Aug 4, 2020

[Feldman, Lauwers and Huscroft JJ.A.]

COUNSEL:

Emily Stock and Brandon Cook, for the appellant

Robert W. Dowhan and Matthew McMahon, for the respondent

Keywords: Contracts, Insurance, Standard of Review, “All Risks”, Coverage, Flood, Sewer Back Up, Business Interruption, “Surface Water” Exclusion, Insurance Act, R.S.O. 1990, c. I.8, s. 128, Statutory Condition 11, Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. , 2016 SCC 37, MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, leave to appeal refused, [2016] S.C.C.A. No. 39, Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33, Canada (Minister of Citizenship and Immigration) v. Vavilov, 2019 SCC 65, Housen v. Nikolaisen, 2002 SCC 33, Sam’s Auto Wrecking Co. Ltd. (Wentworth Metal) v. Lombard General Insurance Company of Canada, 2013 ONCA 186, Pilot Insurance Co. v. Sutherland, 2007 ONCA 492, Cabell v. The Personal Insurance Company, 2011 ONCA 105, Wigle v. Allstate Insurance Co. of Canada, (1984), 49 O.R. (2d) 101 (C.A.),

FACTS:

On July 8, 2013, the GTA experienced a rain event unparalleled in its recorded history. Environment Canada measured in excess of 90 mm of rain in less than two hours at Pearson International Airport. The storm of July 8, 2013, also produced the highest single day rainfall total in recorded history for the GTA.

The entry of water into the banquet hall facility operated by the appellant caused significant damage. The appellant was insured under an “all-risks” policy by the respondent insurer, Co-operators General Insurance Company.

The appellant got a quotation for emergency repairs on July 19, 2013 for $46,396.32, excluding tax, which the insurer paid. The insurer then sent the appellant a quote, provided by the insurer’s contractor, indicating that the full replacement cost to be paid after the repairs were completed was $105,533.94. The appellant was dissatisfied with the quote, believing it to be insufficient and so low that it would not justify shutting down the business to effect the repairs. Many months later, the insurer told the appellant that the actual cash value of the repairs was $79,150.45, which it paid.

The appellant later got a quote estimating the repair cost at $681,869.99. Because there was such a wide gap between the estimates of losses and costs, the appellant triggered the appraisal process provided under Statutory Condition 11 of the policy and s. 128 of the Insurance Act, R.S.O. 1990, c. I.8. The appraisal award set the value of the damage to the building at a replacement cost of $591,552, with an actual cash value of $561,974.40. The value of the contents/equipment loss was set at a replacement cost of $337,777.18, with an actual cash value of $253,332.89. The insurer delayed the payment of the claim under the Sewer Back Up Endorsement. The April 2014 payment brought the total amount paid to about $124,000. The insurer’s next payment came five years after the loss, when it paid the remaining balance up to the $500,000 limit of the Sewer Back Up Endorsement. The insurer denied the appellant’s claim for indemnity for business interruption under the Profits Endorsement Form coverage of the insurance policy because the appellant continued to operate after the rainstorm.

The appellant sued the insurer for the balance of payments it alleged were owed exceeding the $500,000 limit of the Sewer Back Up Endorsement, including for claims under the Flood Endorsement, for losses associated with business interruption, and for extra-contractual damages. The trial judge found that the Sewer Back Up Endorsement applied, and that the insurer had paid out the policy limit of $500,000 and owed nothing more. He dismissed the appellant’s other claims.

ISSUES:

Did the trial judge in in finding that the appellant was not entitled to:

1. Coverage under the Flood Endorsement Form;

2. coverage for business losses under the Profits Endorsement Form;

3. extra-contractual damages on the basis that the insurer delayed making payments; and

4. compensation for professional fees incurred to establish the quantum of the business interruption loss under the Commercial Plus Endorsement Form.

HOLDING:

Appeal allowed in part.

REASONING:

The Court began by confirming that the standard of review relating to the interpretation of standard form insurance contracts is correctness. Questions of mixed fact and law are subject to the standard of palpable and overriding error, except for any extricable errors of law, which are subject to the correctness standard. The principles for interpreting insurance policies, and in particular exclusion clauses, are well-established. The principles of interpretation for insurance policies provide that the policy should be interpreted to promote a reasonable commercial result; provisions granting coverage ought to be construed broadly; provisions excluding coverage ought to be construed narrowly; in the case of ambiguity, the interpretation most favourable to the insured should be adopted; and even a clear and unambiguous clause should not be given effect if to do so would nullify the coverage provided by the policy. In addition, the court must strive to interpret the contract according to “the whole of the contract and any relevant surrounding circumstances” in a way that “promotes the true intent and reasonable expectations of the parties at the time of entry into the contract” and avoids “either a windfall to the insurer or an unanticipated recovery to the insured”.

1. Yes. The influx of water into the appellant’s facility was a flood within the meaning of the Flood Endorsement.

The policy’s Flood Endorsement provided as follows: “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 tsunamis.”

