Our lawyers have worked through the maze of complex litigation and coverage issues, managed the class action juggernaut, and represented employees of insurers that come under attack by plaintiff`s litigation. Some of the problems we face are front page news, most are not. They are all problems that are important to our clients, and to us.
In Parker Pad & Printing Ltd. v. Gore Mutual Insurance Company, the plaintiff’s premises in Haliburton, Ontario were flooded during a severe rainfall. The rainfall resulted in large pools of water collecting outside of the north-west wall of the premises. Water entered the building and covered an extensive area of the interior floor. The flood caused damages to the flooring, walls, printed products, and equipment.
At the time of the loss, Parker Pad was insured under an All Risks Policy with Gore. The insurer denied the plaintiff’s claim on the basis that the loss did not fall within the scope of coverage. More specifically, Gore denied coverage on the basis that the loss was captured by the “flood” exclusions in the policy.
The policy defined “flood”, as follows:
(j) “Flood” means: The rising of, the breaking out or the overflow of any body of water whether natural or man-made and includes waves, tides, tidal waves and tsunami. [emphasis added]
The exclusions also excluded damage caused:
(c)(i) by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings therein, foundations, basement floors, sidewalks, sidewalk lights, or by the backing up of sewers, sumps, septic tanks or drains, unless concurrently and directly caused by a peril not otherwise excluded in PERILS EXCLUDED, hereof.
Finally, Parker Pad also had a “Flood Endorsement” attached to the policy. The Flood Endorsement provided coverage for loss or damage to the property “caused by wind, hail, rain or snow entering the building through an opening in the roof or walls directly resulting from a flood.” The endorsement defined “flood”, as follows:
“Flood” means for the purpose of this endorsement, flood shall mean the rising of, the breaking out or the overflow of any body of water whether natural or man-made and includes waves, tides, tidal waves, and tsunami. [emphasis added]
Gore denied coverage under the Flood Endorsement, claiming that the loss was not caused by a “flood”.
Parker Pad sued Gore for coverage and the broker (presumably for negligence). In a motion for summary judgment, the judge had to determine whether the flood exclusions applied and, if so, whether there was coverage under the Flood Endorsement.
The judge found that the flood exclusions in the policy did apply because the loss occurred “by seepage, leakage or influx of water derived from natural sources through … foundations”. Accordingly, the policy did not cover the loss.
With respect to Flood Endorsement, the judge found that the loss was not a “flood”. The definition of flood in the Endorsement referred to a “body of water”, which the judge found meant a pre-existing pool of water and not a body of water that was created by the rainfall. He held:
In my opinion the ordinary meaning of the phrase “the rising of, the breaking out or the overflow of any body of water whether natural or man—made and includes waves, tides, tidal waves, and tsunami” is limited to pre-existing bodies of water and does not include pooling of rain water in a location where no body of water previously existed. I come to this conclusion by considering all of the words in context. A pre-existing body of water such as a lake, river or reservoir can rise, breakout or overflow. In this case the pool of water did not exist before the rain, and cannot be said to rise, break out or overflow because it has no pre-determined boundary or level from which it can rise, break out or overflow.
While the term “body of water” might be ambiguous when considered in isolation, it is not ambiguous when considered in the context of the complete clause. In my view the context clearly shows that the intention was to include the rising, breaking out or overflow of an existing and identifiable body of water.
Accordingly, the loss was not covered under the Flood Endorsement and the action against the insurer was dismissed.
An interesting component of this case is that the insured also sued the broker, who was not a party to this motion. The judge made the following comment in passing:
There is no evidence in this case whether the Parker premises was anywhere near a “body of water” such that this Flood Endorsement was the appropriate coverage for that building. It may be that what Parker needed was coverage to override the exclusions in clause 6B(c) of the policy, rather then the Flood Endorsement to cover what was excluded by clause 6B(b).
No doubt the broker should be concerned with those statements as the action proceeds against it.
Brokers negligence and the standard of care is front and center in the recent Nova Scotia Court of Appeal decision in Marsh Canada Ltd. V. Grafton. In Marsh, the insured corporation sustained extensive fire damage to one of its building and sought indemnity from its insurer, Lloyds of London. Over many years, there was a misapprehension about the profile of the property. It was not ‘sprinklered and of masonry construction’ although the insured over many years had represented that it was.
The insured corporation had a number of properties that were subject to various insurance arrangements and a number of different people were responsible over the years for managing the insurance issues for the corporation. The misstatement about the building being equipped with a sprinkler system and of masonry construction stemmed from a 2003 application for insurance and was not an intentional misstatement.
When fire destroyed the property in 2007, the insurer became aware of the true profile of the building and denied coverage. The insured sued both the insurer and the broker on the theory that the standard of care of the broker required it to do more due diligence to ensure that the information on the application was accurate.
At trial, the court held that the broker was liable. Ironically, because of the ‘complexity’ of the insured’s holdings and the different people in the organization responsible for insurance arrangements, the trial judge concluded that the broker should have been alive to the fact that the information coming from the insured may not be accurate. Indeed, the trial judge thought that the broker should have inquired as to whether inspections had been done on the property to ensure information was accurately recorded (specifically regarding whether it was sprinklered and of masonry construction) and if not the broker should have recommended inspections be done.
The Court of Appeal overturned the trial judges ruling, noting that the broker was responsible only to make appropriate inquiries to determine the kinds of coverage required of the insured and to advise of the appropriate options available that would satisfy the needs of the insured.
Although this decision will give brokers reason to breathe a sigh of relief, it underscores the importance of robust and well documented communications between broker and insured evidencing that the above issues have been properly addressed.
Neil is a Partner of Samis+Company. Neil focuses exclusively on insurance-related litigation. He has handled a broad range of matters before the Ontario Superior Court of Justice and the Financial Services Commission of Ontario, as well as advocating on behalf of his clients in private arbitrations.