Gardening 101: Construing Efficacy Exclusions in Commercial General Liability Insurance Policies

In West Creek Farms Ltd. v. Lloyd’s Underwriters, 2016 BCSC 48, Mr. Justice Macintosh considered general and specific principles of contractual interpretation to parse an efficacy exclusion clause in which ambiguity was unearthed.

Mardell Greenhouses Inc. (“Mardell”) purchased a particular mix of press block soil (the “Soil”) from West Creek Farms Ltd. (“West Creek”) for use in commercial flower production. Mardell alleged the Soil contained too much sodium, resulting in harm to Mardell’s flowers. Mardell brought an action for breach of contract, negligence, and failure to comply with provisions of the Sale of Goods Act, R.S.B.C. 1996, c. 410.

West Creek sought coverage under a general commercial liability insurance policy (the “Policy”) that it held from Lloyd’s Underwriters (the “Insurer”). The Insurer denied coverage.

The central question was whether the Insurer could rely on an efficacy exclusion contained in the Policy that provided, in part:

Notwithstanding anything contained herein this Policy shall not apply to liability arising out of the failure of any Product manufactured, sold supplied or distributed by the Insured to:

1)         promote growth or enhance yield of any crop/animal or other agricultural product

2)         control or eradicate any weed disease insect or pest

3)         germinate, pollinate or reach expected yield

4)         perform its intended function

Notwithstanding anything contained herein the Policy shall not apply to liability arising out of the failure of any product manufactured, sold supplied or distributed by the Insured which results in a loss of prize winnings, earnings, awards, competition fees or stud values or stud fees or the like

“Efficacy” was not defined in the Policy. The Court relied on a dictionary definition that provided “[p]ower or capacity to produce effects; ability to bring about the intended result.”

The Court based its interpretation of the efficacy exclusion clause on two key principles of insurance policy interpretation:

  • The mere possibility that a claim under the Policy may succeed is sufficient to engage an insurer’s duty to defend (Nichols v. American Home Assurance Co., [1990] 1 S.C.R. 801); and
  • While coverage provisions are broadly interpreted, exclusion provisions are narrowly interpreted (Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33).

In this case, the Court held the absence of either the word “and” or “or” between the third and fourth provision of the efficacy exclusion clause rendered it patently ambiguous. Therefore, the Court undertook the task of construing the ambiguous clause in the context of the Policy as well as in the larger situational context.

Where language of an insurance policy is ambiguous, it will be construed by the courts:

  • Giving preference to interpretations consistent with the reasonable expectations of parties;
  • As long as such interpretation can be supported by the text of the policy;
  • Avoiding interpretations that give rise to unrealistic results;
  • Striving to ensure similar policies are construed consistently;
  • And when general rules of contract construction fails, construing the policy against the insurer.

The Court held “[t]he problem was not lack of efficacy, or not only lack of efficacy, the problem was also damage.” The Soil not only failed to enhance flower growth, it also caused harm. In such circumstances, the efficacy exclusion clause was of no assistance to the Insurer. West Creek had purchased the Policy to protect it from claims when its products harmed customers’ property.

The Insurer’s duty to defend West Creek was engaged in the claim brought by Mardell. The Court ordered that it indemnify West Creek for the expenses incurred or to be incurred in defending the Mardell claim.

In conclusion, where an insurance policy intends to exclude liability due to a failure to bring about an intended result in the specific industry the insured is engaged in, it may not be worth its weight in soil if it is ambiguous and runs contrary to the reasonable expectations of the parties in the circumstances.