Ruling on All-Risk Property Policy Highlights Importance of Clear Policy Language


On January 18, 2010, a three panel bench of the Alberta Court of Appeal delivered a unanimous dismissal of an insurer’s appeal in Engle Estate v. Aviva Insurance Company of Canada. The decision sheds some light on judicial treatment of settlement exclusion clauses in building insurance policies.

Aviva appealed the decision of a chambers judge who found Aviva liable to indemnify its insured, Isaac Engle, for damages sustained to a commercial building Mr. Engle owned in Calgary (the “Building”). Mr. Engle leased the premises to a number of tenants and had secured an “all risk” insurance policy from Aviva (the “Policy”).

The Building was in good condition before July 2006, when construction of a high-rise condominium project began on an adjacent lot. The high-rise project involved deep excavation, pile driving and shoring work. By January 2007, tenants in the Building were complaining of cracks in the walls, floors and ceilings. Evidence at trial showed the cracking had progressed to the extent that the structural stability, safety and physical integrity of the Building was threatened. Mr. Engle’s expert estimated the cost of repairs to be in the range of $1,000,000.

As a result of the damage, Mr. Engle reported the matter to Aviva and sought coverage and indemnity under the Policy. Aviva denied Mr. Engle’s claim on the basis that the Policy contained an exclusion clause for damages as a result of earth movement and settlement (the “Settlement Exclusion”). The relevant portions of the exclusion clause read:

This form does not insure against loss or damage caused directly or indirectly:

  1. To “buildings” by:

  • settling, expansion, contraction, moving, shifting or cracking unless concurrently and directly caused by a peril not otherwise excluded…

Mr. Engle sued Aviva and won before a judge in chambers. The judge noted that the exclusion clause excluded “loss or damage caused directly or indirectly” to buildings by settling but did not specify whether it was intended to apply to both natural and fortuitous types of settlement, or simply to naturally occurring settlement. The judge found that the word “settling” is commonly understood to mean that which is expected and occurs naturally. This interpretation of the exclusion clause was “fairer, more logical, and more in line with the nature of the insurance obtained.” The settlement affecting the Building was not natural but fortuitous and therefore not excluded from coverage. Aviva appealed but lost again.

At the Court of Appeal hearing, Aviva relied on a number of cases where naturally occurring settlement was excluded under similar exclusion clauses. However the Court of Appeal noted that the settlement exclusions in those cases did not use the words “caused by”, meaning it did not matter what triggered the settlement and so both natural and fortuitous causes were excluded. In contrast, the exclusion in the Policy contained the words “caused by” and so it could not be argued that the settlement exclusion applied regardless of the cause.

The Court of Appeal agreed with the chambers judge that the exclusion was ambiguous as to whether fortuitous settlement or natural settlement or both were removed from coverage. The contract interpretation doctrines of contra proferentum (reading ambiguities against the contract drafter) and reading exclusion clauses narrowly both weighed in favour of the exclusion being restricted to natural settlement. The Court of Appeal cinched the deal by looking to the rest of the Policy to determine the intent of the parties.

The Court of Appeal observed that other exclusion clauses in the Policy specifically addressed themselves to causes that were both natural and man-made. The settlement exclusion was silent on this point, suggesting Aviva had not intended to remove both causes from coverage. The Court also noted that the Policy provided “all risk” coverage which typically excludes naturally occurring events but is presumed to cover fortuitous events unless expressly excluded. Finally, the Court noted that excluding all causes of settlement would lead to nonsensical results. For example, a fortuitous event which caused the house to collapse would be covered while the same event would be outside coverage if it only led to settlement damage. The Court concluded that the parties must have intended that only naturally occurring settlement was excluded.

This decision emphasizes the importance of clear language with respect to both the type and cause of settlement damage to be excluded under exclusion clauses in property insurance policies.