The recent BC Supreme Court decision in Versacold Corp. v. Zurich Insurance Co. highlights an ambiguity created by common exceptions to policy exclusions. Insurance policies typically have some exclusions that remove particular perils from coverage. These exclusions often contain exceptions for “loss or damage resulting therefrom” or those making the exclusion inapplicable where the peril itself results from another “peril not otherwise excluded.” As will be seen, how these exclusions and exceptions interact can be unclear.
The Versacold case involved an insurance policy containing both the resulting damage and “peril not otherwise excluded” exceptions. Versacold owned and operated a refrigerated warehouse and needed insurance to cover its own property and customer property in Versacold’s custody. Versacold’s insurance broker prepared a hybrid property and liability policy wording and found five insurers to underwrite it. One of the underwriters was Commonwealth Insurance Company.
The property portion of the policy provided all-risk coverage for Versacold’s own property and the property of others for which Versacold was legally liable. The liability portion of the policy provided coverage for “liability imposed by law upon the Insured for all risks of direct physical loss or damage” but excluded “assumed liability under written or oral contract in excess of liability imposed … by law”. Both the property and liability parts of the policy were subject to the following general exclusions and extensions of coverage:
- PERILS EXCLUDED: This policy does not insure against:
- Loss or damage which may properly be described as day-to-day wear and tear or gradual deterioration; but not excluding any loss or damage resulting therefrom; …
- Loss or damage caused by … leakage of contents, … contamination, …; but this exclusion shall not apply:
- where it is the result of a peril not otherwise excluded; or
- where loss by an insured peril results therefrom, in which case only the loss or damage caused by such resulting or ensuing peril is covered hereunder; …
- REFRIGERATION INTERRUPTION AND REFRIGERANT CONTAMINATION EXTENSION:
This insurance is extended to cover loss of or damage to stock caused by the leakage or discharge or refrigerant from within a refrigerating system resulting in direct loss to stock, directly resulting from the occurrence of an insured peril.
In May, 2003, ammonia leaked from Versacold’s warehouse refrigeration system and onto some Maple Leaf meat products stored on the floor. Versacold had a warehouse services agreement with Maple Leaf under which Versacold was made liable for damages for improper storage. Versacold paid Maple Leaf for the damaged meat and sought reimbursement from its insurers. Four of the underwriting insurers paid their proportionate share but the fifth, Commonwealth, refused, stating that the loss was excluded from coverage. Versacold sued.
At trial, Commonwealth argued that the loss was the meat contamination and so general exclusion 1(f) regarding leakage/contamination eliminated coverage under both the property and liability portions of the policy. Versacold argued that exclusion 1(f) did not apply because it contained an exception for loss or damage resulting from a peril not otherwise excluded. Versacold claimed the meat contamination was caused by wear and tear of a valve in the refrigeration system and pointed out that exclusion 1(a) contained an exception for damage resulting from wear and tear. Because the property portion of the policy provided all-risk coverage, anything excepted from the exclusions was a “peril not otherwise excluded” within the meaning of exclusion 1(f).
Commonwealth countered that an exception to an exclusion was not the same as an included peril. Madam Justice Baker concluded that the policy was ambiguous on this point and sought clarification in the pre-policy negotiations during which ammonia contamination was discussed by Versacold’s broker and Commonwealth. Correspondence between the parties revealed both sides understood that consequential loss from wear and tear was not an insured peril when that consequential loss involved ammonia contamination. The judge ruled that these communications clarified the ambiguity in the policy and concluded there was no coverage under the property portion of the policy.
Versacold also claimed coverage under the liability policy, arguing it was obligated to pay Maple Leaf “by reason of liability imposed by law” because the failure of the refrigeration valve was caused by employee negligence. In that regard, Versacold pointed to evidence indicating that its employees did not inspect or repair the refrigeration valves unless and until they failed. Commonweath argued there was no evidence presented as to the reasonable standard for valve inspections and so there was no proof that the Versacold employees were negligent. Commonwealth asserted that Versacold could only be liable, if at all, under the terms of its storage contract with Maple Leaf which imposed a standard of care higher than that required by common law. Failure to meet this higher standard brought the loss squarely within the exclusion for “assumed liability under written or oral contract in excess of liability imposed … by law”. The judge agreed with Commonwealth, noting that Versacold had presented no evidence on the expected lifespan of the valve in question or showing that Versacold fell below any accepted industry standard for valve inspections.
Commonwealth was fortunate that the judge chose to look outside the policy to clarify the ambiguities and that there were pre-policy communications providing clarity in favour of the insurers. The judge could have instead employed the doctrine of contra proferentum and interpreted the policy ambiguities in favour of Versacold. Perhaps this is what motivated four out of the five insurers to pay the claim. Funny isn’t it, how perfectly reasonable and experienced underwriters can come to completely opposite conclusions on the identical coverage wording!