By Samantha Ip and Cameron Fox
The Alberta Court of Appeal has, in a split decision, affirmed a decision which found that losses resulting from a flood were covered by an insurance policy, despite that policy containing an express exclusion for flood damage.
THE TRIAL DECISION
The facts of 2102908 Alberta Ltd. v Intact Insurance Company were discussed by Clark Wilson insurance law associate Meera Jain in a previous installment of our Insurable Interest Newsletter. The plaintiff purchased a commercial property insurance policy (the “Policy”) for its bowling alley located on the ground floor of a multi-storey building in Fort McMurray, Alberta, approximately 250 metres from the banks of the Clearwater River. The bowling alley was damaged in April 2020 when the river overflowed its banks and water entered the building through various openings in the walls and doors (the “Loss”). The insurer argued that the Loss was not covered under the Policy, which contained the following exclusions:
- EXCLUDED PERILS
This Form does not insure against increased costs, and loss or damage caused directly or indirectly:
2.2. Flood
in whole or in part by flood, including “surface water”, waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water. This exclusion applies whether or not there are one or more other causes or events (whether covered or not) that contribute concurrently or in any sequence to the occasioning of the loss or damage, except for loss or damage caused directly by resultant fire, explosion, smoke or leakage from fire protective equipment;
This exclusion does not apply to property in transit, provided such coverage is afforded by endorsement attached to this Form, or to loss or damage caused directly by leakage from a watermain;
(the “Flood Exclusion”)
2.3. Other Water Damage
2.3.1. by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.2. by the backing up or overflow of water from sewers, sumps, septic tanks or drains, wherever located, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.3. by the entrance of rain, sleet or snow through doors, windows, skylights, or other similar wall or roof openings, unless through an aperture concurrently and directly caused by an insured peril not otherwise excluded in this Form;
(the “Influx of Water Exclusion”)
Notably, the insured had purchased an extension to the Policy which deleted the Influx of Water Exclusion and added equivalent language back into the Policy’s coverage:
- SEEPAGE, LEAKAGE OR INFLUX OF WATER
This Form is extended to cover loss or damage caused by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights.
This Extension deletes Exclusion 2.3.1. of the EXCLUDED PERILS Section of the Building and/or Contents – Broad Form.
(the “Influx of Water Extension”)
In the trial decision, 2022 ABQB 175, the trial judge found that the effect of the Influx of Water Extension was to bring coverage for the Loss back within the Policy. The court began with a reference to the principle set down by the Supreme Court of Canada in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 [Ledcor] that, when the language of an insurance policy is ambiguous, it is to be interpreted against the insurer and in favour of finding coverage. The court found that the Policy was ambiguous because, while a flood had clearly occurred, the actual cause of the Loss was an influx of water through openings in the building, precisely the event described in the Influx of Water Extension. Additionally, the court noted that the condition described in the Influx of Water Extension was narrower than that described in the Flood Exclusion, and stated that to fail to give effect to this specific language “would lead to the perverse result that where the policy contains a clause that expressly deletes a specific exclusion of coverage, that coverage could still be excluded by ambiguous language found in another section” (at para. 30).
THE APPEAL
On appeal, the insurer argued that the trial court failed to apply the decision of the Supreme Court of Canada in Derksen v. 539938 Ontario Ltd., 2001 SCC 72 [Derksen], where the Supreme Court explained that “if an insurer wishes to oust coverage in cases where covered perils operate concurrently with excluded perils, all it has to do is expressly state it in the insurance policy”. The insurer argued that a “flood” and an “influx of water” were distinct conditions according to the language of the Policy and the combined effect of the Flood Exclusion and Influx of Water Extension was therefore clear: coverage for any damage resulting from a “flood” was excluded, but damage caused by influxes of water other than a “flood” (eg, heavy rainfall or rising groundwater) was brought back within coverage. The insurer further argued that, since this was the correct interpretation of the Policy as a whole, there was no ambiguity and therefore no room for the Ledcor principle to operate to find coverage.
