s claim for alleged losses arising from construction delays on that project. The developer was insured under a master Builders Risk policy which included an endorsement insuring against delayed opening losses (the Endorsement ). Individual project certificates were then issued for separate projects that the developer undertook. One such project was the construction of a mixed residential and commercial complex on part of the former Expo 86 site in Vancouver, B.C. (the Project ). The developer typically arranged its insurance on this and other projects through its broker, Willis. Willis usually secured insurance for the developer through an insurance manager, Encon, rather than directly from underwriters. In 1998, Willis and Encon negotiated a certificate for the Project, underwritten by Temple. In the application for that insurance, the developer provided a project completion date of April 15, 2002, which was (not coincidentally) the expiry date for the proposed coverage. Encon had binding authority from Temple to issue the coverage requested by the developer, and issued a project certificate for the Project. Unfortunately, due to a clerical error, the certificate did not include a Scheduled Date of Completion. Water incursion incidents in April and June 2000 forced the developer to stop, reorganize, and re-sequence construction, all of which delayed completion of the Project by several months. The developer alleged that the delay cost it rental revenue, and caused it to incur additional financing costs. Although insurance claims for the physical damage caused by the leaks and for other soft costs were settled, the delayed opening claims were left unresolved. After the loss, Encon reissued the certificates to include the originally-conceived completion date of April 15, 2002. The developer did not accept this change, and commenced proceedings to obtain coverage for its alleged delay losses. 37 2009 BCSC 666 Dolden Wallace Folick LLP 46

The Court thus had to determine whether there was in fact a delay for the purpose of the developer s claim against the Endorsement for delayed opening losses. The Project was completed by January 12, 2002. The developer said that the Endorsement s coverage for delay losses began when the Project would have been tenantable, had it not been damaged by the leaks, or alternatively when the Project should have been completed, on November 15, 2001. The insurer contended that the Project was not supposed to be completed until April 15, 2002, when the insurance expired, so there was no delay. 2. Decision The Court found that Concord had sought insurance for the Project based on its previous practice with other insurers, despite the fact that this was not expressly discussed between Willis and Encon. On all previous insurance applications, Concord had specified expiry dates that coincided with the Scheduled Date of Completion for each project. The Court concluded that Concord had intended to do the same on this occasion. The Court considered the equitable doctrine of rectification, which allows the courts to amend written documents that do not accurately reflect the true intentions of the parties because of a mistake. The Court accepted that the parties to the insurance on the Project had intended, through their respective agents Willis and Encon, to specify a completion date that coincided with the expiry of the insurance. The Court also considered section 12 of British Columbia s Insurance Act, which provides that: 12(1) A term or condition of a contract which is not set out in full in the policy or in a document in writing attached to it, when issued, is not valid or admissible in evidence to the prejudice of the insured or a beneficiary. (2) This section does not apply to an alteration of the contract agreed on in writing between the insurer and the insured after the issue of the policy. Essentially, this section says that unless a term or condition of the insurance contract is set out in writing in the policy, then that term or condition is not a valid term to be used against the insured. However, the Court concluded that Temple was not trying to include a term or condition of the policy that would impose any additional obligations Dolden Wallace Folick LLP 47

