Absence of Specific Wording in Insurance Policy Leads to Application of the Higher of Two Potential Policy Limits

In the recent decision, 202135 Ontario Inc., et al. v. Northbridge General Insurance, 2021 ONSC 4299, the Applicant Insured (“Insured”) sought a declaration, under rr. 14.05(3)(d) and (h) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, against the Respondent Insurer (“Insurer”) that they are entitled to further coverage under a provision of the Business Choice insurance policy (the “Policy”). The specific provision at issue can be referred to as the pandemic-related business income interruption/interference provision.

The Insurer had taken the position that the coverage under this provision was restricted to an aggregate maximum limit of $50,000, in total, for the policy period. The Insured sought a declaration that the maximum sum of $50,000 is payable for each of their seven locations, in the aggregate sum of $350,000.

On March 17, 2020, the Insured was required to shut down their seven daycare centres as a result of the COVID-19 pandemic outbreak and the resulting state of emergency declaration by the Ontario Government. The daycare centres remained closed until June 22, 2020.

The Insured made a claim under the Policy for income loss arising from the interruption or interference with its business operations.

The parties agree that the COVID-19 pandemic outbreak triggered coverage under the Policy as of March 16, 2020. The Insurer approved coverage in respect of the Insured’s business income losses under the Policy in the amount of $50,000.

The only issue in dispute was the limit of liability under the applicable endorsement in the Policy.

The Court’s analysis focused on the subject endorsement within the context of the Policy as a whole. The Court applied the “rules” of contractual interpretation, as applied to insurance contracts, pursuant to the Supreme Court of Canada’s decision in Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23.:

1. a) The court must first determine whether the language of the insurance policy is unambiguous, within the contract as a whole. If there is no ambiguity, effect must be given to that clear language;
2. b) However, if the policy language at issue is ambiguous, the court must apply the general principles of contractual interpretation to resolve that ambiguity. This framework includes the principles that: the interpretation should be consistent with the reasonable expectations of the parties so long as that interpretation is supported by the language of the policy; the interpretation should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was entered into; and the interpretation should be consistent with the interpretation of similar insurance policies;
3. c) If the ambiguity is unresolved after the application of the general principles of contractual interpretation, then the court should apply the doctrine of contra proferentum to construe the policy against the insurer. This is a course of last resort. The corollary of this rule is that coverage provisions in insurance policies are to be interpreted broadly, whereas exclusion or limiting clauses are to be interpreted narrowly.

The Policy at issue provided insurance coverage for multiple perils, including business income interruption/interference coverage. The Policy is comprised of CBC 001 (containing the General Terms and Conditions, including the Declaration Page and attached Coverage Schedules), a renewal of the Policy effective February 3, 2020, for a term of one year, and Endorsement 3 -Association of Daycare Operators of Ontario Program Endorsement (the “ADCO Endorsement”).

The ADCO Endorsement was in force at the time of the loss and, the parties agree, applies to the Insured’s. It modified the coverage provided under Part II — Business Income found in CBC 001. In particular it deleted the coverage extension under Part II, ss. 6(e) Civil Authority, (j) Negative Publicity, and (k) Outbreak Extra Expense and replaced it with the Outbreak and Negative Publicity Extension. The Outbreak and Negative Publicity Extension was the relevant coverage provision at issue in this application.

Firstly, the Court analyzed whether there is an ambiguity in the wording of the Outbreak & Negative Publicity provision contained in the ADCO Endorsement. In particular, the meaning of “at your ‘scheduled risk location'” (s. (l)(i)), and “The most that we will pay under this Extension of Coverage in any one policy period is $25,000 [sic] or as otherwise indicated on the ‘schedule'” (s. (l)(iv)).

The Insured argued that when the Policy is read as a whole, “the most that we will pay” means calculated for each “scheduled risk location” consistent with “schedule” and not a total aggregate sum. In the alternative, this coverage provision is ambiguous, and cannot be resolved by the applicable rules of interpretation. Therefore, resort must be made to the doctrine of contra proferentum to resolve the dispute in the Insured’s favour. Notably, the Insured relied on the fact that the premium payable for this coverage was allocated on a per scheduled risk location basis.

The Insurer argued the opposite — the omission of the phrase “each” (or any similar word) from the “scheduled risk location” meant that the $50,000 limit of liability applied to all of the scheduled risk locations as an aggregate, when read within the context of the Policy as a whole. The Insurer reasons that if it intended the sum of $50,000 to be the maximum payable for each scheduled risk location, it would have inserted “each” before “scheduled risk location” rather than “your”. It did not. Therefore, the court ought to construe this “silence” or omission as meaning the $50,000 limit of liability was in the aggregate for all of the scheduled risk locations.

