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Unjust exclusions and exclusion clauses that nullify coverage may not be enforceable

Section 32 of the Insurance Act, RSBC 2012, c. 1 provides that if a contract of insurance contains an exclusion, condition or warranty, the court can declare it not binding on the insured if it is held to be unjust or unreasonable:
 
If a contract contains any term or condition, other than an exclusion prescribed by regulation for the purposes of section 33 (1) or established by section 34 (2) or (3), that is or may be material to the risk, including, but not restricted to, a provision in respect of the use, condition, location or maintenance of the insured property, the term or condition is not binding on the insured if it is held to be unjust or unreasonable by the court before which a question relating to it is tried.
(Insurance Act, RSBC 2012, c. 1, s. 32).
 
In Morton v. Canadian Northern Shield, 1998 CanLII 6537 (BCCA) the plaintiff owned a rental building insured by the defendant, Canadian Northern Shield. The tenant had vacated the building in preparation for demolition of the building by the owner. Prior to the demolition getting underway, however, the building was destroyed by fire. The insurer denied coverage on the ground that no notice was given for what it asserted was change material to the risk, and argued that building was not covered for vandalism while vacant. The court accepted that view and found that there was no coverage for vandalism, and that the exclusion did not meet the unjust or unreasonable requirement of the statutory provision:
 
In my opinion, it cannot be demonstrated by the respondent, as it must be, that s. 129 [now s. 32] of the Insurance Act permits the Court to conclude the vacancy condition under the "Vandalism" peril is not binding on the respondent as being unjust or unreasonable.
 
There is necessarily a deliberateness on the part of an insured to the premises becoming vacant within the exclusion.  That these premises would become vacant had to be known to the respondent or his agents.  Everything done before the vacancy occurred was deliberate and with a view to demolishing the premises.
 
In my opinion, while the submission of the respondent that coverage can be denied on the first day of vacancy is correct, it cannot be said that at the time of the insurance placement such an exclusion to coverage was "unjust or unreasonable".  I reach this conclusion because in my opinion vacancy does not just happen.  The state of vacancy is brought about by deliberate acts of the insured or his agents.  I think it is reasonable for an insurer to exclude coverage under the "Vandalism" peril where the premises are vacant for however a short period of time.
 
(Morton v. Canadian Northern Shield, 1998 CanLII 6537 at para. 20-22 (BCCA)).
 
Even apart from the above mentioned statutory provision giving British Columbia Courts the authority to not apply unfair exclusion clauses, there is a developing common law rule that even absent ambiguity in the insurance policy the court can refuse to apply an exclusion clause that nullifies coverage.
 
In Cabell v. The Personal Insurance Company, 2011 ONCA 105 the homeowners owned an outdoor in-ground swimming pool that was damaged as a result of hydrostatic uplift pressure which caused the upward displacement of the pool resulting in, among other things, significant cracks. The homeowners had purchased property insurance which excluded coverage for "settling, expansion, contraction, moving, bulging, buckling or cracking of any insured property" and for loss or damage to outdoor swimming pools. However, the homeowners had also purchased an endorsement which provided coverage for their outdoor swimming pool, but which stated that all other terms, conditions and exclusions of the policy remained unchanged. The court held that the exclusion eliminating coverage for various causes of damage would render nugatory the coverage for the most obvious risks the endorsement was designed to cover and would virtually nullify coverage under the endorsement. Finding that such a result could not have been within the reasonable expectation of the parties the court held that the exclusion clause did not apply. In coming to that conclusion the court held that the nullification of coverage doctrine can apply even in the absence of ambiguity in the policy:
 
These passages suggest a different way of looking at the nullification of coverage doctrine, namely, that it is an independent doctrine that applies even in the absence of an ambiguity. This court has adopted this interpretation of the doctrine in a number of cases, including Weston Ornamental and, more recently, in Zurich Insurance Co. v. 686234 Ontario Ltd., 2002 CanLII 33365 at para. 28 (ONCA), leave to appeal to S.C.C. refused [2003] S.C.C.A. No. 33):
 
From Weston Ornamental Iron Works it is clear that this court has concluded that even though an exclusion clause may be clear and unambiguous, it will not be applied where: (1) it is inconsistent with the main purpose of the insurance coverage and where the result would be to virtually nullify the coverage provided by the policy; and (2) where to apply it would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. 
 