on the insured. The Scheduled Date of Completion was a necessary term and the omission was inadvertent. The Court noted that: [145] There is no unfairness in finding that an insured like Concord is bound by an essential term to which it agreed but which, through error, was not included in the policy which was issued. Goodchild 38 held that rectification is not barred by the Ontario Insurance Act. 39 The Ontario provision is virtually identical to the British Columbia equivalent. Goodchild is persuasive. 3. Implications for insurers This case highlights that insurance contracts may be amended through the doctrine of rectification to reflect the true intentions of the parties, so long as there is adequate evidence of those intentions. It is thus important that underwriters, insureds, and brokers keep adequate and proper records throughout the formation of insurance contracts, in case they are later needed to prove what coverage the parties intended. #10 THE APPRAISAL REMEDY For many years, the role of the umpire under the statutory appraisal remedy found in Canadian Insurance Acts was thought to have been defined by the 1990 decision of the Saskatchewan Court of Appeal in Shinkaruk Enterprises Ltd. v. Commonwealth Insurance Co. 40 At the time, the role of the appraisal remedy was restricted to determining property valuation, but all other issues of fact and law were to be determined by the trial judge. This approach continues today in British Columbia, but other provinces in Canada have seen interesting recent developments in the law in this area, which have expanded the role of the appraiser and umpire. These cases suggest the direction of things to come in British Columbia. 38 Goodchild v. Hartford Fire Insurance Co.), [1991] I.L.R. 1-2748, 6 C.C.L.I. (2d) 245 (Ont. Gen. Div.), aff d 1995 CanLII 352 (ON C.A.), (1995), 23 O.R. (3d) 478, 30 C.C.L.I. (2d) 229 (C.A.). The Court also referred to 0712914 B.C. Ltd. v. Aviva Insurance Co. of Canada, 2007 BCSC 163, 69 B.C.L.R. (4th) 343 (S.C.), which considered s.12 but not the issue of rectification. 39 The Insurance Act, R.S.O. 1980, c. 218, s.101 [now s.124]. 40 [1990] S.J. No. 317, 71 D.L.R. (4th) 681(Sask. C.A.) Dolden Wallace Folick LLP 48

1. Jurisdiction of the appraiser and umpire BC approach Section 9 of the Insurance Act in British Columbia authorizes appraisals where there is a disagreement...as to the value of the property insured, the value of the property saved, or the amount of the loss, or...as to a matter for which an appraisal is required in the contract. Following the Shinkaruk case, the courts in BC have given a very limited interpretation to the scope to the issues that fall within the jurisdiction of the umpire under the appraisal remedy. Shinkaruk held that: The intent and object of a statutory provision like the ones under scrutiny here are twofold: to encourage a quick settlement of the insured s loss and to facilitate the use of the expertise of an appraiser (or an umpire) in the sphere of property values. There is nothing in the express wording or in the intent or object of the statutory provision which would justify or even suggest leaving to an appraiser or an umpire disputed legal questions (as one would a court or an arbitration board) about which there is no reason to believe the appraiser or umpire would have any expertise. Likewise, the BC courts have limited the jurisdiction of appraisers and umpires to providing valuations based on facts or assumptions provided by the parties, making it clear that the umpire s urisdiction does not extend to interpreting provisions of the policy, or making findings of fact based on evidence. An appraiser or umpire may provide alternate values based upon differing theories of value and based upon alternate assumptions, but the determination as to which valuation should be applied in light of the factual and legal assumptions, remains the jurisdiction of the court: Ferrier v. Maplex General Insurance 41, and Ivarson v. Lloyds M.J. Oppenheim, Attorney in Fact in Canada 42. As a result, it has been generally understood in BC, that the expertise required of an umpire is expertise in property valuation. 41 1991 CanLII 170 (BC S.C.) 42 2002 BCSC 1627 Dolden Wallace Folick LLP 49

2. Expanding the jurisdiction of the appraiser and umpire Alberta, Manitoba and Nova Scotia Several recent decisions from various jurisdictions have examined the role of the appraiser and umpire in the appraisal process. At least three of these cases have considered the scope of issues that may be determined, and the nature of expertise required of the umpire. It is apparent from these cases that other jurisdictions are giving a wider interpretation of what falls within the context of property valuation as provided by the applicable Insurance Acts. a. An umpire must have expertise in the form of special knowledge or skill Matti v. Wawanesa Mutual Insurance Company 43, is a decision of Mr. Justice Sullivan of the Alberta Court of Queen s Bench dated July 24, 2009. In it, the court was asked to appoint an umpire pursuant to section 514 of the Alberta Insurance Act, because the parties appraisers were unable to agree on an umpire, due to their disagreement about the nature of the dispute. The case arises out of a sewer back up which caused damage to the insured s home. Damage was caused to the drywall, baseboards, carpet and flooring. The insurer and insured each appointed an appraiser to value the damage caused. The appraisers did not agree on the type of remediation required. The insured s appraiser valued the damage based on replacement, but the insured s appraiser disagreed that replacement was required, and valued the loss based on cleaning and repair. Where there is a dispute between the appraisers, the Insurance Act requires the appraisers to jointly appoint an umpire. Here the appraisers did not agree on the appointment, because they each thought a different type of expertise was required. The homeowner s side nominated a lawyer with ADR experience, arguing that the umpire holds a quasi-judicial role which requires a lawyer s legal knowledge and expertise to ensure impartiality, but the insurer s side complained that the lawyer lacked sufficient expertise to determine what property had been damaged by the sanitary sewer back up. 43 2009 ABQB 451 Dolden Wallace Folick LLP 50

