Exclusion Clauses and Fortuitous Damage

The recent B.C. case of Wynward Insurance Group v. MS Developments Inc., 2015 BCSC 324 (“Wynward Insurance”), looks at an insurance policy exclusion clause for damage “caused directly or indirectly” by earth expansion and offers clarification as to whether it operates to exclude only damage caused by natural causes, or whether it also excludes fortuitous damage, such as that caused by a man-made event.

By way of background, in The Owners, Strata Plan NW2580 v. Canadian Northern Shield Insurance Company, 2006 BCSC 330 (“NW2580”), a building was damaged when an excessive amount of preload was placed on an adjacent property. The preload caused earth movement/ settlement, which in turn caused structural damage to the building.

The insurer relied on two exclusion clauses, one related to earth movement and the second related to earth settlement to deny coverage. The insured argued that the exclusion clauses only applied to natural damage caused by changes in soil, moisture and temperature and not to damage which occurs “fortuitously” such as a man-made event.

First, the court found that the earth movement exclusion was ambiguous and on the basis of contra proferentem found that the clause did not apply to man-made events. Next, the court turned to the settlement exclusion which read [emphasis added]:

This form does not insure against loss or damage caused directly or indirectly:

(x) to “buildings” by:

(cc) Settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded.

Because the exclusion clause used the words “caused directly or indirectly”, the court held that it applied to both natural and fortuitous loss, stating:

“Exclusion CC included the words “caused directly or indirectly”, which suggests that whether the settlement was a direct or indirect, proximate, concurrent or contributing cause, coverage would not be extended.”

On this basis, the Court found that the exclusion was not ambiguous and the insured was denied coverage.

In Engle Estate v. Aviva Insurance Co. of Canada, 2010 ABCA 18 (“Engle Estate”), the Alberta Court of Appeal dealt with damage caused to an insured property by an excavation on an adjacent property. The insurer again denied coverage based on a settlement exclusion clause that was almost identical to NW2580 and included the “caused directly or indirectly” wording. In commenting on the applicability of NW2580, the court stated:

“The court adopted a strict interpretation of the earth movement exclusion clause and noted that a plain reading of the clause could arguably lead to the interpretation that it applied to natural and man-made events. However, the court also noted that the insurer could easily have clarified the scope of earth movement by adding the words ‘whether natural or man-made.’ Accordingly, the court found the clause was ambiguous and resorted to the contra proferentem rule to conclude that the earth movement exclusion only applied to naturally occurring events. While purporting to apply this same approach to the settlement exclusion clause, the court found that clause was not ambiguous and that it applied, albeit ‘awkwardly’, in the circumstances. However, exclusion clauses are to be interpreted narrowly, not awkwardly.

The Strata Plan decision [NW2580] is not binding on this court and, with respect, I do not find the reasoning to be persuasive. It appears the court in that case did not consistently apply the interpretive principles governing insurance contracts, particularly the principle that exclusion clauses are to be narrowly interpreted.”

The court in Engle Estate held that the “caused directly or indirectly” wording in the settlement exclusion clause did not provide an answer to whether the exclusion applied to man-made events. The court found the clause ambiguous and, based on the reasonable expectations of the parties, held that the word “settling” is commonly understood to mean only that which occurs naturally and not that which occurs fortuitously. On that basis, the court held that:

“In my opinion, the reasonable intention of the parties to a policy such as this is that the settlement exclusion clause applies to naturally occurring settlement, but not settlement that occurs otherwise. This interpretation is reflected by the language of the insurance policy, and is consistent with the underlying purpose of an ‘all risk’ insurance policy to protect against fortuitous events.”

The decisions of NW2580 and Engle Estate created two contradictory lines of authority with respect to whether a similar exclusion clause applies to fortuitous damage. In NW2580, the court held that the exclusion clause applied to both natural and fortuitous damage; however, in Engle Estate, the court found that the exclusion clause only applied to naturally occurring damage. In Wynward Insurance, the court discussed this issue.

In that case, the water inside of a pipe froze and expanded, causing the pipe to burst. Some of the water then escaped into the soil below under the concrete floor. When that water froze, it caused the ground to lift up and shifted portions of the floors of the premises, causing damage to tiles, interior walls and the ceiling in the affected areas. The court considered an exclusion clause relating to earth expansion that used the same “directly or indirectly” wording as the settlement exclusion clause in NW2580.

The insured claimed that the exclusion clause was ambiguous because it did not stipulate what material was meant to settle or expand. The court held that NW2580 made it clear that such an exclusion clause applied to the expansion of ground material. The insured argued that Engle Estate had put the reasoning of NW2580 into doubt. In discussing NW2580, the court stated:

“In NW2580 a very similar clause was held to apply to both natural and unnatural events.

NW2580 has not been overturned in this Province. The respondents point out that NW2580 was mentioned but not followed by the Alberta Court of Appeal in Engle Estate v. Aviva Insurance Company of Canada, 2010 ABCA 18. The Engle case is interesting and is certainly a different take on interpretation than NW2580, but it is not binding on this court. I find that the principle of comity and stare decisis requires that I give effect to NW2580 here rather than follow a contrary ruling from a different court in a different jurisdiction.”

On the basis of comity and stare decisis, the court decided to follow the logic of NW2580 and determined that the exclusion clause was not ambiguous. Further, the court endorsed the reasoning in NW2580 that such an exclusion clause applies to both natural and fortuitous damages. The Wynward Insurance decision was rendered on March 4, 2015. On March 31, 2015 the insured filed an appeal. It remains to be seen whether the Court of Appeal will comment on the continued applicability of the NW2580 decision post-Engle Estate.