Engineering Firm Successfully Jumps Through the Hoops of E&O Coverage

In MWH International, Inc. v. Lumbermens Mutual Casualty Company 2006 BCSC 219, the B.C. Supreme Court was asked to consider the type of notice required under a policy of project specific professional liability insurance, and the implications of the insured’s corporate restructuring after completion of the project but before making a claim for coverage on the policy.

The construction project was the Keenleyside power plant in Castlegar, B.C. Approximately two years after start up of the power plant, the approach channel to the power plant suffered a significant failure of its concrete liner. The plant was shut down as a result and the ensuing losses were many millions of dollars.

Before commencement of the construction, project specific professional liability insurance was obtained which included as an insured the engineering firm which ultimately became the plaintiff through a series of corporate restructurings. After the failure of the concrete liner, the plaintiff gave notice to the insurer and sought coverage under the policy. The insurer declined coverage on two primary bases:

1. The insurer did not have a duty to defend because it was not the reporting of a “circumstance” giving rise to the claim but the reporting of an actual “claim” against the insured seeking damages that triggers the duty to defend under the policy. In this case, written notice of a “claim” was not given to the insurer until after the expiry of the policy; and

2. The policy did not cover the plaintiff because the plaintiff was not the same entity insured under the policy by virtue of the corporate restructurings.

Notice

The policy in question contained an endorsement to the policy which modified the definition of “claim”:

Written notice of a “claim” containing sufficient particulars of the “claim” was required as a condition precedent to coverage. However the policy also contained a provision that written notice of a “circumstance” during the policy period would be deemed as adequate notice of any “claim” that may subsequently be made against the insured arising out of the same “circumstances”.

The above-mentioned notice provisions were significant to the determination of coverage in this case. If notice of a “circumstance” was not adequate notice of a “claim” under the policy, then absence of proper notice meant the insurer’s duty to defend would not be triggered under this claims-made form of coverage.

The Plaintiff argued that since the endorsement expanded the definition of “claim” to include “circumstance”, it follows that a “claim” includes a “circumstance” and written notice to the insurer of a “circumstance” is adequate notice. If so, the plaintiff argued, then adequate written notice of a “circumstance” had been provided to the insurer on more than one occasion prior to the expiry of the policy period.

The insurer tried to limit the application of the endorsement to the extended reporting period section of the insurance policy. It argued that a “claim” must in fact be made before it can be determined whether that claim will be covered.

In making its decision, the Court returned to the basic principles of policy interpretation as enunciated in Lloyd’s of London v. Scalera [2000] 1 .S.C.R 551. Coverage should be construed broadly. Where a contract is ambiguous, the court should give effect to the clear language, reading the contract as a whole, and give effect to the reasonable expectations of the parties. In applying these principles, the Court found that it would be too narrow to limit the subject endorsement to a particular section of the policy. The endorsement itself contains no language limiting its applicability or scope. The Court found that the wording of the endorsement was not ambiguous but even if it was, it would be interpreted against the insurer, thus favoring a broad interpretation of the clause. As a result, the Court concluded that a “claim” included a “circumstance”, and notice of a “circumstance” was deemed notice of a “claim” and triggered coverage.

The actual notice of a “circumstance” was ultimately found to be in a introductory letter from counsel for the plaintiff to the insurer regarding a “potential claim”. The letter was prepared by the plaintiff’s counsel when very little was known about the loss, and included the admission that “…no formal proceedings or formal claim has yet been advanced against [the plaintiff]”. Yet despite the lack of specific details in this letter, the court accepted the letter as sufficient notice of a “circumstance”.

Named Insured

In a corporate re-organization, after the project but before the loss, the named insured engineering firm converted from a limited partnership to a corporation, went through a name change, and then merged with a related company, ultimately resulting in the entity named as plaintiff.

The defendant took the position there was no obligation to extend coverage under the policy because the plaintiff was not the same entity as the actual named insured. Further, there were technically no “claims” against the plaintiff, per se, because the plaintiff was not the subcontractor or subconsultant on the project.

Having determined that there was coverage and that the duty to defend has been triggered in respect of work provided by the named insured engineering firm, the Court “dodged the bullet” by not deciding the restructuring issue at this stage. Coverage was affirmed for the plaintiff but without analyzing this issue.

The implications respecting the ability of an insured to claim coverage following a corporate re-organization could be significant. Professional consulting firms would be wise to factor this consideration into their risk planning. Insurers should be aware of the potential for minimizing risk by limiting exposure to only named insureds under a policy.

The full text of the Supreme Court's judgment in MWH International, Inc. v. Lumbermens Mutual Casualty Company can be found at: http://www.courts.gov.bc.ca/jdb-txt/sc/06/02/2006bcsc0219.htm.

If you have any questions about the decision or any other insurance matter, please contact Samantha IP (tel: 604.643.3172 email: ssi@cwilson.com), or any other member of the Clark Wilson LLP Insurance Practice Group.