The insurer s side nominated an experienced insurance appraiser, arguing that the umpire must have knowledge and experience in the field at issue between the parties, which was appraisal, but the homeowner s side complained that the insurer s nominee was potentially biased and not impartial. The court decided the case on the basis of expertise, and did not address the bias issue. The court distinguished Shinkaruk, and found that it was not always necessary for an umpire to be an expert in property valuation. Instead, the court created a framework for determining the type of expertise required of an umpire, which varies depending on the issues in question in the action. The court further held that the area of expertise required of the umpire should be given a wide definition. The court referenced the dictionary definition of expert, and determined that the expertise required of an umpire was akin to the expertise required of an expert witness at trial. An umpire should have a special knowledge or skill in the field in issue between the parties, which knowledge or skill has been acquired through study and/or experience. To determine what type of skill or experience is required of the umpire in each case, the court engaged in the following analysis: (1) determine the issue that cannot be resolved; and (2) find a person with knowledge or expertise on that issue. Applying these tests to the facts of the case, the court held that a lawyer would only be required where the issue between the parties requires legal expertise to understand. Here, the issue between the parties was the appropriate type of remedy required to fix the damage. The court held that neither the lawyer nor the appraiser was qualified in this area. It was not an issue of valuing the repairs, but deciding on the appropriate method of repair. The court held than an expert in the field of home rehabilitation or home reclamation would be in the best position to decide how the damage should be fixed. The court sent the parties away to try to appoint an umpire with this type of expertise. A similar conclusion was reached in 265 Commercial Street Ltd. v. ING Insurance Company of Canada 44, a decision of Mr. Justice Frank Edwards of the Nova Scotia Supreme Court issued January 15, 2010. Following the Matti framework for determining the nature of expertise required of an umpire, the court defined the issues 44 2010 NSSC 14 Dolden Wallace Folick LLP 51

in dispute to be the value of physical damage to property, which includes: the extent of covered loss; the necessity, manner and cost of repairs; the extent to which amounts claimed have already been addressed; the correct manner of repair; and the costs of repair. The judge then categorized the areas of expertise required as being twofold: expertise in appraisal and expertise in construction. The court considered the two nominees, and found that the insured s nominee did not demonstrate sufficient evidence of expertise in either of these two areas, whereas the insured s nominee had demonstrated expertise in both. The court held that the umpire must possess expertise in all areas required to determine the issues in dispute, and appointed the insurer s nominee. b. Choose the umpire with the skills best able to encourage a quick settlement of the insured s loss The Matti case was also recently followed by the Manitoba Court of Queen s Bench in 2712270 Manitoba v. Grain 45, issued October 22, 2010. That case involved significant fire damage to the plaintiff s milling and baking business which occurred in 2003. All claims except for business interruption loss had been settled, but the valuation of the business interruption loss was to be resolved through appraisal. The issue for the court was what type of skill set was required of the umpire to best resolve the issues between the parties. The insured s side wanted to nominate a lawyer, a former insurance litigator and judge, arguing that the issues in dispute were factual, and the lawyer would be better equipped to address the evidence required to determine the factual issues. They argued that once the facts were determined, the remaining accounting and valuation issues were non-controversial. The insurers side wanted to nominate an accountant with significant experience acting as an appraiser and umpire and with business interruption claims and commercial arbitration, on the basis that once the factual issues have been determined, they expected the accounting and valuation issues to be controversial and the umpire should have sufficient expertise to address such issues. The insured disputed the insurer s nominee on the basis that he was not capable of determining the factual issues. Dolden Wallace Folick LLP 52