However, the Court noted that the Insurer’s position relied on an interpretation of the limit of liability clause, in isolation from other provisions of the Policy, that contains the general terms, conditions, and definitions applicable to the Policy (unless expressly changed in an Endorsement or another part of the Policy).

A review of the various endorsements showed that there was no uniform wording specifying the application of the limit of liability for each insured risk and whether it is in aggregate or applies separately to each individual “scheduled risk location”.

The Court stated “the limit of liability provision in the ADCO Endorsement is not clear when read in the context of the Policy as a whole. The fact that the limit of liability provision was silent as to whether it is on a per scheduled risk location basis, or on a total aggregate basis, leads to an uncertainty as to its meaning, beyond being “unclear” or “imprecise””

Further, the Court held that the ADCO Endorsement’s limit of liability as it relates to the Outbreak & Negative Publicity Extension coverage under Part II – Business Income, is ambiguous when read in the context of the whole Policy. The Insured asked the Court to effectively read into the provision “each” before the “scheduled risk location”. The Insurer asked the Court to effectively read into the provision “in the aggregate” after the phrase “scheduled risk location”.

However, when reviewing the Policy as a whole, and in particular the definition of “insured risk location”, including all seven daycare centres as per the Coverage Schedule, which is stated to prevail over the Coverage Summary of the ADCO Endorsement, the Court was persuaded by the Insured’s interpretation. The reasonable expectations of the parties, as reflected by the Policy as a whole, was that this coverage, like the majority of the other insured risks contained elsewhere in the Policy (which were specified to be either for each scheduled risk location or per occurrence), was to be subject to a limit of liability calculated on a per scheduled risk location, and not in the aggregate for one policy period.

Ultimately, the Court held that by applying of rules of contractual interpretation and reading the Policy as a whole to determine the reasonable expectations of the parties, or applying the doctrine of contra proferentum, yielded the same result: the limit of liability under the ADCO Endorsement is a maximum of $50,000 for each of the seven scheduled risk locations, for a maximum aggregate coverage of $350,000. Hence, the application for was granted.

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Recently, the Ontario Court of Appeal released a decision which opined on the novel interpretive issue of data exclusion clauses. In Family and Children’s Services of Lanark, Leeds and Grenville v. Co-operators General Insurance Company, 2021 ONCA 159, the appellate court unanimously allowed for the appeal of an application judge’s decision requiring an action be brought in order to deny the duty to defend.

In this case, the respondent, Family and Children’s Services of Lanark, Leeds and Grenville (“FCS”), hired the respondent, Laridae Communications Inc. (“Laridae”), to provide communication and marketing services, namely updating FCS’s website. Laridae obtained and was insured under both a professional liability policy and a commercial general liability policy (“CGL”) from the appellant, Co-operators General Insurance Company (“Co-operators”). FCS was an additional insured under the CGL.

In April 2016,  a password-protected portal on FCS’s website was hacked. After which, a hyperlink to a confidential report, which contained numerous clients’ personal information, was posted on a social media platform.

Subsequently, a class action was brought against FCS and others. As a result, FCS commenced a third-party claim against Laridae for breach of contract and negligence.

Both FCS and Laridae brought applications seeking a declaration that the appellant had a duty to defend them against the class action and third-party claim after their request was denied.

On the application, the appellant argued that coverage was excluded under both policies for any personal injury arising from the distribution or display of data (“data exclusion clause”). The respondents took the position that the data exclusion clause did not exclude all the claims against them. Moreover, the respondents argued that this was an important issue that should not be determined on an application

The application judge agreed with the respondents concluding that coverage should not be determined on an application. The judge also found that there is the possibility of coverage in this case. Lastly, the application judge concluded that the appellant would be obligated to fund both defences, if there was a conflict of interest between the two respondents and neither of which would report to appellant.

The appellant successfully appealed.

The Ontario Court of Appeal held that a determination regarding the appellant’s duty to defend could be made based on the application materials before the court. Through a coverage analysis, the court found that the exclusion clauses are clear and unambiguous. Moreover, the appellant court disagreed that some of the claims could be covered by the policy. Based on the substance of the claims pleaded in the class action, the allegations would fall directly within the policy exclusions. Therefore, the appellant owes no duty to defend either respondent.

