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Order of interpretation: coverage, exclusions, exceptions

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This book was written by Michael Dew, a Vancouver lawyer who practices civil litigation, including representing persons who have been denied coverage under property insurance policies, or liability insurance policies. If you have been denied insurance coverage and require assistance with making a claim against your insurer call Michael at 604 895 3160.
In order to properly read an insurance policy it is important to understand how polices are structured, and the different types of provisions they contain.
Insurance policies are structured as follows:
  1. Coverage provisions: these define the risks the insurance covers. Coverage provisions can be visualized as setting a perimeter within which all risks are covered i.e. imagine drawing a perimeter around the large green area in the diagram below, and then shading in that entire perimeter with green to indicate coverage.
  2. Exclusions: these provisions reduce the scope of coverage by removing from coverage certain risks that were included within the coverage provisions. Exclusions (the red area in the diagram below) can be visualized as putting a red sticker over part of the green coverage area (ignore the green box within the red area for now) and imagining that the red area indicates risks not covered by the insurance policy.
  3. Exceptions: exceptions put risks excluded by the exclusion provisions back into coverage. The word “exception” relates to “exclusion” not “coverage” i.e. it is an “exception to the exclusion”, not an “exception to coverage”. The exceptions can be visualized as peeling off an inner zone of the red sticker referred to in the point above to expose the green coverage area that previously existed below that peeled off red portion portion.  
The risks ultimately covered are graphically represented by the green in the above diagram i.e. the green coverage area that was never covered by red exclusions sticker, and also the green coverage area exposed by the “exceptions hole” cut in the red exclusions sticker. 
In light of the above principles the Supreme Court of Canada has confirmed that the proper way to read an insurance policy is coverage provisions first, then exclusions, then exceptions.
[I]t is generally advisable to interpret the policy in the order described above: coverage, exclusions and then exceptions. 
(Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33 at para. 28).
Reading an insurance policy in the order described above ensures that the analysis goes no further than it needs to i.e.:
  • if there is no coverage (because you are not even in the large green area to begin with) then that is the end of it,
  • if there is coverage and no exclusion applies then that is the end of it.
  • If there is coverage and an exception does apply, then consider if there is an exception that applies to the exclusion.
The above approach has been endorsed by other courts:
The court must first determine whether the claim falls within the insuring agreement contained in the policy.  If it does not, that is the end of the matter.  If it does, it is necessary to determine if it is excluded by any of the exclusion clauses in the policy.
(Swagger Construction Ltd. v. ING Insurance Company of Canada et al., 2005 BCSC 1269 at para. 11).
Clearly identifying the nature (coverage, exclusion, exception) of the provisions of an insurance policy substantially assists in understanding the meaning of a policy.