In 2006 Kelowna homeowners, Mr. Buchanan and Ms. Grace (the “Owners”), discovered a leaking public water valve near their property. The District repaired the valve and removed large amounts of soil and water from the ground. Over the next several months the homeowners noticed various problems in and around their home including cracks in the foundation driveway and interior of their house. A retaining wall also cracked and shifted and water seeped through it. A geotechnical engineer concluded that the problems were likely caused by a waterline leakage and resulting loss of ground support. Repairs to the house and foundation were estimated between $175,000 and $250,000.
The Owners turned to their “all risk” homeowners policy issued by Wawanesa. They relied on clause 9(c) below and took the position that damage from water escaping a public watermain was a covered specified peril. Wawanesa denied coverage under the policy, relying on the “settlement clause” at clause 2. The relevant clauses are set out as follows:
You are insured against all risks of direct physical loss or damage to the property described in Coverage A and B except:
(1) losses excluded under LOSS OR DAMAGE NOT INSURED as described under SECTION 1 – CONDITIONS;
(2) settling, expansion, contraction, moving, bulging, buckling, cracking, or the falling of ceiling or wall plaster. If loss or damage to building glass results, we will pay only for that resulting damage;
loss or damage caused by or resulting from:
(9) (c) water below the surface of the ground, including water which exerts pressure on or flows, seeps or leaks through sidewalks, driveways, foundations, walls, basement or other floors or through doors, windows or any other openings;
If the loss or damage is the result of the escape or water from a swimming pool or attached equipment or a public water main, you are insured;
The Court of Appeal revisited the issue of whether “settlement exclusions” in “all risk” policies exclude all settlement no matter how it occurs. The courts considered four appellate decisions from B.C., Manitoba and Alberta. The policy wording in all but the Alberta case was relatively similar.
The first was Pavlovic v. Economical Mutual Insurance Co. 1994 CanLII 2834 (BC C.A.), (1994) 99 B.C.L.R. (2d) 298 (C.A.). In that case a waterline also ruptured and percolated under the ground, producing considerable damage to the home and property. The waterline was not a public waterline. The engineer’s report stated that the cause of damage was 1) the long-term collapse of the soft soils underground, unrelated to the waterline break; and 2) the infiltration of water from the waterline break into the collapsible soil underground. The only issue before the Court of Appeal was whether the equivalent of clause 9(c) above excluded coverage. The court did not consider a “settlement exclusion” per se. The court had to decide whether the damage was “caused by” seepage or leakage of water. It was found that the leakage of water was one of several necessary links in the chain of events, beginning with the failure of the pipe. Finch J.A. held that the damage was not directly caused by leakage of water, rather leakage of water was one of many contributing causes. Coverage was upheld.
The second case, Leahy v. Canadian Northern Shield Insurance Co. 2000 BCCA 408 (CanLII), 2000 BCCA 408 proved to be the most problematic. In that case the property owners’ neighbour had a problem with their sprinkler system which caused water to escape underground. The owner noticed cracks and sinking in and around their property. The Court of Appeal denied coverage based on the settlement clause on the basis that it excluded specific types of damage and the exclusion was not in any way cause dependent. Esson J.A. found it unnecessary to rely on the contra proferentem rule since he found no ambiguity or lack of clarity as to the meaning of the settlement clause.
The third appellate decision was Rivard v. General Accident Assurance Co. of Canada 2002 MBCA 70 (CanLII), 2002 MBCA 70. The property owner suffered extensive damage to her residence due to the escape of 26,000 gallons of water from her pool into the ground and resultant movement of the subsoil. The insurer argued that the settlement exclusion applied to damage caused by any type of settlement and not just to normal or natural settling. The Court of Appeal disagreed with Leahy and upheld Pavlovic stating that the exception to the exclusion (clause 9(c) above) was drafted to specifically cover damage from a pool on the insured’s property and that would have been the understanding / expectation of a reasonable person placing insurance.
The fourth appellate decision was Engle Estate v. Aviva Insurance Co. of Canada 2010 ABCA 18 (CanLII), 2010 ABCA 18. A building belonging to the plaintiff experienced cracks throughout, apparently as a result of a large excavation in the adjacent property. The insurer relied on the settlement exclusion. The court drew a distinction between settlement clauses that exclude coverage without regard to the cause, such as in all of the preceding cases, and settlement clauses that contained the words “caused by”, such as in the present case. The court took the view that the settlement clause in this policy was meant to exclude “damages for passive, gradual, naturally occurring events” but not for settlement otherwise occurring. The court said that an insured would not expect naturally occurring and inevitable settlement to be covered but the same cannot be said for settlement from an unexpected, fortuitous event.
After considering all the appellate authority, the Court of Appeal in Buchanan distinguished Leahy by the fact that it dealt with settlement caused by a neighbours sprinkler system. In Buchanan the settlement was caused by a public watermain and this reference in clause 9 was a specific exception to clause 2. The court said Leahy does not mean any exclusion that is not cause-dependant is impervious to all exceptions and qualifications. A prospective insured on reading this policy would reasonably have assumed that he or she would be covered in respect of any damage resulting from the escape of water from a public watermain.
Of note is that Mr. Justice Groberman dissented and said that the Leahy decision is not distinguishable. He said that the fact that the Owners in this case can take themselves outside the leakage exclusion by showing that the leakage occurred from a public water main cannot put them in any better position than the owners in Leahy. The plaintiffs in Leahy were already assumed to be outside of the leakage exclusion. Coverage was excluded by the settling exclusion, which operates independently of the leakage exclusion.
In summary, the appellate authorities, including Buchanan can be reconciled as follows:
- Where a settlement clause excludes coverage without regard to the cause of settlement, effect must be given to the plain language of the settlement clause to exclude damage caused by any type of settlement (Leahy).
- In Alberta, a distinction has been drawn between settlement clauses that exclude coverage without regard to the cause and those that contain the words “caused by settling”. In the latter case, settlement means naturally occurring settlement not settlement from a fortuitous event (Engle). Whether BC courts will adhere to this principle in light of Leahy, remains to be seen.
- Generally policies contain exceptions (escape or water from a swimming pool or attached equipment or a public water main) to the exclusion for damage caused by water below the surface of the ground. If one of the exceptions is triggered, then the loss is covered, notwithstanding the inclusion of a separate settlement clause in the policy (Rivard and Buchanan).
- Absent ‘concurrent causation’ wording in the exclusion, damage is still covered even if the exception to the exclusion discussed in (c) is but one of many contributing causes of the damage (Pavlovic).