Lastly, Appellate Court affirmed that the onus would be on the insured to establish a reasonable apprehension of a conflict of interest on the part of the insurer in order to remove their right to participate in the defence.

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Insurers Beware: Coverage for Business Interruption Losses Could Include Partial Cessation of Business Activity

In the recent Ontario Court of Appeal decision, Le Treport Wedding & Convention Centre Ltd. v. Co-operators General Insurance Company, the court reaffirmed the relevant principles for interpreting insurance policies, including coverage for business interruption losses.

Background

In this case, the plaintiff-insured operated a banquet hall that had suffered significant damage following a severe rainstorm. Among others, the policy included a sewer back up endorsement, flood endorsement, and indemnity for business interruption losses. Shortly following the date of loss, the insurer advised the plaintiff to cease business operations to complete the necessary repairs. The plaintiff declined to do so.

The insurer paid out its policy limits under the terms for sewer back up but denied coverage for flood and business interruption losses as the insured had failed to cease business operations. The plaintiff sued for coverage.

The trial judge held that losses due to sewer back up losses had been paid to its limits; the flood endorsement did not apply based on an application of a surface water exclusion which effectively precluded the plaintiff recovery; and dismissed all other claims. The plaintiff appealed and the appeal was allowed in part for coverage per the flood endorsement. Interestingly, though the appeal court affirmed the trial judge’s decision to deny the plaintiff coverage for business interruption losses, the court came to its conclusion based on a different understanding of the applicable law and policy term.

Ruling with Regards to Coverage for Business Interruption Losses

The relevant term of the policy stipulated that the “insurer agrees to indemnify the insured against loss directly resulting from necessary interruption of business.” The trial judge denied coverage on two grounds: first, the trial judge was not convinced the evidence supported an actual loss of profits. Second, and importantly, the trial judge adopted a narrow view of the term ‘necessary interruption of business’ as requiring a total cessation of activity for a period of time for coverage to arise. In the absence of the word, ‘interfere’, the trial judge concluded that business ‘interruption’ must mean total cessation of business activity to trigger coverage based on analogous cases.

The ONCA disagreed. Instead, the court held that though analogous cases may be useful for purposes of interpretation, the focus must nonetheless be on the specific language of the policy at issue. The ONCA relied instead on other portions of the policy to inform ‘interruption’ of business activity as including interference with or partial cessation of business activity.

This case thus serves as a reminder that coverage under policies must first and foremost be determined in view of the contract as a whole and its surrounding circumstances. Under a different set of facts, the policy for business interruption losses would have interpreted to include partial cessation of business activity though not expressly stated in the actual clause itself.

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An Insurer’s Duty to Defend

In Développement les Terrasses de l’Îles inc. v. Intact, Compagnie d’assurances, 2019 QCCA 1440, the Court of Appeal of Quebec enforced Intact Insurance Company’s duty to defend, by overturning the Superior Court’s decision absolving the Insurer of its duty.

In this case, the Insureds purchased a commercial general liability insurance policy from Intact Insurance Company. An action was brought against the Insureds for damages and defects caused during the construction of a building. The claim was later amended to include damages resulting from structural issues, mould and water infiltration. The Insureds brought a claim against Intact when their Insurer declined to defend the action on the grounds that the damages claimed were not covered by the Policy.

The Superior Court held that the damages claimed did not result from a “loss” pursuant to the Policy, but instead, from construction and design errors attributed to the Insureds. Thus, the damages claimed were not covered by the Policy.

In a unanimous decision, the Court of Appeal overturned the ruling. The court reiterated a long standing principle that an Insurer’s duty to defend is triggered if the Insureds can demonstrate that material damages may be recoverable under the scope of the Policy. The Insurer can then resort to deferring liability if it can prove that a clear and unambiguous exclusion clause can preclude the claim. Intact had not proven that an exclusion clause excluded coverage, so it would be required to compensate for material damages, but not for the cost of remedying the consequences flowing out of those damages, such as water infiltration.

While there was some contention in discerning whether the damages occurred as a result of the defect, or were defects in and of itself, the court concluded that the duty to defend had been triggered nonetheless.

The court also advised that coverage provisions were to be interpreted broadly while exclusion clauses were to be interpreted restrictively. The court held that the lower court interpreted “loss” too narrowly. The design defects had caused unforeseen material damage and this was sufficient in triggering the Insurer’s duty to defend.

This case provides interesting dicta about an Insurer’s duty to defend and opines on the limits of this duty. While this decision may be persuasive, it is not binding on the courts of Ontario.

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