Last Week’s Court Rulings from the Alberta Court of King’s Bench, Court of Appeal and SCC.
Edited by Steven Graham
2102908 Alberta Ltd. v Intact Insurance Company, 2023 ABCA 34
Exclusion Clause | Flood | Ambiguity
The Respondent company operated a business premises insured under a commercial policy provided by the Appellant insurer. A river overflowed and the building in which the business was located saw water come in through openings in the walls and doors of the business, as well as through the adjourning unit and underground parkade.
A dispute arose over whether the instance was covered under the policy. The Respondent’s policy included a Broad Form coverage which “insures all risks of direct physical loss or damage to the insured property”. There were exclusions for “flood” and “other water damage”:
[3] The respondent’s commercial insurance policy included a Broad Form for property coverage (the Broad Form), which “insures against all risks of direct physical loss or damage to the insured property.” Sections 2.2 and 2.3 of the Broad Form excluded coverage for flood damage or other water damage:
2. EXCLUDED PERILS
This Form does not insure against increased costs, and loss or damage caused directly or indirectly:
2.2. Flood
in whole or in part by flood, including “surface water”, waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water. This exclusion applies whether or not there are one or more other causes or events (whether covered or not) that contribute concurrently or in any sequence to the occasioning of the loss or damage, except for loss or damage caused directly by resultant fire, explosion, smoke or leakage from fire protective equipment;
This exclusion does not apply to property in transit, provided such coverage is afforded by endorsement attached to this Form, or to loss or damage caused directly by leakage from a watermain; [original emphasis deleted]
2.3. Other Water Damage
2.3.1. by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.2. by the backing up or overflow of water from sewers, sumps, septic tanks or drains, wherever located, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.3. by the entrance of rain, sleet or snow through doors, windows, skylights, or other similar wall or roof openings, unless through an aperture concurrently and directly caused by an insured peril not otherwise excluded in this Form;
The Respondent’s policy also included an extension of coverage for “seepage, leakage or influx of water” which would have otherwise been excluded:
[4] The respondent’s policy included an extension of coverage as set out in EDGE Complete 4.0, s 3, para 61 (the Extension):
61. SEEPAGE, LEAKAGE OR INFLUX OF WATER
This Form is extended to cover loss or damage caused by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights.
This Extension deletes Exclusion 2.3.1. of the EXCLUDED PERILS Section of the Building and/or Contents – Broad Form.
The question before the chambers judge was whether the damage was excluded with particular reference to paragraph 2.2 as set out above. The Respondent argued that paragraph 61 of the Extension negated s.2.3.1 of the Broad Form, such that damaged caused by ‘seepage, leakage or influx of water’ was not excluded. The Appellant contended that s.2.2 of the Broad Form excluded coverage.
The Chambers Judge concluded that the Respondent was entitled to indemnity under the extension, finding some ambiguity between wording of the s.2.2 Broad Form and paragraph 61 of the Extension. Given the ambiguity, the exclusion was interpreted narrowly.
On appeal, the Court of Appeal first considered whether there was ambiguity in the policy. The Appellant argued that since the Broad Form specifically excludes “flood”, then even if there are other concurrent or sequential causes or events that contribute to the loss which are otherwise covered, the fact that the underlying cause was a ‘flood’ means the exclusion applies.
The Court of Appeal addressed this argument by considering whether ‘flood’ and ‘influx’ were mutually exclusive and distinct causes:
[24] The appellant also submits we must interpret “flood” and “influx” as mutually exclusive to give effect to insurer’s intention. It says the chambers judge’s interpretation
virtually nullifies the flood exclusion. The agreed facts are only capable of applying to the Incident if it is characterized as an “influx” of water from “other openings”. It is difficult to conceive of circumstances where a flood is not also an influx of water from other openings. [Emphasis added]
We agree with the emphasized statement, and note that it cuts both ways. If a “flood” necessarily includes an “influx” of water, then an “influx” of water may include water from a “flood”.
[25] Because it is difficult to conceive of circumstances where damage caused by flood is not also caused by an influx of water through openings, there is ambiguity in the policy. In particular, there is ambiguity in para 61 of the Extension: was it meant to extend coverage to any influx, or only to influx unrelated to flooding?
The Court of Appeal rejected the Appellant’s assertion that s.2.3.1 of the Broad Form and paragraph 61 of the Extension applied only to water entering a premise from below ground:
[23] We disagree. “Basement” appears in front of “walls” and, later in the phrase, “floors”, but not the nouns in between. We take this drafting to be intentional. Therefore s 2.3.1 of the Broad Form and para 61 of the Extension are not limited to below-ground influxes of water.
The majority of the Court of Appeal panel found ambiguity in the policy, and as such applied the well established principles from the Ledcor decision of the Supreme Court that exclusion clauses are interpreted narrowly. While there was no evidence as to the parties’ intentions, the Court found it was “clear the respondent sought to add coverage for ‘seepage, leakage or influx of water’”. The Court further found that paragraph 61 of the Extension was not limited to damage from flood:
[27] In Ledcor, there was no evidence to assist the Court in determining the parties’ expectations at time the contract was formed. Here, we have no direct evidence or stated fact regarding the parties’ intentions, but it is clear the respondent sought to add coverage for “seepage, leakage or influx of water”. It would be open to an insured, seeking added coverage for “seepage, leakage or influx of water”, to conclude that para 61 of the Extension provided coverage for “influx” derived from a flood.
[28] This interpretation is supported by the language of the policy. While para 61 of the Extension deletes 2.3.1 of the Broad Form, it does not purport to delete only 2.3.1. Nor was it expressly made subject to an exclusion for flood. Other provisions of the Extension, such as para 64, do expressly exclude flood damage from coverage, mirroring the wording of s 2.2 of the Broad From:
SNOWSLIDE, LANDSLIDE, SUBSIDENCE
This Form is extended to cover loss or damage caused by snowslide, landslide, subsidence or other earth movement.
This Extension does not cover snowslide, landslide, subsidence or other earth movement occurring concurrently with and directly resulting from earthquake shock, flood, including surface water, waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water. [Emphasis added]
A customer who added coverage for the influx of water could reasonably expect to receive exactly that, without limitation, since no limitation was stated in para 61 of the Extension.
From a commercial reality standpoint, the Court of Appeal determined that if paragraph 61 provided coverage for influx from natural sources, but that coverage would not apply if the influx was a result of something excluded elsewhere in the policy (ie. for flooding), then there was no value at all to the extension the Respondent purchased:
[29] From the perspective of commercial reality, what did the insured buy? Paragraph 61 of the Extension provides coverage for influx from natural sources, including through above-ground openings. If that coverage excludes flood and rain, sleet and snow under ss 2.2 and 2.3.3 of the Broad Form, then there is no benefit to the insured from purchasing para 61 of the Extension. As the Supreme Court cautioned in Ledcor at para 79, quoting Estey J. in Consolidated‑Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 SCR 888 at 901-2, 112 DLR (3d) 49, “the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract”. Interpreting para 61 of the Extension as applying to an influx of water from a flood strikes the appropriate balance.
The majority of the panel ultimately determined there was no error in interpretation and dismissed the appeal.