CITATION: Cabell v. The Personal Insurance Company, 2011 ONCA 105 |
DATE: 20110208 |
DOCKET: C52026 |
COURT OF APPEAL FOR ONTARIO |
Rosenberg, MacPherson and LaForme JJ.A. |
BETWEEN |
Barbara Janet Cabell and Leslie John Gerald Cabell |
Applicants (Appellants) |
and |
The Personal Insurance Company |
Respondent (Respondent) |
Hillel David, for the applicants (appellants) |
Loris Carlesi, for the respondent (respondent) |
Heard: November 5, 2010 |
On appeal from the judgment of Justice Michael A. Penny of the Superior Court of Justice, dated March 30, 2010. |
[1] The appellants appeal from the judgment of Penny J. dismissing their application for a declaration that they have coverage under an insurance policy for a loss relating to their outdoor in-ground swimming pool. The issue is whether one of the common exclusions in the policy applies to an endorsement that the appellants purchased for loss or damage to their pool. The application judge held that the exclusion applied, and therefore, the appellants’ loss was not covered. The appellants submit that the policy, including the endorsement, is ambiguous, and in accordance with well-known principles of interpretation, the policy should be interpreted in favour of the insured. Alternatively, the appellants submit that the interpretation urged by the respondent would virtually nullify coverage or render coverage illusory and therefore the exclusion cannot be enforced against the appellants.
[2] I agree with that latter submission. Accordingly, I would allow the appeal and grant a declaration that the appellants do have coverage for the loss relating to their pool.
[3] There is no dispute concerning the underlying facts that gave rise to the loss suffered by the appellants. The appellants’ outdoor in-ground swimming pool was damaged as a result of hydrostatic uplift pressure. The increase of this pressure was due to the build up of groundwater, which caused the pool to lift out of the ground. This displacement of the pool, among other things, caused the pool to crack resulting in significant damage.
[4] The appellants had purchased property insurance from the respondent. Part 1 of the policy is headed “Coverages” and includes:
Permanently installed outdoor equipment on the premises, including outdoor antennae, fences, retaining walls and driveways.
[5] Part 3 of the policy is headed “Common Exclusions” and provides as follows:
We do not insure:
…
(11) settling, expansion, contraction, moving, bulging, buckling or cracking of any insured property, except resulting damage to building glass.
…
(18) loss or damage:
- to outdoor radio, T.V. and communications antennae (including satellite receivers) and their attachments caused by windstorm, hail or collapse;
- to outdoor swimming pools, hot tubs, spas, saunas and their equipment, their specific fittings and decks or patios attached to the swimming pools, hot tubs, spas or saunas but detached from the building;
- caused by vermin, insects, rodents, raccoons or birds except loss or damage to building glass.
[6] The appellants, however, purchased Endorsement 33b, which “amends” the policy and provides as follows:
Outdoor Inground Swimming Pool, Hot Tub, Spa and Sauna Coverage (Endorsement 33b)
Property Coverages
Perils Insured
We insure your outdoor inground swimming pool, hot tub, spa and sauna, their equipment and specific fittings and decks or patios attached to the swimming pool, hot tub, spa or sauna but detached from the building, against all risks of direct physical loss or damage, including damage caused by freezing or the weight of ice, snow or wet snow. We will also pay for the cost incurred to repair or replace the damaged property.
All other terms conditions and exclusions of this policy remain unchanged, including the exclusions regarding:
- loss or damage:
- occurring before during or after flood waters reach the premises. "Flood" includes waves, tides, tidal wave:, and the rising or overflow of any stream of water or body of water, whether natural or manmade;
- caused by impact by water-borne objects.
- loss or damage caused by wear and tear, deterioration, defect or mechanical, electrical or electronic breakdown or disturbance, rust or corrosion, dampness of atmosphere, extremes of temperature, wet or dry rot, fungi or spores, but resulting damage to other property caused by a peril not otherwise excluded is insured.
- the cost of making good faulty material or workmanship.
- loss or damage caused by vermin, insects, rodents, raccoons or birds.