In the appeal decision, 2023 ABCA 34, the majority of the Court of Appeal disagreed with the insurer’s submissions and affirmed the decision below finding coverage. First, the majority held that a “flood” and “water damage” were not clearly distinct conditions, since “it is difficult to conceive of circumstances where damage caused by flood is not also caused by an influx of water through openings”. The policy was therefore ambiguous and had to be construed in favour of finding coverage (at para. 25). Second, the majority found that a reasonable insurance customer who purchased coverage for the influx of water would have expected to receive coverage even if the loss was caused by a flood, especially since the Influx of Water Extension did not state that it was limited in any way (at para. 28). Finally, the majority held that commercial reality favoured finding coverage:
[29] From the perspective of commercial reality, what did the insured buy? [The Influx of Water Extension] provides coverage for influx from natural sources, including through above-ground openings. If that coverage excludes flood and rain, sleet and snow…then there is no benefit to the insured from purchasing [the Influx of Water Extension]…
THE DISSENT
A lone dissenting justice would have allowed the insurer’s appeal and found that the Loss was excluded from coverage under the Policy. After reviewing case law which emphasized that a court must not be overly eager to find an insurance policy to be ambiguous (at paras. 43-46), the dissent concluded that the Policy language was not ambiguous:
[53] In my view, the Policy, when read as a whole, is not ambiguous. In the absence of the Influx of Water Extension, the damage at issue here would not have been covered due to two separate exclusions in the Policy, either of which is sufficient to defeat the claim:
- It was caused, in whole or part, by a flood, whether concurrently or in sequence with other causes (Flood Exclusion); and
- It was caused by an influx of water through various openings in walls and doors in the leased premises and through openings in walls between the leased premises and the adjoining unit and underground parkade (Influx of Water Exclusion).
[54] The Influx of Water Extension reinstated coverage in the latter situation, but not the former. If the Influx of Water Extension was intended to reinstate coverage for the exclusion dealing with flood in addition to the exclusion dealing with seepage, leakage or influx of water, language other than, “This Extension deletes Exclusion 2.3.1 of the EXCLUDED PERILS Section of the Building and/or Contents-Broad Form”, would have been used.
Thus, the trial judge and majority of the Court of Appeal erred by finding that the Influx of Water Extension conflicted with the Flood Exclusion. Rather, the Policy, read as a whole, reflected “an intention to carve out from coverage damage caused by an influx of water caused by a flood, as opposed to an influx of water derived from another natural source such as a heavy rainfall or rising groundwater” (at para. 56).
The dissent also took issue with the trial decision’s statement that to decline coverage in these circumstances would lead to a “perverse result” where a specific extension could be nullified by the ambiguous language found in another exclusion, noting that this was contrary to the Supreme Court of Canada’s decision in Derksen which holds that it is perfectly acceptable for an insurer to exclude coverage for a particular cause even when that cause occurs concurrently with another, covered cause – provided that this is done so clearly in the policy’s language:
[60] In my view, the Policy is clear that exclusions in the Broad Form are intended to apply unless specifically and directly modified. There is no language in the Policy that specifically and directly modifies the Flood Exclusion. The Flood Exclusion provision in the Broad Form uses the type of specific language contemplated in Derkson, excluding loss or damage “caused directly or indirectly”. The Flood Exclusion goes on to use even stronger specific language, stating it “applies whether or not there are one or more other causes or events (whether covered or not) that contribute concurrently or in any sequence to the occasioning of the loss or damage, except for loss or damage caused directly by resultant fire, explosion, smoke or leakage from fire protective equipment”. The Flood Exclusion is unambiguous and the [Influx of Water Extension] does not expressly delete or modify it.
The dissent held that the insured was not entitled to be indemnified for the Loss.
TAKEAWAYS
It is difficult to reconcile the decision of the majority of the Alberta Court of Appeal, with the decision of Derksen which is a 2001 decision from Canada’s highest court, and still good law in Canada. The Flood Exclusion is very clear in its wording and intent, and was clearly drafted with the requirements of our Supreme Court of Canada from Derksen in mind. “Flood” is not equal to “seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights…”, but by its decision, the majority in the Alberta Court of Appeal appears to draw definitive parallels between these two conditions, which resulted in the ultimate coverage determination.
While this decision is not binding on courts in Canadian provinces other than Alberta, it will no doubt have an impact on coverage analysis across the country. As the law currently stands, underwriters would be wise to consider the overall impact of all water-related coverages and exclusions on a policy’s interpretation, and if there is an intention to exclude cover, to do so explicitly, even at the risk of redundancy, to ensure there can be no uncertainly of the policy’s intention.