(Cabell v. The Personal Insurance Company, 2011 ONCA 105 at para. 17).
 
The court noted that even though the trial judge refused coverage on the grounds that evidence had not been lead to establish that there would be no meaningful coverage if the exclusion clause was applied to the type of loss before the court, the Court of Appeal held that such evidence is not always required:
 
I agree that in some cases evidence may be needed, especially if the case concerns some particularly arcane set of circumstances. It seems to me that a court is in a good position to determine what are the most obvious risks for which an ordinary homeowners' policy is issued. If the court is able to determine on an objective basis that the insurer's interpretation would render nugatory coverage for the most obvious risks for which the endorsement is issued, a tactical burden shifts to the insurer. It will be for the insurer to show that the effect of its interpretation would not virtually nullify the coverage and would not be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. This is a reasonable approach given that the insurer is in an ideal position to show that, contrary to what appears to be the case, the endorsement does in fact provide coverage. For example, the insurer would have access to its records and the experience in the industry and would be able to show that claims have been paid for loss or damage not falling within the exclusion.
(Cabell v. The Personal Insurance Company, 2011 ONCA 105 at para. 28).
 
Regarding the exclusion for all types of damage to outdoor swimming pools it was not controversial that it did not apply:
 
Whether or not loss as a result of damage to the appellants’ outdoor in-ground pool falls within the Coverage part of the policy, such a loss is clearly excluded by Common Exclusion 18, the exclusion for, among other things, "outdoor swimming pools". The only reasonable interpretation of Endorsement 33b is that it at least amends the policy so that the part of Common Exclusion 18 referring to outdoor swimming pools does not apply.
(Cabell v. The Personal Insurance Company, 2011 ONCA 105 at para. 19).
 
Regarding the exclusion that covered loss caused by “settling, expansion, contraction, moving, bulging, buckling or cracking”, given that counsel for the insurer, and the court itself, could conceive of no meaningful coverage for outdoor swimming pools that was not otherwise excluded, the court found that the exclusion did not apply: 
 
I have no difficulty in finding that Common Exclusion 11 would, to use the words of Foodpro, "render nugatory the coverage for the most obvious risks" for which the endorsement was issued. Common Exclusion 11 excludes coverage for "settling, expansion, contraction, moving, bulging, buckling or cracking of any insured property, except resulting damage to building glass". The most common causes of loss or damage for a homeowners' policy such as theft or fire have no obvious application to an outdoor in-ground swimming pool. It is difficult to conceive of any damage or loss to an in-ground swimming pool that would not come within that exclusion, especially the word "cracking". When counsel for the respondent insurer was pressed for an example that would not come within Common Exclusion 11, he was unable to do so. In fact, the only loss that I can think of that might be covered by Endorsement 33b and not excluded by the Common Exclusions is that covered by Common Exclusion 12, which reads as follows:
 
We do not insure:
. . . . .
 
(12) marring or scratching of any property unless caused by impact by land vehicle, aircraft, satellite or spacecraft, riot, vandalism, hail, windstorm, theft or attempted theft or transportation as defined in exclusion (7) above.
 
It hardly seems likely that the appellants would have purchased the endorsement if they knew it only covered marring or scratching given the $500 deductible, or that it was limited to marring and scratching from the impact of a land vehicle, aircraft, satellite, spacecraft, riot, vandalism, hail, windstorm and theft, none of which seem very likely candidates for damage to an in-ground outdoor pool. Even less likely if they knew that if the impact resulted in cracking of the pool it would not be covered because of Common Exclusion 11.
 
In my view, application of Common Exclusion 11 to Endorsement 33b would virtually nullify coverage. Such a result could not have been within the reasonable expectation of the parties.
 
(Cabell v. The Personal Insurance Company, 2011 ONCA 105 at para. 29 - 31).
 
The rule that even absent ambiguity an exclusion clause which nullifies coverage is a developing doctrine, and one that will not likely be broadly applied i.e. the exclusion must literally “nullify” (bring to nil) a particular coverage provision.

 

 
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.