[7] To understand the interaction between the Common Exclusions in the policy and Endorsements, it may be helpful to consider another endorsement. For that purpose, I am setting out Endorsement 22b, which provides as follows:
Fire, Explosion and Smoke Damage Resulting from an Earthquake (Endorsement 22b)
Property Coverages
Perils Insured
You are insured against direct physical loss or damage to the property caused by fire, explosion or smoke which results from an earthquake shock, subject to the exclusions and conditions of your policy.
Loss or Damage not Insured
The following exclusions are additional to those contained in the Property Coverages section of your policy.
We do not insure loss or damage caused:
- directly or indirectly by floods, surface waters, ice, waterborne objects, waves or tides, whether or not attributable to an earthquake shock;
- by your failure to use all reasonable means to save and preserve the property;
- by earthquake shocks occurring before this endorsement is effective or after its expiration.
All other terms and conditions of the policy remain unchanged.
[8] The application judge held that Endorsement 33b is not an independent part of the policy. Accordingly, the Common Exclusions in the policy apply to Endorsement 33b, except to the extent those exclusions are amended by the Endorsement. In particular, Common Exclusion 11 applied and excluded coverage for the damage to the swimming pool since that damage fell within the words “settling, expansion, contraction, moving, bulging, buckling or cracking of any insured property”. The application judge rejected the submission that only the exclusions expressly referred to in Endorsement 33b applied.
[9] The application judge also rejected the argument that the scope of Common Exclusion 11 as applied to Endorsement 33b was so broad as to nullify coverage under that endorsement to permit the appellants to rely upon the principle in Weston Ornamental Ironworks Ltd. v. Continental Insurance Company, [1981] I.L.R. 477. The application judge held that there was no evidence “as to the universe of possible damage to which an outdoor pool might be exposed or how often an exclusion for ‘settling, expansion, contraction, moving, bulging or cracking’ might be engaged in the context of outdoor pool claims”. On this record he was therefore unable to conclude whether Common Exclusion 11 virtually nullifies the coverage under Endorsement 33b so as to engage the principle in Weston Ornamental.
[10] The application judge looked at the nullification of coverage argument as involving a question of reasonable expectations, which required objective evidence. The type of evidence that would be helpful “could include objective evidence of surrounding circumstances that might inform the expectations of reasonable outdoor pool owners regarding the risks of outdoor pool ownership and where hydrostatic lift and, more generally, settling, expansion, contraction, moving, bulging or cracking, fit into the hierarch of those risks”. Only if there was such evidence could a court assess whether Common Exclusion 11 was inconsistent with the main purpose of the insurance coverage so that enforcement of that exclusion would virtually nullify coverage.
[11] The general principles of interpretation that apply to insurance policies are well-established. A clause in the policy providing coverage will be broadly interpreted in favour of the insured. An exclusion clause limiting coverage will be strictly interpreted. Since insurance contracts are contracts of adhesion, any ambiguity in the policy will be construed against the insurer, applying the contra proferentem doctrine: Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252 at 268-69; Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888. However, these principles of interpretation cannot create ambiguities; if the exclusion clause is clear, it is to be applied according to its terms, subject to the nullification of coverage doctrine discussed below.
[12] As to interpretation of endorsements, such as Endorsement 33b, generally speaking the endorsement does not operate independently of the policy. As Lang J.A. put it in Pilot Insurance Company v. Sutherland (2007), 86 O.R. (3d) 789 (C.A.) at para. 21:
An endorsement changes or varies or amends the underlying policy. While it may be comprehensive on the subject of the particular coverage provided in the endorsement, it is built on the foundation of the policy and does not have an independent existence.
[13] However, if limitation of apparent coverage in an endorsement is ambiguous, the limitation should be set out in the endorsement itself. As Cory J.A. said in Wigle v. Allstate Insurance Co. of Canada (1984), 49 O.R. (2d) 101 (C.A.) at p. 120 in relation to underinsured motorist coverage:
Limitations on the apparent coverage in the endorsement that are ambiguous in the sense that they are not clearly apparent, should be set out in the endorsement itself. If it was the intention of the insurer that the endorsement was not to cover an “unidentified” vehicle, it would have been a simple matter to say so in the explanatory note.