The policy’s Sewer Back Up Endorsement provided as follows: “The coverage provided by this Policy is extended to include loss or damage caused directly by the backing up of sewers, sumps, septic tanks or drains subject to the following [limits].”

Under the policy, “Surface Water” means water or natural precipitation temporarily diffused over the surface of the ground.

The trial judge erred in giving any effect to the definition of “Surface Water” in the Commercial Broad Form policy when he interpreted the Flood Endorsement, for two reasons. First, the trial judge’s use of the exclusion language misapprehends the relationship between the Commercial Broad Form policy and the Flood Endorsement. An endorsement is not a standalone insurance policy. It is linked to the policy to which it is attached and with which it is purchased. An endorsement “does not have an independent existence” from the policy. In other words, the policy and the endorsement must be read together.

The second reason why the trial judge erred in importing the exclusion of “Surface Water” flooding into the Flood Endorsement is that doing so would effectively nullify flood coverage, not only in this case but in almost all cases, because few buildings stand right on the edge of a body of water. The appellant’s facility is on land located some distance away from water. How could the Flood Endorsement ever be engaged if it excluded a flood via surface water? The insurer effectively conceded this point, explaining: “If water breaks the banks of a body of water and then has to flow across a surface before entering a premise and causing a loss, it will still be deemed a Flood under the Policy. Surface Water is excluded from the Policy unless there is a Flood, as defined by the Policy.” The Flood Endorsement should be read as entirely displacing the flood exclusion in the Commercial Broad Form policy, without giving any weight to the “Surface Water” exclusion.

The influx of water into the appellant’s facility was a flood within the meaning of the Flood Endorsement for the following reasons. First, there is no question that the ordinary meaning of the word “flood” would include the massive, forceful, and fast-moving flow of water into the facility on this occasion.

Second, there was a catastrophic failure of all the water channelling features in the vicinity, both natural and man-made. Drainage channels, stormwater management facilities, ditches, and even creeks can be dry on occasion. Just before a creek or a drainage ditch overflows, it constitutes a “body of water,” even though it might have been dry several hours earlier. There is no sense in which the Endorsement requires the body of water to have a permanent existence. The fact that counsel for the insurer struggled in oral argument to find a circumstance in which the Flood Endorsement would ever benefit the appellant was telling.

Finally, in construing the Flood Endorsement, the trial judge departed from the principle that provisions granting coverage ought to be construed broadly. His interpretation effectively nullified coverage for the “obvious risks” identified in the Endorsement and belied the reasonable expectations of the appellant in purchasing that coverage. He also made a palpable and overriding error in failing to find on the evidence that there was a flood within the meaning of the Flood Endorsement.

In conclusion, it was difficult to imagine a realistic scenario that would constitute a flood within the meaning of the Flood Endorsement if, on the facts, this event did not satisfy that definition.

Because the Flood Endorsement applied to the loss or damage caused by the flood, the limit of covered losses in the Sewer Back Up Endorsement no longer served to limit the appellant’s claim. The available evidence on that additional loss was the appraisal award, calculated according to the process in Statutory Condition 11 in the policy and s. 128 of the Insurance Act.

2. No. The claim for business interruption losses was not made out on the evidence, as found by the trial judge. This was therefore not the case in which to definitively interpret the meaning of the expression “necessary interruption of business” in the Profits Endorsement Form. However, the Court made it clear that it did not want to be taken as necessarily agreeing with the trial judge that the expression requires a total cessation of business activity for a period of time for coverage to arise. The Court doubted the trial judge’s interpretation of the Profits Endorsement Form. “Interference” with the appellant’s business, rather than a complete shut-down, might have sufficed to trigger coverage.

3. No. There was no basis on which to set aside the trial judge’s disposition of this issue, which rested on the dual finding that the appellant had not proven a loss of profit and revenue, and that it was the author of its own misfortune. While the delay in payment was not acceptable, the trial judge acceded to the appellant’s submission that some adjustment should be made to account for the delay in the costs award to the insurer by reducing the costs award.

4. No. The policy provided that “in the event of loss or damage by an insured peril, the Insurer will pay reasonable fees to auditors, accountants, architects, engineers or other professionals, other than public adjusters and the Insured’s own employees, for producing and certifying particulars or details of the Insured’s business required by the Insurer in order to arrive at the amount of loss payable under this Policy. This extension applies only to fees incurred in establishing the quantum of a loss, liability for which is otherwise accepted by the Insurer. This extension may also apply to any Business Interruption loss covered under this Policy.”

The appellant’s expert was not retained for the purposes of producing and certifying particulars or details of the appellant’s business in order to arrive at the amount of loss payable under the policy. Rather, he was retained for the purposes of providing evidence at trial, as the timing and the content of his report showed. The appellant was therefore not entitled to reimbursement for this expert’s expense under the policy.