Again, the court followed Matti, and held that the object of the statute is to encourage a quick settlement of the insured s loss. Where the court is asked to decide between two different skill sets for the umpire, the court should appoint an umpire with the skill set most appropriate as determined by the circumstances of the case. The court held that to determine factual issues, the umpire will need to have experience hearing evidence and determining facts. To determine the accounting issues, the umpire will need to have experience with accounting and valuation issues. The lawyer candidate had skills in only one of the two areas required, whereas the accountant had some experience with both areas. The court appointed the insurer s nominee, the accountant, as the umpire. c. It is not necessary that a professional appraiser be appointed Ice Pork Genetics v. Lombard Canada Ltd. 46 is a decision of the Manitoba Court of Queen s Bench issued April 1, 2010. A barn was totally destroyed by fire, and a dispute arose under the fire policy regarding the valuation of the destroyed barn. Each party appointed a disinterested appraiser pursuant to section 121 of the Insurance Act of Manitoba. The parties each took issue with the other s appraiser, on the basis that one was not disinterested, and the other was not an appraiser. The court considered the phrase disinterested and appraiser by reference to the dictionary definitions of each word. The court held that disinterested meant impartial, without pecuniary interest and not influenced by personal advantage. Appraiser meant an impartial person who estimates the value of something, a valuer. The court held that the person challenging the appraiser has the onus of proof. The court held that an appraiser with extensive experience valuing property to determine an insured s loss was qualified, and that it was not necessary that the appraiser be a member of a professional association. Interestingly, the statute does not specifically provide a right to challenge the appointment of an appraiser. The statute provides that an application may be made to 45 2010 ManQB 233 46 2010 MBQB 77 Dolden Wallace Folick LLP 53

the court where the parties have failed to appoint an appraiser, the appraisers are not able to agree on an umpire, or the umpire is unable to act. The court questioned whether it had the jurisdiction to review the suitability of an appraiser appointed by a party. Rather than determining the issue, the court held that if it did have jurisdiction, it would decline to disqualify the plaintiff s appraiser. As a result, the issue of whether such an application is appropriate remains to be decided. 3. Implications for insurers As these cases demonstrate, the appraisal remedy seems to be taking on a larger and larger role in the resolution of claims related disputes across the country, with appraisers and umpires being asked to determine disputes that include factual and other issues related to valuation. This trend in the law has been reflected in the amendments that were recently made to the Insurance Act in British Columbia, which will come into force upon the passing of regulations. Under the amended Insurance Act, the appraisal remedy has been expanded by the new section 11, which provides as follows: In case of disagreement 11. (1) In the event of disagreement as to the value of the insured property, the value of the property saved, the nature and extent of the repairs or replacements required or, if made, their adequacy, or the amount of the loss or damage, those questions must be determined using the applicable dispute resolution process set out in the Insurance Act, whether or not the insured s right to recover under the contract is disputed, and independently of all other questions. As these new factual issues become commonplace for resolution using the appraisal remedy in BC, these cases will provide useful guidance on the type of expertise that is required of an umpire appointed under the appraisal remedy. Dolden Wallace Folick LLP 54

CONCLUSION This survey of property insurance coverage issues highlights recent developments in case law across Canada. Several of the issues discussed in this paper demonstrate that insurers and insureds must pay particular attention to policy wordings, and ensure that the wordings reflect the intentions of the parties. Contract documents and precontractual negotiations are often considered by the courts to help establish the intent of the parties and guide policy interpretation. Other issues demonstrate the importance of recent statutory amendments made to the Insurance Act in BC and other jurisdictions, which will bring changes affecting property coverage issues. The wide variety of issues addressed in this paper reflects the diversity and complexity coverage disputes arising in the context of property insurance. For each issue, we have set out the trends in the jurisprudence to help guide the industry in their assessment of coverage issues, and have identified the implications for insurers and some of the associated litigation risks. We hope that you will find this survey to be a useful tool when confronted with these issues in your practice. Dolden Wallace Folick LLP 55