[14] This case involves the doctrine of nullification of coverage. In Canada, this doctrine appears to originate in the reasons of Estey J. speaking only for himself in Indemnity Insurance Co. of North America v. Excel Cleaning Service, [1954] 1 S.C.R. 169 at pp. 177 – 80:
Such a construction would largely, if not completely, nullify the purpose for which the insurance was sold – a circumstance to be avoided, so far as the language used will permit. Cornish v. The Accident Insurance Co. [(1889) 23 Q.B.D. 453.], where at p. 456 Lindley L.J. stated:
The object of the contract is to insure against accidental death and injuries, and the contract must not be construed so as to defeat that object, nor so as to render it practically illusory.
…
When regard is had to the possible meanings of the words "care," "custody" and "control" as they are here used as part of general provisions prepared without reference to the particular coverage purchased by the respondent, together with what is perhaps the more important consideration that, if construed as the appellant submits, these words would largely, if not entirely, nullify the usefulness of the insurance purchased, it is difficult to determine the precise meaning that ought to be attributed to these words.
It is, in such a case, a general rule to construe that language used in a manner favourable to the insured. The basis for such being that the insurer, by such clauses, seeks to impose exceptions and limitations to the coverage he has already described and, therefore, should use language that clearly expresses the extent and scope of these exceptions and limitations and, in so far as he fails to do so, the language of the coverage should obtain. Lord Justice Lindley stated:
In a case on the line, in a case of real doubt, the policy ought to be construed most strongly against the insurers; they frame the policy and insert the exceptions. Cornish v. The Accident Insurance Co., supra, at p. 456.
[15] These passages appear to indicate that the nullification of coverage is simply a particular application of the broader rule of interpretation that in case of an ambiguity in an exclusion clause, the ambiguity is to be construed against the insurer. The subsequent decision of the Supreme Court of Canada in Consolidated Bathurst also created some ambiguity as to how the doctrine applied. In a passage that has been repeatedly applied in interpreting insurance contracts, Estey J., speaking for the majority of the court, held as follows at pp. 901 - 902 :
Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, 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. [Emphasis added.]
[16] To a similar effect is Amos v. Insurance Corp. of British Columbia, [1995] 3 S.C.R. 405 per Major J. speaking for the court at paras. 16 - 17 concerning a statutory no-fault benefits scheme:
Traditionally, the provisions providing coverage in private policies of insurance have been interpreted broadly in favour of the insured, and exclusions interpreted strictly and narrowly against the insurer (Brown and Menezes, at p. 131). In Indemnity Insurance Co. v. Excel Cleaning Service, [1954] S.C.R. 169, it was held that the construction given to a policy of insurance must not nullify the purpose for which the insurance was sold.
In the same way, while s. 79(1) must not be stretched beyond its plain and ordinary meaning, it ought not to be given a technical construction that defeats the object and insuring intent of the legislation providing coverage. [Emphasis added.]
[17] These passages suggest a different way of looking at the nullification of coverage doctrine; namely, that it is an independent doctrine that applies even in the absence of an ambiguity. This court has adopted this interpretation of the doctrine in a number of cases including Weston Ornamental and more recently in Zurich Insurance Co. v. 686234 Ontario Ltd. (2002), 62 O.R. (3d) 447 (C.A.) at para. 28 (leave to appeal to S.C.C. refused, [2003] S.C.C.A. No. 33):
From Weston Ornamental Iron Works it is clear that this court has concluded that even though an exclusion clause may be clear and unambiguous, it will not be applied where: (1) it is inconsistent with the main purpose of the insurance coverage and where the result would be to virtually nullify the coverage provided by the policy; and (2) where to apply it would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. [Emphasis added.]
[18] I will return to the application of the nullification of coverage doctrine after interpreting the policy and the endorsement.
