Competing Language in an Insurance Policy Leads to Coverage Dispute
February 27, 2023
In John Grisham’s latest legal thriller, The Boys from Biloxi, one of the lead characters is a lawyer representing members of a community whose town was ravaged by flood waters from the Gulf of Mexico. The insurance companies who had contracts with many of the residents claimed that any damage from a storm which included flood waters negated home insurance policies even if the flood waters themselves, which were excluded from coverage, did not cause all of the damage.
While fictional, the story provides useful insight into some of the issues that cause conflict between insurance policyholders and the companies that issue those policies, especially when the factors that led to damage have multiple sources or when a policy includes two pieces of seemingly contradictory clauses. This led to a recent decision issued by the Court of Appeal of Alberta in which the respondent company sought indemnity from damage caused by water, with the appellant insurance company claiming the policy did not provide such coverage.
Flooding of river leads to damage
The issue began when a river overflowed, leading water to work its way into the building where the respondent ran their business. The surface water that entered the building did so through openings in the walls and doors, primarily on the ground floor of the building.
The appellants had a policy with the respondents that included a Broad Form for property coverage, which “insures against all risks of direct physical loss or damage to the insured property.” However, it contained a section that excluded coverage for flood or other water damage.
The section of the Broad Form that excludes flood damage states,
in whole or in part by flood, including “surface water”, waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water. This exclusion applies whether or not there are one or more other causes or events (whether covered or not) that contribute concurrently or in any sequence to the occasioning of the loss or damage, except for loss or damage caused directly by resultant fire, explosion, smoke or leakage from fire protective equipment;
This exclusion does not apply to property in transit, provided such coverage is afforded by endorsement attached to this Form, or to loss or damage caused directly by leakage from a water main; [original emphasis deleted]
2.3. Other Water Damage
2.3.1. by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.2. by the backing up or overflow of water from sewers, sumps, septic tanks or drains, wherever located, unless concurrently and directly caused by an insured peril not otherwise excluded in this Form;
2.3.3. by the entrance of rain, sleet or snow through doors, windows, skylights, or other similar wall or roof openings, unless through an aperture concurrently and directly caused by an insured peril not otherwise excluded in this Form;”
However, another section (“para 61) of the Broad Form contained the following language around “seepage, leakage or influx of water,”
“This Form is extended to cover loss or damage caused by seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights.
This Extension deletes Exclusion 2.3.1. of the EXCLUDED PERILS Section of the Building and/or Contents – Broad Form.”
When the respondent submitted a claim for coverage, it understood that para 61 negated the language in section 2.3.1, thus allowing damage caused by seepage, leakage, or influx of water to be covered. However, the appellant took the position that the flood damage was excluded under s.2.2, which was not explicitly deleted.
A statement of facts agreed to by both parties said that the river overflow led to water entering the building and that damage was caused directly or indirectly by flooding.
Lower court’s decision is in favour of respondent
At the initial hearing, the chambers judge found the respondent was entitled to the indemnity it sought, finding that the facts place the situation within that covered within para 61, which refers to an “influx of water derived from natural sources” as opposed to s.2.2 which had language limited to “any natural or artificial body of water.” The chambers judge added that s.2.2 was too ambiguous to exclude the coverage provided by para 61 and that it would lead to a “perverse result” if an exclusion in para 61 were found not to be in effect because of the ambiguity in s.2.2
On appeal, the court agreed that the contract was ambiguous. It is difficult to conceive of circumstances where an influx of water does not also cause damage caused by flooding through openings. Furthermore, it agreed that para 61 extends coverage to any water influx and not just that from flooding.
Once the ambiguity is established, the rules of contract construction take over. Common law has long held that an interpretation of a contract should be consistent with the reasonable expectations of parties so long as it is supported by the language of, in this case, the policy. If ambiguity still exists, the resolution should favour the insured rather than the insurer.
After completing this analysis, the court agreed with the chambers judge’s decision that indemnity was owed to the respondent.
Contact Calgary Insurance Lawyers At HMC Lawyers For Your Property and Casualty Loss
At HMC Lawyers, our experienced insurance lawyers have decades of collective experience in representing clients in matters related to insurance law, insurance coverage disputes, property and casualty loss and general liability, including flooding. We understand the risks involved in every step of the litigation process and work with our clients to help identify and avoid potential problems with their claims. To find out what you might be able to expect from an insurance-related dispute or to find out how we might be able to help you through the negotiation or litigation process, please don’t hesitate to contact us online or by phone at 403-269-7220.