Insurable Interest

GRASS IS GREENER FOR INSURERS OF CONDO BUILDING: MULTIPLE GROW-OPS GET MULTIPLE DEDUCTIBLES

In Owners of Strata Plan LMS 3904 v. Commonwealth Insurance Company, the British Columbia Supreme Court has just decided the first Canadian case addressing who has the burden of proving the number of occurrences that caused a loss and, consequently, the number of deductibles to be applied.

The Plaintiffs were members of a strata corporation which owned a 90–unit residential condominium complex in Richmond BC. Most or all of the owners drew income from renting their units to tenants and they shared a common insurance policy. The BC Strata Property Act compels strata corporations to obtain property insurance covering all common property which includes all fixtures installed in the unit as part of the original construction. In this case, the strata corporation fulfilled its obligation by obtaining an all–risks property damage and business interruption insurance policy (the "Policy") prepared by an insurance broker and underwritten by the Commonwealth Insurance Company and St. Paul Fire and Marine Insurance Company.

The Policy called for separate adjustment of losses resulting from each occurrence and limited the insurers' liability limited to the amount exceeding the applicable deductible. For losses in respect of "PolicyIllegal Drug Activity"Policy, the deductible was $50,000. The definition of "Policyoccurrence"Policy was unique to the Policy and somewhat circular, stating an occurrence was "Policya loss and/or a series of losses which are attributable directly to one cause, disaster or occurrence"Policy.

In March 2005, an anonymous tipster advised the RCMP to investigate possible marijuana grow–ops in nine condominium units. The first police searches lead to additional warrants, ultimately resulting in the discovery of grow–ops in the nine units identified by the tipster plus an additional 21 units! The grow–ops had damaged the units housing them and cost the owners a total of $500,000 for repairs. An RCMP press release concerning the grow–ops gave the building a stigma that made it difficult for all unit owners to find tenants and resulted in loss of rental income.

The insurers refused to pay for the repairs or lost rental income, taking the position that each grow–op was a separate occurrence with a separate deductible and no unit had a loss greater than its deductible. The owners sued, arguing that a single occurrence had caused all losses and therefore only a single deductible applied.

The judge first had to decide who had the burden of establishing how many occurrences there had been or, put another way, how many deductibles could be applied. Normally, insureds must prove the loss falls within the policy's insuring agreement (where the requirement for an "occurrence" is found) and words in the agreement are construed broadly in favour of coverage. On the other hand, the insurer must prove that the loss falls within an exclusion clause and the words in these clauses are construed narrowly, again in favour of coverage. The insured owners argued that deductibles restricted coverage and so should be treated like exclusion clauses. The judge found no Canadian cases on the subject but disagreed with the owners. He ruled that where the question is whether losses that occurred in different places at different times should be aggregated, the burden of proof should fall upon the party seeking to establish the aggregation. If the case concerned the application of deductibles, the insureds would be seeking aggregation of the losses to reduce the number of deductibles and so the insureds would have the burden of proof. If the case concerned the application of policy limits, the insurers would be seeking aggregation to reduce multiple applications of the same policy limits and so the insurers would bear the burden of proof. This case was about deductibles and the owners had the burden.

The owners then dissected the Policy definition of "occurrence", arguing that all of the losses were the result of either one "cause" or one "occurrence". The alleged common cause was illegal drug activity. The judge disagreed, finding that the type of activity was not, in itself, a sufficient common factor to aggregate the losses. In support of a common occurrence, the owners presented expert police evidence indicating that a cluster of grow–ops could only be the result of coordinated activity or at least mutual knowledge and tolerance among separate operators. The judge rejected this, ruling there was no proof of coordinated activity among all of the grow–ops and that mutual knowledge and tolerance did not constitute a common occurrence. However, the judge did accept the expert's evidence that the tipster's knowledge of nine grow–op units indicated he was probably part of a common criminal enterprise involving those operations. Therefore, the property damage connected to these nine units were from a common cause and only one deductible applied. The other grow–ops were all treated as separate occurrences with separate deductibles.

The judge had different views regarding the rental losses. He divided these into two types: (1) rental losses of the repaired units; and (2) rental losses of the remaining units. For the losses of the repaired units, the judge broke them down as he did with the repair costs. The losses of the nine units identified by the tipster resulted from one occurrence. The losses for the other 21 repaired grow–op units were caused by separate occurrences. For the remaining units in the building, the judge concluded the rental losses resulted from a common cause, the RCMP press release. In the result, only a single deductible applied to these rental losses.

When the number of deductibles are in issue, this case benefits insurers by saddling insureds with the obligation to prove the number of occurrences. When limits are in issue, the situation is reversed. Because multiple grow–op cases rarely concern limits, insurers might take comfort from the judge's conclusion that most of the grow–ops were separate occurrences as there was no evidence of a common enterprise or coordinated activity. However, the judge hinted his decision might have been different if the Policy definition of "occurrence" included the commonly used phrase, "continuous or repeated exposure to substantially the same general harmful conditions." Insurers who include that phrase in their definitions may face greater exposure.