[19] Whether or not loss as a result of damage to the appellants’ outdoor in-ground pool falls within the Coverage part of the policy, such a loss is clearly excluded by Common Exclusion 18, the exclusion for, among other things, “outdoor swimming pools”. The only reasonable interpretation of Endorsement 33b is that it at least amends the policy so that the part of Common Exclusion 18 referring to outdoor swimming pools does not apply. The appellants submit that the Endorsement is ambiguous as to whether any of the other Common Exclusions apply. The appellants point to the specific reference to some of the Common Exclusions in the endorsement itself. For convenience, I repeat that part of the Endorsement and have added the clause numbers that correspond to the Common Exclusions in the policy:
All other terms conditions and exclusions of this policy remain unchanged, including the exclusions regarding:
-(5) loss or damage:
- occurring before during or after flood waters reach the premises. "Flood" includes waves, tides, tidal wave:, and the rising or overflow of any stream of water or body of water, whether natural or manmade;
- caused by impact by water-borne objects.
-(8) loss or damage caused by wear and tear, deterioration, defect or mechanical, electrical or electronic breakdown or disturbance, rust or corrosion, dampness of atmosphere, extremes of temperature, wet or dry rot, fungi or spores, but resulting damage to other property caused by a peril not otherwise excluded is insured.
-(10) the cost of making good faulty material or workmanship.
-(18) loss or damage caused by vermin, insects, rodents, raccoons or birds.
[20] Counsel for the appellants points out that Endorsement 33b exactly duplicates clauses 5, 8, 10 and part of 18. He submits that if the introductory language to this part of the endorsement – “All other terms conditions and exclusions of this policy remain unchanged, including the exclusions regarding” – was intended to incorporate all of the Common Exclusions there would be no need for reference to these specific exclusions. If the respondent intended to have Common Exclusion 11 apply to the endorsement, it should have said so explicitly as it has with Common Exclusions 5, 8, 10 and part of 18. This submission finds support in the decision of this court in Wigle in the excerpt set out earlier, which is as follows:
Limitations on the apparent coverage in the endorsement that are ambiguous in the sense that they are not clearly apparent, should be set out in the endorsement itself. If it was the intention of the insurer that the endorsement was not to cover an “unidentified” vehicle, it would have been a simple matter to say so in the explanatory note.
[21] The appellants submit that by including certain exclusions in the Endorsement but intending nevertheless to include all the other Common Exclusions, Endorsement 33b has become a trap for the unwary. The homeowners would read the Endorsement and understand that it covers all risks of direct physical loss or damage to their swimming pool, except the express exclusions; but unbeknownst to them all the other Common Exclusions apply including Exclusion 11, which, it seems, would be the most likely and obvious source of loss or damage to a swimming pool.
[22] The appellants submit that if the insurer is correct in its interpretation, the inclusion of particular Common Exclusions in the Endorsement was redundant. True, if the appellants are correct then the term “exclusions” is redundant in the phrase: “All other terms conditions and exclusions of this policy remain unchanged”. However, since it is the respondent that drafted the policy it is for it to explain the redundancy. At the very least, the endorsement is ambiguous and the ambiguity should be interpreted against the insurer.
[23] In that respect, the appellants point to Endorsement 22b, which is clear in terms of the exclusions that are meant to apply. That endorsement states simply that it insures against loss from fire, explosion or smoke from earthquake shock “subject to the exclusions and conditions of your policy”. It then refers to “additional” exclusions. The homeowners looking at Endorsement 22b would know that they must look to the Common Exclusions in the policy and the other “additional” exclusions in the endorsement. There is no trap for the unwary in Endorsement 22b, unlike Endorsement 33b. There is much to be said for the appellants’ submission as to ambiguity of the Endorsement. However, in my view, this case can be resolved by resort to the nullification of coverage doctrine to which I now turn.
[24] The application judge found against the appellants on the nullification of coverage issue because there was no evidence that the effect of Common Exclusion 11 was to nullify coverage and no objective evidence as to the reasonable expectations of the parties. In reaching that conclusion the application judge referred to Zurich Insurance, Excel Cleaning, and Western Ornamental. The application judge considered that in all of those cases “there was an evidentiary record upon which to form the judgment that coverage had been virtually nullified by the scope of the exclusion”. But, there was no such record in this case.
[25] It may well be that there was some evidence in those cases from which a determination could be made about nullification of coverage and reasonable expectations of the parties, but there is no case that holds such evidence is essential. Thus, in one of the recent cases from the Supreme Court of Canada concerning reasonable expectations, Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., it is not apparent that the court relied upon evidence in determining the reasonable expectations of the parties.
[26] Another example is Foodpro National Inc. v. General Accident Assurance Co. of Canada et al. (1986), 57 O.R. (2d) 489 (H.C.J.), where the trial judge was required to interpret a so-called “sistership” exclusion in an insurance policy. The trial judge, making no reference to the nullification of coverage doctrine, interpreted the provision as covering the loss. On appeal to this court at 63 O.R. (2d) 288 (leave to appeal to S.C.C. refused, [1988] S.C.C.A. No. 707), the court held as follows:
In our opinion the interpretation of the exclusionary clause by the weekly court judge was the interpretation placed on it by the American authorities where it has been considered. That interpretation is one which the clause can properly bear and conforms with the acknowledged purpose for which the clause was created. To give the clause the interpretation urged by the appellant insurers would be to render nugatory the coverage for the most obvious risks for which the policies were issued. [Emphasis added.]
[27] It is not apparent that this court referred to any evidence in reaching the conclusion that the clause would not cover “the most obvious risks” for which such policies are issued. There is certainly no indication that there was any burden on the insured to lead evidence to that effect.
[28] I agree that in some cases evidence may be needed, especially if the case concerns some particularly arcane set of circumstances. It seems to me that a court is in a good position to determine what are the most obvious risks for which an ordinary homeowners’ policy is issued. If the court is able to determine on an objective basis that the insurer’s interpretation would render nugatory coverage for the most obvious risks for which the endorsement is issued, a tactical burden shifts to the insurer. It will be for the insurer to show that the effect of its interpretation would not virtually nullify the coverage and would not be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. This is a reasonable approach given that the insurer is in an ideal position to show that, contrary to what appears to be the case, the endorsement does in fact provide coverage. For example, the insurer would have access to its records and the experience in the industry and would be able to show that claims have been paid for loss or damage not falling within the exclusion.
[29] I have no difficulty in finding that Common Exclusion 11 would, to use the words of Foodpro, “render nugatory the coverage for the most obvious risks” for which the endorsement was issued. Common Exclusion 11 excludes coverage for “settling, expansion, contraction, moving, bulging, buckling or cracking of any insured property, except resulting damage to building glass”. The most common causes of loss or damage for a homeowners’ policy such as theft or fire have no obvious application to an outdoor in-ground swimming pool. It is difficult to conceive of any damage or loss to an in-ground swimming pool that would not come within that exclusion, especially the word “cracking”. When counsel for the respondent insurer was pressed for an example that would not come within Common Exclusion 11, he was unable to do so. In fact, the only loss that I can think of that might be covered by Endorsement 33b and not excluded by the Common Exclusions is that covered by Common Exclusion 12, which reads as follows:
We do not insure:
…
(12) marring or scratching of any property unless caused by impact by land vehicle, aircraft, satellite or spacecraft, riot, vandalism, hail, windstorm, theft or attempted theft or transportation as defined in exclusion (7) above.
[30] It hardly seems likely that the appellants would have purchased the Endorsement if they knew it only covered marring or scratching given the $500 deductible; or that it was limited to marring and scratching from the impact of a land vehicle, aircraft, satellite, spacecraft, riot, vandalism, hail, windstorm and theft, none of which seem very likely candidates for damage to an in-ground outdoor pool. Even less likely if they knew that if the impact resulted in cracking of the pool it would not be covered because of Common Exclusion 11.
[31] In my view, application of Common Exclusion 11 to Endorsement 33b would virtually nullify coverage. Such a result could not have been within the reasonable expectation of the parties.
[32] Accordingly, I would allow the appeal, set aside the judgment and grant a declaration that the appellants have coverage for the loss relating to their outdoor in-ground swimming pool. The appellants are entitled to their costs of the application and the appeal which I would fix at $7,500 and $5,000 respectively inclusive of disbursements and applicable taxes.
Signed: “M. Rosenberg J.A.”
“I agree J. C. MacPherson J.A.”
“I agree H. S. LaForme J.A.”
RELEASED: “MR” February 8, 2011